M?\" Key performance indicators (KPls): How to set the right metrics your business Well-designed KPIs and dashboards drive financial success, strategic planning, employee retention and efcii Read time: 11 minutes What gets measured gets managed. It's a common saying, and for good reason. Data is crucial in today's business worldthe key to eve from growing sales and prots to implementing a business strategy, retaining employees and increasing operational efciency. But many businesses fail to use suitable key performance indicators (KPls) and monitor them properly with dashboards. This can leave companies at riskin the dark about critical problems and unable to respond to challenges or set goals. Ill-considered KPls can even create serious operational issues that disrupt the entire business. It's really about data. In the 21st century, data should be driving your decisions. Josh Ramsbottom Senior Business Advisor, BDC Advisory Services Operational efciency expert Josh Ramsbottom is a big believer in the virtues of well-designed KPls and dashboards. "The right data can be used to improve productivity, understand and pursue opportunities, and build transparency, team alignment and engagement,\" says Ramsbottom. a Senior Business Advisor with BDC's Advisory Services who specializes in coaching businesses on operational e'iflciency. First pass yield Scrap rate Time from order to nal delivery On-time delivery rate Accident and reportable incident rates Other waste-related metrics Number of innovation ideas proposed by employees Revenue from innovations Sales Conversion rate Number of new contracts per period Average value of new contracts Number of sales calls Marketing Marketing return on investment Website and social media trafc Social media conversion rate Search engine keyword ranking Average website session duration Human resources Employee turnover Employee satisfaction and engagement Absenteeism rate Training hours Diversity representation, hiring. retention; promotion and compensation rates 4. Display KPls to your team With the right KPls in hand, it's important for your team to see them and regularly talk about them. Dashboards are key for this. You can create personalized dashboards that each employee can see on their company portal showing relevant KPIs. You can also put dashboards on monitors or digital displays around the business that show metrics applicable to different departments and the overall company. With Industry 4.0 or smart manufacturing technology, you can automate data collection, analysis and display directly from equipment. What makes a good dashboard? Dashboards should be: Updated often so they stay relevant. Clear and simple so yourteam can see the KPls at a glance and easily understand the data and trends. Reviewed regularly to ensure they incentivize the activities you want. Used as a focal point to inspire and guide conversations at meetings and team huddles. You can also include the data in regular KPI reports. "Be sure to put the data where employees will see it and talk about it so it drives behaviour to your goals,\" Ramsbottom says. Want to take the next step to boost your productivity? Read our free eBook to learn more about Exlpfofg Metal efciency or fill out a form to start talking with one of our experts. \"It's really about data. In the 21 st century, data should be driving your decisions. It's not about emotions anymore,\" he says. The wrong KPls can hurt a business Ramsbottom gives an example of the power of KPls to help or damage a business. He worked with a company that was having trouble with poor on-time delivery and couldn't gure out why. The culprit turned out to be a poorly thought-out KPI. The company was giving employees a cash bonus each day if they hit their production target. The problem: The defect rate was through the roof. which meant many products had to be reworked, leading to delays. The KPI was also causing employees to prioritize production of items that were quickest to make, not those needed for delivery. \"They had lost control of scheduling, production planning and quality control because the KPI was driving the wrong behaviour,\" Ramsbottom says. Changing KPIs to focus on quality control and timely delivery led to major benets for the company: reduced defect rates, inventory costs and real estate needs for scrap and work in progress improved productivity, cash ow and profitability better employee engagement and customer satisfaction less clutter in the facility The benefits can be very signicant when companies adopt appropriate KPIs. What is the purpose of KPls? KPls serve three major purposes: 1. Gauging and improving performanceKPIs let the business owner, efciency supervisors and other employees understand the company's performance and productivity. You can compare data to industry benchmarks. analyze it to identify gaps and opportunities to improve. and monitor trends and progress toward objectives. such as those in your strategic plan or an operational efciency project. 