Imagine running a competitive multi-day marathon: you are aiming to win the overall race, however, you have no idea what your standing is in relation to the other runners until the end of each day. Not having a real-time metric that tells you where you place in the pack of competitors will severely impact your ability to make immediate adjustments to your strategy. For instance, do you go for broke on the next hill, or take it easy and save your energy for a final spurt? Without dynamic and timely performance indicators, the runner’s ability to enhance and alter his/her strategy will be severely diminished and competitive advantages will not be actualized to their fullest.
As in the world of competitive running, businesses will never fully understand how they are truly faring in the marketplace unless they have accurate and timely key performance indicators (KPIs). As Peter Drucker once stated: “You can’t manage something you can’t control and you can’t control something you can’t measure.” As KPIs have become a staple of the global business lexicon, the way we look at and discuss KPIs has continued to evolve. While the most important KPIs of an enterprise tend to be focused on financial performance on an inter-department basis, increased attention is being given to vertical-specific KPIs.
When we talk of vertical KPIs, we usually speak of a more generic set of KPIs that apply to a given industry, or more specifically, a set of performance indicators that are common for corporate conglomerates engaged in a specific business activity or provide a similar product/service. Thus, vertically oriented KPIs can apply to an entire industry segment (e.g., automotive manufacturing, hospital care, etc.) or they can apply to sub-segments, i.e., focus on unique business processes that will remain siloed at a product or department level (such at IT, corporate affairs, human resources, etc.).
The aim of lower-level KPIs should be to provide an increased transparency into greater depths of the business. With more vertical-centered KPIs, firms can discover and uncover business issues that have remained hidden for years. Problems with wasteful or ineffective business processes will finally bubble up to the surface. Having a clear measure of the output of a business process in terms of resources (human and material), time and quantitative production is a must for all businesses that compete in the global marketplace. The only way to truly stay lean, nimble and agile, is to know exactly how your business is performing in terms of each product or service. This detailed transparency is also a must if governance, risk management and compliance efforts [see my Dashboard Insight articles on GRC for more detail] are to succeed according to plan.
The need to better track individual employee performance makes a very compelling case for vertical KPIs. Having a set of performance indicators that can focus and measure a suite of tasks which are determined by job description will greatly enhance the effectiveness of employee performance reviews and serve as a valuable aid in their future development. Such KPIs can be used as measures of individual or business unit performance, making reviews and bonus payments less subjective and more objective. Employees will be able to better set goals, be more accountable, and have a comfort level with all formal review or performance evaluation processes.
The pitfalls of verticalizing KPIs will differ from industry to industry; however, there are important caveats that senior managers need to keep in mind:
- There may be extra expense involved in structuring KPIs to measure quality on business processes when applied at a lower level. Some customization may be inevitable to properly capture the nuances of unorthodox or manually intensive processes.
- There is a clear and present danger of organizations becoming “KPI heavy,” as they try to measure too many granular facets of the business at once. Applying KPIs to business areas that reflect a more finite minutia of process can divert attention and resources away from the tactical management of the core business. Firms do not want to be held hostage to KPIs, especially ones that vertically mirror a specific line of business or tactical operational silo.
- Just as enterprise-level KPIs should not serve as substitutes for strategic business planning and governance, lower-level KPIs have the potential to render an organization “KPI dependant,” where they apply too much focus on meeting existing KPIs at the expense of proper business planning.
- KPIs used to measure specific internal processes will often be unusable in other business areas due to their customized nature.
- Just as siloed data can have a multitude of adverse consequences for a company, so too can siloed KPIs. This is especially true if KPIs are leveraging data that is unnecessarily siloed, making quality assessment tools brittle and difficult to leverage in the future. Be aware of future change management issues and document all scalability concerns.