Companies need to track their health and compare it to where they want to be. Metrics, otherwise known as Key Performance Indicators (KPIs) provide the ability to conduct this strategic planning and introspection in real-time. Even before recorded history, individuals have used tools to track performance. Ranging from rudimentary to digital, keeping track of metrics are a priority.
“A strategy without metrics is just a wish. And metrics that are not aligned with strategic objectives are a waste of time.” - Peter Drucker
It was not until the 1990s that Peter Drucker, who explored the way human beings organize themselves and interact, introduced what we know as modern business metrics. He was the organizational expert who famously said, “A strategy without metrics is just a wish. And metrics that are not aligned with strategic objectives are a waste of time.” Because of his work, businesses adopted dashboards and KPIs. Today, the use of dashboards underpins most businesses and provides executives with the viability they need to decide.
With KPIs, businesses became ‘dashboard driven.’ If we could measure it, businesses bent over backward to do it. Over the last two decades, several critical problems with dashboard-driven culture have emerged that we will unpack, and what businesses can do to overcome these limitations.
Data is hard work
The most common reason KPIs fail is that they can be hard to measure. KPIs blend data, business objectives, and departmental targets to act as guideposts for success. Without that first piece—data—your KPIs are abstract and conceptual.
Data provides a foundation for your KPIs, so you better make sure you can actually measure and track them. A prominent example of this is the desire to measure “wins influenced by social media.” It is a brilliant concept that social media marketers rightfully laud and work towards. However, measuring this is difficult. Social media engagements often eschew the measurement technology traditional digital marketing teams have in place, which is why it's important to keep technology simple. The tools of the marketing analytics trade - tracking cookies and inferred acquisition paths - cannot show the real value of positive social interaction.
Metrics are only as useful as the data behind them. When the data to directly correlate an action to a goal is difficult to generate, or hard to interpret, the overall effectiveness of that measurement drastically diminishes. So, if a single KPI is specifically driven by a data point, it makes sense to sink significant resources to accurately measure it.
When setting metrics, we should expect and embrace failure.
Sometimes, a specific KPI is too difficult to measure. Which is okay. When setting metrics, we should expect and embrace failure. Companies should use the lessons learned by failed metrics to better set and measure subsequent KPIs. Overall, taking an interactive approach to metric development will help businesses stay ahead of emerging trends and collect the right data.
In the rush to measure everything, companies measure too much. Many businesses today have an excess of KPIs. If ten are good, twenty must be better, and so on, or so the thinking often goes. But more KPIs do not equate to better performance. Research has shown that too much data actually makes leaders less objective-oriented.
The core problem with collecting and analyzing too much data is that it makes the business less focused. When companies measure too many things, responding to new trends becomes harder. Companies with too many metrics end up optimizing KPIs that are not core to the business.
A key metric for most companies is the conversion rate of prospects to customers. From a revenue perspective, this makes sense. Businesses need a constant flow of new customers to grow. If the conversion rate is the goal, companies will spend on marketing to get customers in the door. The issue becomes after all we have spent the lead generation money, does the customer acquisition cost align with the business model? If it takes five years to recoup the initial cost to bring on a customer, you better well be sure that most customers last 10+ years (which is easier said than done).
Focusing on too many data points may cause your company to focus on goals that are actually detrimental to a company.
For some businesses, the conversion rate may well offset acquisition costs. But the risk exists, and it is significant. Focusing on too many data points may cause your company to focus on goals that are actually detrimental to a company. The way to overcome this is to understand your business model and set a few goals to help you get from where you are to where you want to go.
Try to set only five high-level goals regarding your business. Each major category can have KPIs underneath to help you track your progress. Avoid trying to measure everything, because when you measure everything, you spend acting on nothing.
Winning with Analytics
There are many free resources to help you set your initial metrics and update your KPIs. As a good rule, always start with strategy. Without a firm stake in the ground around what your business is seeking to achieve, it is incredibly easy to end up with a dauntingly long list of indicators that you feel you could or should measure.
Your strategy, therefore, acts as a starting point for designing appropriate KPIs–but only if it is clear. All too often companies create a 30–40-page strategy document that no one ever reads or understands. A great way around this is to create a simple one-page strategy. This will help you clearly define your objectives, and help you work out what you need to put in place to achieve them.
Next, linking your KPIs to your strategy will immediately sharpen your focus and make the relevant KPIs more obvious. Identifying the questions you need answers to will further narrow your focus because questions give context to metric numbers.
That is why, as well as KPIs, companies should think about KPQs: Key Performance Questions. These will help you work out what data you need to gather, and, therefore, which KPIs you will find most useful. For example, if you plan on executing a simple strategy to increase your income by focusing on the most profitable areas of your business, you could ask “Where are we making a profit, and which processes are most costly compared to the returns we receive?”
Once you are clear on the questions you need to answer, you can make sure that every indicator you subsequently choose or design is relevant not only to your strategy but also provides the answers to very specific questions that will guide your strategy and inform your decision making.