Fouad Awad | Associate Consultant
15th July, 2020
An implication of the above subtitle is that you cannot improve your department's or an individual's performance in a specific key result area (KRA) like sales if you do not, or cannot measure and benchmark actual performance in that particular area. To measure performance, you need to design and apply appropriate key performance indicators (KPIs). A KPI is a measure of performance linked to a particular key result area or simply, KRA. Therefore, KRAs and KPIs go hand in hand. Examples of KRAs include recruitment, training, compensation, manufacturing, sales, customer service, quality, profitability, productivity, employee engagement, etc. How can you manage (primarily improve) these result areas if you do not measure present performance in these areas?!!! The main purpose of this article is three-fold:
1. Explain the difference between a KRA and a KPI.
2. Elaborate the exact meaning of a SMART KPI.
3. Demonstrate how a KPI can be used to set SMART objectives and continuously improve the status of a certain KRA.
The best way to understand the difference as well as the relationship between KRAs and KPIs is by considering what happens at the doctor's clinic when you go there for a consultation. In this case, the KRA is your health. This is the result that you want to check out and improve. To start with, the doctor or his nurse will measure those health vital signs like blood pressure and body temperature in order to find out how you are doing. Don't be surprised, blood pressure and body temperature are KPIs used to measure your health. Simple, isn't it? If say your blood pressure is above a certain medical benchmark (120/80), the doctor tells you that your blood pressure is high and you need to reduce it towards the benchmark of 120/80. The benchmark, in this case, is the target. Next comes the action plan that needs to be put in place to reduce your blood pressure. This might include losing weight, eating healthier, and exercising daily. Without first measuring the ‘performance’ of your health, the doctor wouldn’t be able to prescribe an improvement action plan for you to follow.
Many people confuse a KPI with a task. For example 'going three times to the gym per week'. Is this a KPI or a task? Going to the gym three times per week is a process or a task. Where is the result? There is none, so far at least. Another example of a task is 'conduct twenty job interviews per week'. Where is the result? The latter is not to conduct so many interviews. The result is to fill a vacancy as quickly as possible and with the right person. Conducting interviews is the process or the task that leads to achieving the desired result. Similarly, going to the gym three times a week is not a result. Losing five kilos by the end of the month is the result. Visiting potential clients monthly is not a KPI. It is a process. Achieving a 10% increase in sales through these visits is the result.
So what is a KPI? As stated earlier, it is a simple but very clear measure of performance linked to a particular result area. Each of the functions of HR, for example, is a key result area. HR people have to achieve results in recruitment, training, development, compensation and benefits, employee relations, succession planning, employee satisfaction, employee relations, employee morale, etc. If you take recruitment as an example of an HR KRA, the number of job interviews conducted per period of time is not a KPI for sure because it does not reflect a result in that area. Examples of appropriate KPIs linked to recruitment would be:
1. Average time to fill a vacancy. The less the time, the better.
2. Average cost per new hire. The less the cost, the better.
3. Qualified applicant ratio. The higher the ratio, the better.
Please note that a KPI is a lagged indicator because it measures a result that has already taken place. Leading indicators are quite different. They will be the subject matter of a future article.
Not every measure or metric is a KPI by default. Below are the characteristics of result-driven or SMART KPIs:
1. A KPI is a measure of performance linked to a specific result area (KRA).
2. A KPI is a statement without a verb (average time to fill a vacancy or average revenue per customer). A KPI is neither a number nor a date. It is just a measure as shown in the above recruitment KPIs. As we shall see later, a SMART KPI can be transformed into a SMART objective.
3. A KPI has to be simple and fat-free so that it can be easily understood. It shouldn’t be complicated. Simple is beautiful.
4. A KPI has to have a clear unit of measurement. (%, $, days, etc.)
5. A KPI has to have a clear and specific formula to measure it.
6. A KPI can be reported on demand.
7. A KPI must be cost-effective to measure, monitor, and report. It does not make sense to design a KPI that costs a lot of time and money to collect data to measure it and report it regularly.
Now that you have designed a specific KPI you can use it to set SMART objectives at any organizational level; corporate, departmental, or individual. Below is an example of few SMART objectives:
1. Reduce average emergency room patient wait time by 30% by end of quarter 4, 2020. Where is the KPI? It is 'average emergency room patient wait time'. What is the KRA related to this SMART objective? It is 'patient service' or 'customer service'. The target is the number '30%', and the deadline is 'end of quarter 4, 2020'.
2. Reduce the average time to fill a vacancy from 67 days to 40 days by end of quarter one 2021. Where is the KPI? It is 'average time to fill a vacancy'. The KRA to which this SMART objective is related is 'recruitment' with a target of '40 days' and the deadline to achieve this result is 'end of quarter one 2021'.
3. Reduce employee turnover rate by 15% by end of quarter four 2020.
4. Increase average revenue per customer by 25% by end of quarter two 2021.
5. Increase average employee productivity by 10% by end of 2021.
As can be seen from the above examples, a SMART objective has the following general form: Action verb (reduce) + KPI (turnover rate) + Target (15%) + Time (end of quarter four 2020). You can write all your SMART objectives in this clear and simple way.
The process of continuous improvement consists of the following steps:
1. Highlight the KRA that is to be improved.
2. Design a KPI to measure that KRA.
3. Calculate the KPI based on available department data.
4. Benchmark the calculated KPI internally and externally. By internally I mean with a previous company/department result (last quarter or year) and externally by comparing your present result with industry leaders.
5. Set a SMART objective for improvement over the next period (see examples above).
6. Formulate a plan to achieve the SMART objective.
7. Implement the plan, monitoring and reviewing continuously.
8. Hold specific people accountable for achieving the desired result and reward generously when and if the result is achieved or exceeding the set objective.
In my next article, I will differentiate between lagging and leading indicators and show how they could be used.
NB. I will be very happy to answer all your questions related to this article. Please do not hesitate to get in touch. I look forward to hearing from you. My email address is [email protected]
About the Author
Fouad William Awad is an Associate Consultant with Meirc Training & Consulting. He holds a Bachelor’s degree in Economics from the American University of Beirut and a Master’s degree in Development Economics from the University of Leicester, UK.