Any owner, whether a top manager of a large corporation or an entrepreneur from the small and medium business sector, dreams that his or her company runs like clockwork and requires minimal management intervention in solving routine tasks. For this, it is necessary that every employee realizes the importance of his or her participation in the overall success of the whole company and, as a consequence, takes responsibility for the performance of his or her duties.
This can be achieved with the help of KPI (Key Performance Indicator), which is gaining popularity in the companies all over the world. For example, the introduction of KPI allowed us to achieve excellent results in a short time: a decrease in the turnover rate of accounts payable and the turnover ratio of commodity stocks, optimization of the working capital structure. At the same time, staff turnover level decreased by 30%, and staffing increased by 18% in just three years.
The KPI system is becoming more popular, but many entrepreneurs still have doubts – is it worthwhile to implement such a tool in their own business? Let’s try to answer the leaders’ most frequent questions.
- 1 Why does my business need a KPI system?
- 2 I am a small business owner. How do I know if I need KPI or not?
- 3 How to choose the right KPI for a particular employee?
- 4 How to start the implementation of the KPI system?
- 5 Do I need to hire a person in charge of the KPI system, or can I monitor everything on my own?
- 6 When can I expect the first results from the introduction of the KPI system?
- 7 How to motivate employees to achieve KPIs and what to do with those who cannot?
- 8 How will employees treat the KPI system? What to do in case of resistance of the collective?
Why does my business need a KPI system?
The KPI system allows all employees, regardless of the position, to focus on achieving the company’s strategic goals and to understand their area of responsibility precisely.
Performance indicators set employees’ benchmarks for work and help to correctly prioritize tasks. It is important that even the back-office and support staff have an understanding of the usefulness of the result of their activities, the ability to distinguish between primary and secondary tasks. In this case, the most difficult thing is to set ambitious, but achievable goals.
I am a small business owner. How do I know if I need KPI or not?
To implement the KPI system, several basic conditions must be observed. First, the interest on the part of the owner and top management. Secondly, all employees should have an understanding of the strategic goals of the company. In this case, it is important to convey these goals to every person in the company and to inspire not only a narrow circle of managers but the whole team up to line employees.
The third important condition is a sufficient level of development of accounting systems, which are necessary for efficient and rapid monitoring of KPI (records, reports, documents). Remember that the amount of financial and human resources spent on monitoring these indicators should not exceed the benefit. The ideal control system is fully automated and does not require costs. Finally, the fourth important factor is that the employees have the authority to achieve their goals. Remember not only to assign responsibilities to the staff but also give them the rights, create opportunities for showing initiative and the introduction of creative solutions.
How to choose the right KPI for a particular employee?
Performance indicators, of course, have their own classification and, depending on the purpose and the measurable characteristics, there are financial and non-financial, quantitative and qualitative, indicators of efficiency and effectiveness, lagging and advancing, operational and strategic, functional and project, individual and command, etc. The higher the employee level, the more aggregated the indicator can be a part of is or her motivation.
For example, the recruitment specialist is responsible only for the “selection funnel”, the head of the staff development department – for the degree of execution of the training plan, but none of them is responsible for the indicator of the staff skill level, because to achieve it it is necessary to ensure the efficient simultaneous operation of the selection system, adaptation, motivation, and development of personnel. Such authority is concentrated only in the hands of the HR director. Accordingly, he or she should have the level of classification as an indicator. All these are examples of functional indicators.
For line employees, quantitative indicators work best: for example, 100 calls a month for a call center operator or at least 100 sales for a consultant. Project indicators are more suitable for mid-level managers because these people are responsible for the result of the project as a whole, including financial indicators, and the motivation of the project team.
In general, the advice is this: do not try to establish standards for all measured indicators in the company and cause a so-called “norming hysteria.” Without the goal, this or that indicator does not give any useful information.
How to start the implementation of the KPI system?
The introduction of the KPI system begins with the goal-setting and digitization of the top-level objectives. It is not necessary to dwell only on intermediate quantitative indicators, such as “to reach a monthly turnover of 100 000 dollars” or “to sell 1 million units of production this year”. It is important to include a long-term vision of the entire firm’s strategy here: winning market leadership or creating an international company. The KPI system helps to achieve the desired results faster, but only if the goals are set correctly.
The next step is to determine the key success factors to achieve the desired results. Then, these initiatives and goals are passed down to the level of departments, directorates or divisions, and decomposed to primary quantitative indicators. In case all the final KPIs ensure the achievement of the top-level goals in a given period of time and at the same time are necessary to achieve it, you can proceed with the reorganization of the company’s management structure and the introduction of a performance monitoring system. At this stage, the format, tools, and frequency of each KPI control are determined.
Do I need to hire a person in charge of the KPI system, or can I monitor everything on my own?
The issue of hiring an individual specialist usually depends on the scale of the company. In order for the system of indicators to be balanced, this person should be responsible for the harmonization of goals and indicators and their passing over from the strategic to the operational level.
Often in companies, the KPI system is perceived solely as an element of motivation, so the development and monitoring of indicators are passed on to the HR specialist. In other organizations, the KPI system is created by the person in charge of strategy formation, which is a more robust approach, since both the KPI system and the motivation system are essential tools for achieving the goals of the company.
When can I expect the first results from the introduction of the KPI system?
The system of indicators starts to bring its effect pretty soon. In our company, in the first three months after the establishment of a certain indicator, a moratorium is imposed on the motivation or punishment of the employee when he or she doesn’t achieve this indicator. This approach allows us to assess the adequacy of the established standard, the method of its control and helps the employee to take the necessary preparatory and corrective actions to achieve the established indicators.
How to motivate employees to achieve KPIs and what to do with those who cannot?
To encourage employees to achieve KPI, you can use any tools of material and non-material motivation: bonuses, fines, honor boards, competitions, etc. The main thing is to ensure clarity and objectivity of the assessment and create the right information environment. For example, for industry production targets work well, posted on the wall along with a “countdown” – how much is left before the goal is achieved. For the administrative and managerial team, an online report on KPI published on the corporate portal of the company is more suitable.
How will employees treat the KPI system? What to do in case of resistance of the collective?
There are three common types of staff reaction to the introduction of the KPI system. In the first case, the employee understands why it is necessary and how it works, but he or she has a feeling of resistance to changes that can ruin the existing comfortable stability. This is a natural reaction, after a while, the new KPI system becomes familiar and irreplaceable for him or her.
In the second case, the employee does not understand the purpose or principle of the system. Education, collective discussions, and internal PR can help to solve this problem.
Finally, some employees refuse even the attempts to adapt to the system of indicators and understand the purpose of its implementation. Unfortunately, not all changes in the principles of management allow keeping the 100% current team. The main thing is to remember that the interests of the company are above the interests of a single employee.