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So, when time is short and there are competing priorities for your attention, how do you make sure that you focus on the key metrics for your organisation, rather than getting lost in a deluge of data which isn’t necessarily all relevant?
There is no doubt that strategies change, but very often management accounts and key performance indicators (KPI) remain constant. The problem is how easy it is for people to end up valuing the metrics that they're measuring, rather than measuring the metrics that they value. So, how do you ensure that you focus on the right information?
Firstly, KPIs need to be aligned to your strategy and, while this may seem obvious, it is so often missed. Lots of companies have a strategy focused on 'growth' – but is that growth of revenue or profit; of customer numbers or average customer spend; of product range or of repeat orders; of existing geography or new territories? All of those are valid strategies– but each will have a different KPI. It’s important to pick a KPI that actually aligns to what you're trying to achieve – otherwise you will be flying blind.
There should be a mixture of leading and lagging indicators. Lag indicators track results happening now or in the past; such as revenue or headcount. Lead indicators track a current activity that will change future performance; such as hours spent on learning and development, or advertising spend. However, it is important to note that lead indicators are not infallible, as an increase in advertising spend is not guaranteed to increase revenues, although they can be useful in providing a view of likely future performance and, therefore, an early warning to take corrective action if needed.
Metrics also need to be appropriately spotlighted. If you bury your most relevant metrics amid lots of 'noise', they will not get the appropriate level of attention. If your strategy is to improve profitability, then this is the metric that should always be in the spotlight – in board packs, in internal newsletters, in presentations, in employee awards, etc. Results will certainly suffer if, for example, revenue is the metric that is always talked about as people may value revenue growth at the expense of margins and profitability.
It is advisable that organisations review their KPI selection regularly and certainly whenever there is a change to strategy or plans. That way the metrics will always be relevant and focussed on what you really value – meaning that you can have proper visibility of your progress towards achieving your goals.
As an added benefit, you may find that reviewing your KPIs leads to a reduction in the amount of reporting you collate (but not necessarily the amount of data you capture). Refining your KPI selection can remove a host of unnecessary reporting work for finance, and ensure that what is being reported are the metrics that management really value.