So you know you need to set KPIs but which ones and how to make these work? Many businesses start with the common KPIs which may be to ‘maintain profit margin at x %’ or to ‘achieve sales growth of x % per annum, but that’s not necessarily going to ensure you achieve them. Why? Well in most SME’s with more than 5+ employees achieving targets will be dependent on everyone who is involved in that business understanding and buying into these targets.
So how do you get buy in to your KPI’s?
My experience is to ensure that the KPI’s you set are cascaded though or down your business, so that at each level it is meaningful to the owner and there is a clear line of sight back up through the business to show what the impact is.
This is more easily explained through a diagram as below which shows examples of meaningful KPi’s cascaded down through 3 levels of a business.
Hence, by cascading KPI’s down through the business, the KPI’s are created which are meaningful to the level of staff using them and furthermore, they can see that by working on these actions, they are helping to deliver the top level target for the business of increasing profit margins.
If we want to be even more effective, we could even quantify the impact of lower level targets on the top level target. E.g. A reduction of lead time achieved by the Purchasing staff, which impacts on an overall decrease in lead time for the process as a whole, means we reduce our direct costs of production, whilst maintaining our price; we increase our profit margin by x%. Likewise, increasing the level of support that Finance staff can now offer through freeing up time from rationalising its month end processes. Finance staff can support non finance departments by providing meaningful data, which helps the achievement of business wide efficiency initiatives and materialise in lower actual costs for the business. Lower actual costs with no negative impact on sales revenue results in increased profit margins.
It is often this final calculation which is the most important, as knowing that the direct impact of your actions results in a % increase in profit margin, publicised to the rest of the business through the review of these KPI’s, is both rewarding, empowering and motivating to all of those concerned.