This article was written by Erez Shilon, who is the Senior Product Manager of Leverate.
In the first part of this series, we talked about why we should use KPIs in our organization. Now let’s talk a bit about the ‘how’: which KPIs should we set, how to do it properly, and most importantly, how to ensure that we are getting the correct data.
How to set KPIs
When we set KPIs we are doing it to measure the improvement of a process, and definitely not to improve the KPI to match the existing process. Therefore, it’s important to make sure we define a few things in the process (let’s assume our KPI is conversion rate):
1. How well do we perform right now? What’s the current conversion rate? Do we agree on how to calculate it?
2. What is our goal? Let’s assume our conversion rate is 3.5%, and we want to get to 8%. It’s more than a 100% improvement (!). Is it even possible? What’s the industry average?
3. Improving processes takes time. The growth may not be linear. I suggest setting goals throughout the year: Jan (3.5%) Feb (3.7%) Mar (4.1%)… When you set the growth on a timeline, think about the following: past performance patterns, seasonal and outside effects.
There is significant importance to the level of KPIs and how we choose to communicate it. In part I we discussed how KPIs can be used to benefit team meetings and help the organization move forward. This is something that can be easily understood – each member of the organization should align to the same objective.
Every management book out there will explain how important it is that all organizational hierarchies align to the same objectives. This is hard to do in real life (if it were easy, all organizations would be very successful).
There are usually a few reasons why organizations don’t do well in setting up good KPIs for different levels of the organization:
1. Make sure the KPI fits the role: a junior support engineer can’t be expected to have responsibility for the goal of increasing traders LTV by 5%, since there are many other factors that affect the LTV. If given this goal, the junior support engineer may get lost and will probably be very frustrated.
2. Make sure management knows the reasons for success: executives should be getting clear understanding of how the KPIs help their ‘top line’ (increase revenues) and create relatable goals for their employees.
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3. Link between the organizational and operational KPIs: maybe the most frequent problem happens when the goals (and KPIs) of the hierarchies are not linked correctly. In our example, the organization’s goal is to increase traders LTV, and by doing so, increase top line revenues. If the KPIs of the support, retention and management are not connected to the organization’s KPIs (increase top line revenue), we will have a dysfunctional organization.
Allow me to illustrate with a simple example of how things can go wrong: the goal of the company is to increase top line revenues. Each department may get a different goal: management – increase LTV, retention – increase volume, support – stricter SLAs, etc. SLA measurement for support or trading volume for retention may not increase the LTV and then management will be measuring something which isn’t supported by the employees and therefore reporting to the board on KPIs which have no connection to reality.
When things get better (or worse) they won’t have clear explanations as to ‘why’.
So how do we link KPIs? I believe that the best way to do it is by making sure each department’s KPIs are set according to what generates the most value for a set goal. In the given example, in order to increase LTV (which is a good KPI to increase top line revenues), brokers should focus on ‘net deposits’ more than they do on ‘trading volume’.
However, this is not enough. We need to make sure we also have ‘supporting’ KPIs, meaning, measuring actions which support the increase of ‘net deposit’ (i.e. engage your top tier traders X times a week with relevant offers related to deposits).
Once the correct KPIs are set, we should assign them to the right people, but also – make sure that they own them and that they understand how they impact the ‘management’ KPI. In return, management can now explain this to the board with ease: we are ‘winning’ or ‘losing’ because of a specific reason, process or actions that we have taken.
So let’s assume that all the KPIs are set, agreed upon and also carefully linked so everyone knows that they are contributing to the overall effort. Now all that’s left is to actually measure. This is where things may get a bit tricky, since in some scenarios, the cost of measurement may be too high. To achieve this, I offer you three general rules:
1. Start with what brings the most value to the organization. This is something that can be measured with a few parameters: value, cost, and alignment with company goals. As a product manager I have a quick tip: prioritization is something most product managers do well, so make sure to include them in the process (it’s usually a good idea to get their ‘buy-in’ as well).
2. Agile: you don’t have to wait for all KPIs to be set in order to start. If you can start focusing on just 2/5 and deliver the rest later, it will still make a HUGE change in the organization. You’ll find that it will get everyone speaking the same language and working towards what really matters. This is a very strong principle in ‘agile’: deliver value as soon as you can.
3. Don’t set too many KPIs: focus is very important. Sometimes during these KPI meetings, every member of the organization would want to add something else. Make sure you keep the KPIs to a minimum and deliver only MVPs (Minimum Valuable Product) at the beginning of the process.
Now that we know how to set KPIs, in the next part we can discuss what to do with them, once we have them set. Basically, how to make the organization ‘tick’ according to its KPIs.