It is easy to say that SMART KPIs must clearly align to business objectives and to state that your business vision and your business objectives must be clearly articulated, however, the process needs focus and collaborative input and agreement from key stakeholders in order to be truly successful.
Smarter KPIs – Are They Achievable?
With the potential for insufficiently researched strategies, requirements and specifications, poor communication and miscommunication (on both sides), differing agendas, personality clashes, corporate environment misalignment, terminology misunderstandings, and inaccurate perceptions to contend with, it’s a wonder that any vendor relationships turn out to be successful. But appropriate planning, good research, careful communication, and a having skilled team to manage the process from start to finish can make all the difference.
For anyone to know that they are on target for success there needs to be a measure that they can refer to. There has to be a reliable, accepted performance indicator that both client and vendor can review to determine progress, to show that milestones have been reached. And that is your KPI, or Key Performance Indicator. After all, a service delivery relationship or project that does not have clear and defined progress markers is open to abuse from less scrupulous vendors (and clients) that could charge additional fees for requirement changes, even when the only change that has happened is a clarification that should have been identified by the vendor in the first place as part of their ‘duty to warn’.
The 6 Steps to Smarter KPIs
To offer greater insight into the world of KPIs and the huge importance of their role in the success of complex in-house and outsourced projects and relationships, we have condensed several decades of war wounds, trials and tribulations into 6 clear steps to smarter KPIs:
Step 1: Understand the true purpose of KPIs (they’re not just performance measurement)
In service delivery partnerships, KPIs are targets that need to be achieved or someone has to explain why not. They can be considered the periodic goal along a road to project completion. A true, but not complete, definition.
Wikipedia says: “KPIs evaluate the success of an organisation or of a particular activity in which it engages. Often success is simply the repeated, periodic achievement of some levels of operational goal (e.g. zero defects, 10/10 customer satisfaction, etc.), and sometimes success is defined in terms of making progress toward strategic goals. Accordingly, choosing the right KPIs relies upon a good understanding of what is important to the organisation.”
To my mind, this is also only partially right. A KPI is primarily a learning, motivational and refocusing tool – a statistical indication of where you stand on your business-critical tasks in relation to where you are going. They are quantifiable measures offering those involved in a service delivery relationship or project, visibility of their contribution on, and the magnitude of, the task that lies ahead.
While the data gathering, graphical representation and dissemination are essential parts of the process, more important still, and where many organisations go astray – ending up driving the wrong vendor behaviours – is on determining not only what they should actually be measuring in the first place, but why.
Step 2: Build your third-generation balanced scorecard
The design process for a third-generation balanced scorecard requires involvement from the entire management team who will eventually use it. The managers themselves, not external experts, must make all decisions about the balanced scorecard’s content. The process begins with the already clearly articulated organisational vision and business objectives. These inputs should have been used to build a ‘strategic linkage model’, describing the shorter–term management priorities – both the strategic activities to complete and the strategic outcomes to achieve. Then assign owners from within the management team, who subsequently take the quantified/clarified objectives, and design the measures and targets associated with them.
The main improvements with this third generation of balanced scorecard and aligned SMART KPIs relate to the greater relevance of the strategic objectives. Objectives are selected in the context of the organisation’s longer–term strategic goals, using a destination statement, and the greater “ownership” of the objectives by the business, its Intelligent Client Team and the service provider.
Testing your KPIs through Early Market Engagement can help you determine how realistic your objectives and SMART KPIs are for the service budget you have available and what service providers can do to achieve them. And from this initial research, KPIs can be determined, and later refined, as part of your selection process to formalise the right relationship with a selected supplier.
Step 3: Identify what to measure
While relatively easy to put in place the processes required to track indicators you have deemed important enough to classify as KPIs, it is infinitely more difficult to identify exactly what to measure in the first place, why, and what behaviour you are trying to drive as a result. KPIs need to be focused on the right actions and services throughout an organisation that are combined to drive the behaviours that enable you to achieve your relationship or project objectives. Important questions you should be incorporating into this decision are:
- What are the best measures to identify progress towards business objectives?
