In order to be most effective, Key Performance Indicators (KPIs) require targets.
Aren’t KPIs and targets the same thing? They are not, but the confusion over this stems from people using the terms interchangeably. KPIs help organisations understand how well they are performing in relation to their strategic goals and objectives. First, you start with a strategic objective, then you decide how to measure it (your KPI) and then define a target for your KPI.
Let’s look at an example to illustrate the steps.
1. First, a strategic objective is defined to improve quality.
Improve quality = strategic objective
2. What is one way to measure your progress toward the strategic objective? You could reduce waste.
Reduce waste = KPI
3.Then, a target has to be established for the KPI.
Reduce waste by 10 percent by the Dec 2020 = target
Targets Must Be Specific
Considerable goal-setting research and target setting practice shows very clearly that your targets need to be specific and time-bound.
A target for your KPI helps measure where you are in relation to where you want to be.
Targets can be set as:
- Absolute: “Increase of seven”
- Proportional or percentage: “Increase of 4%”
Targets should be defined relative to:
- Internal benchmarks: “Surpass last year’s results.”
- External benchmarks: “Surpass competitor X.”
- Global best practice: “Become as good as X.”
Targets should have a clear time frame:
- Achieve target X by December 2020.
When your targets are specific and tied to a timeline for completion, you remove any confusion or ambiguity. The people involved will know exactly where they are where they are heading.
Targets Should Be Realistic and Achievable
Targets should push your team and present a challenge or a stretch compared to current performance. Beware of stretching them too far, however, because if a target is considered unrealistic and too hard to achieve, your team won’t strive to achieve it. You also don’t want to make the target too easy because it won’t be taken seriously by your team and they won’t engage with the KPI.
The objective of any KPI is to be a mechanism for learning and delivering continuous performance improvement, so setting the right targets is critical to facilitating that outcome. Here are a few more tips to help set the right targets:
- Detect trends and patterns: A look at the existing data you have that gives you performance history is a good place to spot trends and patterns that can be extrapolated and used to define a target.
- Account for seasonal variations: In some cases, seasons will impact performance. If you create a target that’s only ever possible for three months of the year, your team will not take it seriously.
- Take national targets, best practice benchmarks into account: National targets or the best practices of other organisations in and outside your industry can help you determine a stretch target that is achievable but that pushes your team.
- Consider cause-and-effect relationships: For example, there is no point setting top-level outcome targets if you don’t then set appropriate operational targets for the people charged with delivering on that target. After all, you can’t expect to deliver better financial performance tomorrow unless you hit the right KPIs on customer satisfaction, efficiency and employee engagement today.
- Take time lags into account: It will sometimes take time for leading indicators (such as improved brand awareness) to translate into lagging indicators (such as increased sales).
Setting the right targets for your organisation’s key performance indicators is essential for them to drive high performance and for your organisation to develop a corporate culture of learning, growth and empowerment