Since most leaders – because of the economic environment – are being asked to do more with less, introducing Key Performance Indicators (KPI) into your organization can be an excellent improvement strategy. A KPI is simply a measure that predicts future outcomes of performance. Often confusion arises over what an appropriate KPI is designed to do.  Here are some practical rules for designing KPIs for your business in a step-by-step order.

Decide what outcomes you want to achieve. An example may be to achieve $100,000 in net profit for the year. We all know that net profit does not just show up at our doorstep, so what are the indicators for you that will predict net profit for you in the future? Choosing a shared outcome or goal is very important. How motivated are employees going to be for you and shareholders to line the company's pockets with net profit?  It's probably not very likely unless they partake in a profit sharing plan. So, rule number one is to be sure that you select the right goal that is shared among everyone that you want to work together to achieve it. 

Decide what activities are most important to lead to your defined outcomes. Here is where we need to be really honest with ourselves and get specific about what are really the best activities to lead to our goal. We always love to rationalize our activity and convince ourselves that the things we are working on will make the largest difference. Within ActionCOACH, we have a very specific formula that is guaranteed to lead to a net profit outcome that is called the 5 Ways. The KPIs that are part of the 5 Ways are Leads, Conversion Rate, Number of Transactions per Customer, Average Dollar Sale per Customer, and Net Profit Margin. Increases in these 5 KPIs are guaranteed to produce Net Profits for you. If you are completely honest, what are the true KPIs for you that will lead to your desired outcome?

Be sure that the KPI is a consistent measure of that activity and it is indefinite. When a KPI is implemented, it should be a measure that does not end at some set time period like a goal would have a set timeframe. For example, you could always measure and improve on the Number of Leads that you are acquiring through your marketing. On the other hand, the goal of implementing a single marketing campaign would have a definite timeframe and would not be considered a KPI. The number of marketing campaigns initiated for the quarter, however, would be an example of a KPI because you always could improve on that number. A KPI that can be measured indefinitely offers your team the ability to monitor and continuously improve on their efforts. 

Decide how you will measure the KPI and report it consistently. A KPI is not a KPI until it produces a number that can be compared and looked at over a trend in time. Putting a process and system in place to be sure that the KPI can be accurately reported in a consistent manner is a must. Otherwise, a permanent change will not occur and inconsistent results will ensue. 

Decide who is accountable to the KPI and its measure. My recommendation is to always begin with a company wide KPI before implementing individual KPIs for your team. If individual KPIs are introduced before a company KPI, then people's behavior tends to be individual in nature and communication and teamwork break down because people are concerned about their own personal results.

Introducing a company KPI first and then a department KPI next, provides employees an example that you as the leader are taking accountability and that everyone needs to work together to achieve the KPI target. One of the most powerful motivators is peer accountability. If people know that their evaluation is based on the performance of the team as a whole, they will either bring other team members up to new standards or make low performing team members uncomfortable. The healthy conflict that occurs is a powerful motivator for teams and releases the pressure from an authoritative top down approach. 

Once you have the reporting and accountability in place, set targets for your KPIs and align incentives to them. Once you have the systems and consistency in place for your company, you then can introduce incentives to targets you set for the KPIs. Be careful because once you align monetary incentives to the KPIs, be prepared to see employee behavior change. You want to be sure that employee behavior is aligned to your correct outcomes and that is why steps 1 through 5 are so important.

As a leader in your organization, if you feel like you are the one doing all the work, then introduce KPIs into your company and watch your employees take over. It's hard to win the game if you do not know what the score is. I hope you have a high performance month. 

Brian Blomgren is the owner of Atlanta's ActionCOACH, a business coaching and training company. Brian's professional experience includes work with McKesson and HBO in addition to owning and investing in several independent business ventures. Brian has an undergraduate degree in Industrial Engineering from Georgia Tech and an MBA from Emory's Goizueta School of Business. Brian specializes is helping small and mid-sized businesses become more productive and successful.