- How much change should occur at different stages along the timeline of achieving an outcome to identify that you are on schedule?
- Who is responsible for achieving these results?
- When should these indicators be reviewed along the timeline?
- What is the ‘lessons learned’ and ‘delivery reshaping’ process to capture the good behaviour and eliminate the poor behaviour from both sides going forward?
Here are a few additional questions we would recommend you consider when determining the right KPIs for your project or relationship. Are they:
- Clear enough? For a KPI to be effective it has to be clearly defined so that everyone understands what is expected of them. Ambiguity often leads to confusion and disagreement, both of which take away from the fundamental purpose of the KPI.
- Easily communicated? Following on from clarity is the ability for you to inform all stakeholders of your expectations of them in terms they will understand. So the language used is important.
- Measurable? It may sound obvious, but all KPIs need to be measurable through standard and accepted means in order for clear and undisputed results to be gathered, shared and appreciated.
- Realistic? If the data you are collecting is not gathered (or gatherable when you need it), if it could cost too much to obtain, if the data is not relevant enough to the project or the organisation, or if the processes being measured cannot be changed (enough), even if the indication is that they should be, then such KPIs are unrealistic measures.
- Guiding the right behaviours? KPIs can be used by some to justify doing only what is required of them. They should not stifle innovation: they should encourage it.
Individually, KPIs offer only a partial picture of what is happening in your relationship or project. For a clearer view it is important to develop an entire suite of indicators – in other words, a ‘balanced scorecard’ that is aligned to your business outcomes. This web of gathered knowledge can then, over time, be used to identify progress patterns and behaviours so that projects and relationships can be managed more effectively. Cost, quality, efficiency and user perception can then be mapped more accurately and, through this, overview strategies can be formulated to ensure that deviations from the path are corrected, and innovations introduced to ensure even better results than were planned for at the outset.
Step 4: Evaluate which KPIs encourage the most productive behaviours
It is common for KPIs to be used by clients to reward or punish vendors. This is one way of using them. But, to be contentious, using KPIs in this way is like electrocuting chimpanzees for bad behaviour. Yes, science has proven that it stops chimps behaving badly quite quickly, but it also stops them from trying anything new – because they don’t know if they will be electrocuted again.
Unfortunately, for all of our talk and experience of smart KPIs, balanced scorecards and driving the right behaviours, there are some vendors that simply don’t ‘get it’, but, over time, experience will help you to recognise these vendors. In these cases, the ‘blunt instruments’ of carrot and stick KPIs – withholding payments and resorting to contractual escalation processes – are the only actions that keep such organisations on track, keeping the lights on for your service delivery. It’s a fact of life that there will be times when you just have to accept that this is how some vendors are. Naturally, you can’t expect any innovation from these organisations. But they are usually quite good at taking cost out of an existing process that is unlikely to change – or that you don’t want to change; you just want it to be delivered as-is, only cheaper.
Fortunately, this type of vendor is disappearing. Most vendors these days have strong innovation teams and are working towards strong partnership models that deliver high mutual value – with flexible contracting arrangements that allow for no-penalty de-scoping of services as well as increasing service capacity.
KPIs have to be designed very carefully – and the numbers of them need to be used sparingly as it can drive the wrong sorts of behaviours if you present KPIs as the goal rather than as an indicator towards an ultimate target. Through the regular and widespread dissemination of KPI data in easy-to-consume graphical form, those responsible for pushing the relationship or project forward will recognise their importance and they will become embedded into both client and vendor organisations and worker psyche. And this is fundamentally how you are able to positively influence good behaviour across a project or service delivery relationship.
