KPI is short for Key Performance Indicators and refers to the measures taken for tracking how well the important parts of a business are doing. They direct how a business can make decisions to lead to profitable and successful businesses. These indicators are high-level and act as an overview or summary of how an efficient and effective business should be run.
A KPI tree refers to the graphical representation modeled on a tree diagram that manages KPIs. See how we built one for an e-commerce business.
Such trees provide a clear structure that helps position the KPIs to ensure balance, clarity and hierarchy.
Key steps in creating a KPI tree
1. Determine the audience and the objectives
The KPIs should address the particular audience it wants to reach and the objectives that are relevant to them. Each of the KPIs needs to be formulated with the levels of management in mind. This is important for showing who the report is for. Since the KPIs are a summary, the higher up the management level, the fewer the details to be included. This is because a KPI that is integral to one manager will not be important or relevant for managers up the organization level, and may contain too much information. On a KPI tree start by determining, at least, two objectives for each audience in the tree to understand what is critical for the success of certain levels.
2. Have clear indicators
In KPI trees, it is important to understand the meaning of the first initial: “Key”. Key refers to a company’s important activities only. It ensures that not too much information is utilized and only a low level of detail is given. When well designed, KPIs result in showing where and if things are bad, OK, or good. This will fuel an action of either doing nothing or investigating.
Once KPIs are clear, decisions are easily made. When things are bad, investigate to find out why and how to get things back on track. When things are good, investigate and also find out why and how to keep them that way. When OK, it means things are on track and no action is needed. Ensure that the KPIs only serve as indicators while not giving reasons why. If they don’t indicate an outcome or explain a problem they need changing.
These indicators will show the interactions between the various activities. They will also show which activity has a direct influence to another, such as the sale of popular dishes will cause an increase in sales. An example of those that conflict each other is a decrease in rewards and staff motivation. They will also show which ones complement another, such as prevention of accidents complements reduction of injury.
3. Keep the balance
KPIs should create a balance by focusing on each objective for the particular audience. This prevents opportunistic behavior when taken into context. For input KPIs, they should measure the quantity of resources provided where necessary; even the quality should be taken into account. In process KPIs, the activities in question need measuring for determining the number needed for a particular output against expected output. Output KPIs are all about the goods or services produced by the inputs; quality and quantities should be at par with the standard. For the impact KPIs, the results gotten through the output of goods or services is measured, and quantity and quality also apply.
To achieve this balance, the clear definition of objectives obtained earlier will act as a guide. The KPI tree should encompass all these aspects so that not only the KPI itself will improve but also all aspects that are involved in the process performance. An example is like when measuring the number of cars repaired within a number of hours, the number of customers satisfied with the service and hours per fault, which would all fit into the KPI tree.
4. Use different types of KPIs
KPIs should not be of one similar type alone, all stakeholders in a company have different needs. The KPIs should link to the entire executive strategy, and using different types of them will take care of both the qualitative and quantitative measures.
When relevant, use various types of KPIs such as:
- Target KPIs: These are the KPIs with a price tag attached to them. A budget is usually given and the resultant actions will determine if they are within or over budget. If costs are above the budget, questions will be raised as to why and what caused it and how to prevent a similar occurrence.
- Directional KPIs: Here, the direction that a certain trend is going is more of importance than the number. An example is with a high staff turnover though the number leaving the company cannot be controlled. If a rising trend is noted, investigations and action into why it is happening should be undertaken.
- Benchmarking KPIs: These KPIs are obtained by comparing an organization to a similar one; it could be a competitor or a world class organization. Though they are sometimes not exact due to differences in processes, these comparatives could fail to provide the operating details to issues found.
5. Test the KPIs
After the KPIs have been determined, all that is left is testing them. This will measure if the chosen indicators are up to standard. To test the KPIs, ensure that they follow the following rules:
- How the KPI is arrived at, can be explained by someone easily using less than 10 words. Its name should have fewer than 5 words.
- Use rates or ratios, they are better than the use of cumulative values and absolutes.
- It should compare to other segments of the KPI tree and time frames.
With all the KPIs being monitored in most organizations, having a structure that shows the clarity that a KPI tree brings is essential in monitoring them. They show the relationships between KPIs and how they link to each other. This structure will lend focus and accord importance to areas that may be left out. Since it resembles a tree, the most important KPIs are located at the top giving a clear hierarchy. On the KPI tree, strategic objectives are turned into precise KPIs.