Setting targets and key performance indicators
- 1 Overview
- 2 Benefits of reviewing your business
- 3 Assessing activities and identifying measures
- 4 Choosing and using key performance indicators
- 5 Setting targets for your business
Having a performance measurement system should give you reliable information to allow you to set targets for implementing your growth strategies. You will should update your business plan with your new strategy and make sure you introduce the developments you have noted.
This guide sets out the business benefits of performance measurement and target-setting. It shows you how to choose which key performance indicators (KPIs) to measure and suggests examples in a number of key business areas. It also highlights the main points to bear in mind when setting targets for your business.
Strategic business reviews are useful if:
- you are uncertain about how well your business is performing
- you want to know how to get the most out of your business or market opportunities
- your business plan is out of date - eg you haven't updated it since you started trading
- your business is moving in a direction different to the one you had planned
- the business is becoming difficult or unresponsive to market demands
The benefits of performance measurement
Knowing how the different areas of your business are performing can help you to assess where your business is strong, where it is weaker and factors you can change for the better.
You should focus on specific factors that are easy to measure and show the areas where your business is successful when compared to the rest of the market. These are known as key performance indicators (KPIs).
You should measure non-financial targets as well as considering financial ones. Some others areas you could consider are:
- your customers - eg how many you have, how often they use you and how many customers you have lost or gained
- customer service - eg waiting times for assistance, complaints, or reasons customers have complained
- market share - eg whether your share of the market increased or decreased against competitors
- your staff - eg satisfaction levels, work quality or attendance records
The benefits of target-setting
Your strategic visions can sometimes be difficult to communicate, but you can break your main objectives down into smaller targets to make it easier to manage. By doing this, your smaller targets become more like day-to-day operations which, once completed, move you closer to your final goal.
It is a good idea to find the areas which make your business successful and then decide how best to measure performance in those areas.
Make sure you find the correct measurements for the areas you want to assess. For example, a manufacturer that produces and sells low-cost goods in high volumes might focus on production line speed. Alternatively, another manufacturer that produces smaller quantities but uses high-cost components might focus instead on reducing production line errors.
Assess your core activities
A good starting point for your business performance review is to evaluate what you actually do - your core activities, the products that you make, or services that you provide. Think about what makes them successful, how they could be improved and whether you could launch new or complementary products or services.
For example, some of the things you could consider might be:
- How effectively are you matching your goods and services to your customers' needs?
- Which of your products and services are succeeding? Which aren't performing as planned?
- What's really behind the problems of a product or service?
- Are you conducting frequent financial management reviews? Are you keeping a close enough eye on your direct costs, your overheads and your assets? Are there different ways of doing things or new materials you could use that would lower your costs?
Answering these questions will give you the basis on which to improve performance and profitability.
Finding your specific measures
Once you have identified your key performance indicators (KPIs), you need to find the best way of measuring them. You should focus on the areas and elements of your business performance that make you successful or profitable.
For example, you may decide that customer service is a strategic priority for your business and start measuring this. You might consider measuring:
- the proportion of sales by returning customers
- the number of customer complaints received
- the number of returned items
- the time it takes to fulfil an order
- the percentage of incoming calls answered within 30 seconds
None of these is necessarily better than any other. The challenge is to find which specific measure - or measures - will enable you to improve your business.
This type of measurement unit is often called a KPI. A typical KPI is usually expressed as a number, and it captures a key driver of the business.
Some businesses also use colour-coded systems of measurement, such as traffic lights. For example, red can signify a problem while green can mean all is fine.
Using standardised measures
There are standardised performance measures that have been created which almost any business can use. Examples include balanced scorecards and industry dashboards.
There are a few things to consider when selecting key criteria that your KPIs should meet:
- They should be as closely linked as possible to the top-level goals for your business.
- Your KPIs should relate to aspects of the business environment over which you have some control. For example, interest rates may be a crucial determinant of performance for a given business, but you can't use the Bank of England base rate as a KPI because businesses have no power to change it. By contrast, a business' exposure to fluctuations in interest rates can be controlled and so this might make a useful KPI.
Getting the most from your KPIs
Your KPIs indicate trends in your business performance so you can use them to spot potential problems or opportunities. For example, if the trends are moving in the wrong direction, you know you have problems to solve. Similarly, if the trends move consistently in your favour, you may have greater scope for growth than you had previously forecast.
You can also use your KPIs to set targets for departments and employees throughout your business that will deliver your strategic goals.
Setting performance targets can help you deliver the strategic changes that many growing businesses need to make. The top-level objectives of your strategic plan can be implemented through departmental goals, and setting targets based on KPIs is an ideal way of doing this.
For example, a company seeking to expand on the basis of its product design capabilities might target year-on-year increases in the number of patents it secures, new product launches, or licensing income. The specifics will depend on which KPIs best capture the dynamics in the market.
Setting SMART targets
Your targets should be SMART - specific, measurable, achievable, realistic and time-bound:
- Using KPIs ensures your targets will meet the first two criteria, as all KPIs should, by definition, be specificand measurable.
- Achievable- you need to set ambitious targets that will motivate and inspire your employees. Look back at your recent performance to get a sense of what is feasible.
- Realistic- setting realistic targets means being fair on the people who will have to reach them. Make sure you only ask for performance improvements in areas that your staff can actually influence.
- Time-bound- people's progress towards a goal will be more rapid if they have a clear sense of the deadlines against which their progress will be assessed.
Using your review to set your business goals
One you have obtained adequate research into your business, you should reconsider the following questions:
- Where is the business now?
- Where is it going?
- How is it going to get there?
These questions should help you to refocus your goals and plan how you are going to reach them. At the end of any review process it's vital thatwork plansare prepared to put the new ideas into place and that atimetableis set.
Regularly reviewing how the new plan is working and allowing for any teething problems or necessary adjustments is important too. Today's business environment is exceptionally dynamic and it is likely that you will need regular reviews, updates and revisions to your business plan in order to maintain business success.
Business Gateway can give you more advice on setting targets. Call us on 0845 609 6611 for more information on our services.