KPIs should also not be considered static measuring tools – they should evolve and change with the implementation and maturity of the project or relationship, adapting to enhance their effectiveness as management utilities, motivators and productivity lightning rods. KPI evolution is an important stage in your relationship lifecycle as it should be recognised that however much you invest in determining the most appropriate KPIs at the outset of your partnership, you are likely to need to adapt or refine them at regular intervals (minimum every six months) throughout in order to achieve your business objectives.
So, whether you are measuring employee engagement, percentage of processes optimised, identifying whether your transformational outsourcing partnership is actually delivering value that stands up to external scrutiny, or the reduction of time to delivery or innovation levels on the project/relationship, it’s important to recognise that KPIs serve two primary functions:
- to identify shortfalls and opportunities in achieving your business outcomes
- to set specific targets at all levels within your service delivery relationship/project and organisation.
Step 5: Acknowledge the reality of KPI selection
In reality, there are some inevitable influences that cannot be avoided on any project/relationship which will contribute to the selection of your KPIs.
- Board-level input. Those at the top should know the strategic intent of their organisations best, but that does not always mean that they are the best people to decide on relationship/project level KPIs. Often front-line employees, vendors (with caution), external advisors and in-house specialists are. Will they be given enough airtime or will board-level mandates be non-negotiable?
- Management input. Politics has no place in KPI selection, though it will often try to creep in. Throughout the management hierarchy there will be those who will attempt to influence KPI selection for their own ends. Beware of this agenda when accepting advice. This is also true of external advisors who have an interest when performance isn’t going well.
- Customer/citizen input. The amount of importance placed on the opinions and perceptions of customers does vary widely between organisations, and while it is always useful to ask for their input, it is also important to ensure that larger customers do not influence the relationship/project direction away from your corporate goals without good reason.
- Supplier input. Same as customer input, it varies by organisation, and once again a healthy wariness of agenda needs to be employed here.
Step 6: Recognise patterns and act upon them
KPIs offer up their best insights over time. It is the comparison of results between organisations or periods of time that reveal a pattern, and this is why a recognised, regular and recorded series of KPIs need to be actioned throughout a project.
Having an ‘Innovation and Implementation Board’ (note the word ‘implementation’ in the title) with the right stakeholders is key. Ensure that you have a formal reshaping process for capturing what is working well, what is not, and the ideas that the people on the coalface have to improve matters. Brainstorming really innovative ways of piloting and testing and doing things differently, is important. But what is even more critical is the method of implementation. Actually doing it.
‘All talk and no action’ is an impotence that you should not allow to infiltrate your Innovation and Implementation Board. If you have a formal reshaping process that is operated every 6 months, it will keep your business outcomes, KPIs, relationships, stakeholders, contracts, specifications and requirements all focused on the key goal – driving maximum value that can be evidenced, in your relationships and mission-critical projects.
Smarter KPIs – Conclusion
As an aside, we are a very visual species, us humans. Our brains find it far simpler to recognise patterns in graphical form than numeric. It is important to determine the best way to visualise your data – using brightly coloured and inspiring visual aids, through a KPI dashboard, a traffic light system or on graphs – so this information can reveal its hidden nuances and can be used to engage with front-line project staff to quickly recognise what is going well, and what is not, and then to drive the right behaviours as a result.
Be mindful that the knowledge gathered through KPIs is of little relevance unless shared with those with the authority to enact the necessary changes within a relationship or project. Really good KPIs are increasingly challenging to define and keep simple to operate: it is even more difficult to predict the behaviours they drive if they are misaligned. However, the ongoing intelligent identification of the business drivers for the parties involved, appropriate documentation, steadfast collection, analytical interpretation, innovative visualisation of KPIs is still essential to the successful management of any strategic service delivery relationship or project.
Want to Learn More About SMART KPIs?
If you want to learn more about SMART KPIs and how to optimise your strategic supplier relationships speak to the experts at BPG.
Call us on 0845 345 0130, email advice@bestpracticegroup.com or schedule a confidential chat directly with an expert here.