2. Ensuring stable operationsA second major purpose is to ensure systems, processes and teams are operating at a stable rate. "KPls are like a speedometer in your car,\" Ramsbottom says. "If I see my speed uctuates greatly, something is probably wrong with my vehicle or driving. A KPI tells me everything is running smoothly.\" 3. Incentivizing your teamKPls also let you incentivize and reward your team in a fair, non-emotional way that eliminates favoritism and moves the business toward its objectives. "How do you say somebody did an amazing job if you can't tell them how well they did the job or what your expectations were?\" Ramsbottom asks. "Businesses are increasingly using KPIs for HR because they align with the expectations of the millennial workforce and help address today's labour shortages.\" KPls are not the same as milestones Keep in mind that KPls are not the same as milestones. The latter are events marking progress toward completion of business initiatives. They' re often used in planning documents. but shouldn't be confused with KPls, which are based on data. Performance indicators include three elements 1. Objectives -............= -.................... 2. Gaps 3. Team results Weeks 0 1 2 3 4 5 6 7 8 9 10 11 12 13 4 steps to select the right KPIs Ramsbottom uses four steps to help businesses design and use KPIs.1. Review current metrics The rst step is to look at what KPIs, if any, you currently use to measure your business. Companies usually keep an eye on some basic data, such as annual nancial statements or client feedback. But many businesses neglect to develop more sophisticated data as they grow. "When companies are small. it's easy to have a direct line of sight to sales or production and gauge instinctively whether the business is okay or struggling,\" Ramsbottom says. \"But as companies grow and mature. that line of sight usually gets obscured. Starting on a KPI journey is about guring out what you need to know to proactively make the appropriate decisions at every level of the business, and not reactively wait until month-end or year-end statements, which are lagging indicators.\" Starting on a KPI journey is about guring out what you need to know to proactively make the appropriate decisions at every level of the business. 2. Understand your goals The next step is to review your business objectives. This is a key step when choosing the right KPIs. "We need to know where we're going if we want to develop a plan to get there," Ramsbottom says. "Once we understand the goals, we can look at all areas of the business and ask how each department or unit inuences that target.\" You can use a Gemba walk and lean principles to identify challenges in your company. Root cause analysis and Pareto analysis can help you locate the key underlying causes of problems. while structured problem-solving or a Kaizen blitz are useful for developing solutions. Example of a business dashboard Productivity Revenue/labour hours Billable time Billable Target Non-billable On-time delivery On-time Late Financial health A - - LA....Margins Cash TIow Installations Rentals Services JFMAMJJASOND Debt management Q1 Q2 Target Q1 Q2 Times Debt: interest Equity 3. Set appropriate KPIs Now you're ready to choose KPIs for various areas of the business and the company as a whole.Three elements that make up good KPIs KPIs should be: i. Targeted Set different KPls at various levels of the business that drive employees toward your broader objectives. "If you want to increase the company's overall sales, the sales team needs KPIs that support that bigger number," Ramsbottom says (see below for sales KPI examples). KPls should also be related to activities that employees can inuence. "You can't reward orjudge a team for an activity they can't control,\" Ramsbottom says. Be aware of how KPls may incentivize activities that affect other functions. For example, if you incentivize your sales team to sell more. make sure your production department can handle increased orders. ii. Practical Collecting the data should be easy and quick. Ideally, it should be automated. "You don't want to have to crawl under a machine every hour and collect 17' different numbers. then multiply them in a complex formula? Ramsbottom says. iii. Sufcient You need enough indicators at each level of the business. but not too many. \"A common mistake when businesses start doing KPls is they tryto do too many.\" Ramsbottom says. "Or they tryto nd a single KPI for the whole company." Examples of common business KPls Here are some commonly used KPIs for different business areas and objectives: Examples of common business KPIs Here are some commonly used KPIs for different business areas and objectives: Financial performance Revenue growth Net and gross prot margins Margin by product line Cash on hand Cash conversion cycle Inventory turnover EBITDA 1v'alue created by each employee Operations and distribution Defect rate Return rate Customer complaint rate Machine and employee downtimes Capacity utilization Throughput First pass yield