What exactly KPI is?

When it comes to KPI, the word "assessment" immediately comes to mind. Assess and manage employees with KPI. It's easy to equate KPIs with performance and reviews. But it's not.

KPI has been misunderstood.

What exactly is KPI?

KPI is a Key Performance Indicator. The core of a KPI is the Indicator.

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In the real world, indicators are used to show you the way.

Driving on the highway, the sign of the speed limit of 80 is an indicator. Indicator is to indicate what kind of standard code our behavior should conform to in a particular place. Another example is the dashboard in a car. You put your foot down, you know you're speeding up, but by how much, you don't know. You have no idea what your foot on the gas is doing to this car. Because of the dashboard, the speed limit is 80, you're going 100, and you know: It's time to ease up. Without the dashboard, it's hard to know how hard you're stepping, when to step on it, and when to let it go. The Indicator lets you see where you are, what the results are when you make an action, and how you should react. Knowing this thing, in this position, what I should do. What kind of norms are there. These are all called indicators.

What's the point of indicators？

If you're in the gym, you probably know a BMI indicator. BMI, Body Mass Index, or Body Mass Indicator. It is a standard commonly used worldwide to measure how fat and thin the human body is and whether it is healthy. How do you calculate that? You take your weight in kilograms divided by your height squared.

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With BMI, one thing I knew when I looked at this picture was what kind of range my body type was in. I think I know if I'm fat or thin. Before BMI, you probably didn't know how to measure whether someone was overweight. The same 150 catties, is fat is light, the body shape is healthy, put on 1.5 meters and 2 meters of people, completely different, so BMI is an Indicator. Where you are, where you want to go, if you wish to be fat or thin, that's your choice. But first, you have to know. Know where you are and where you stand. "Know" is the Indicator, not the assessment.

What's the goal of indicators？

Once we know the Indicator, we need to know what it's trying to accomplish. What exactly are you looking for when you look at BMI? You don't live for BMI, your goal is to be healthy. BMI, on the other hand, is just an Indicator of fitness. You look at BMI to tell yourself whether you're healthy or not. Blood pressure is also an Indicator.

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Let's look at this chart, invented by humans to measure a person's blood pressure and cardiovascular health. When we do a physical exam, we'll tell you that 140/90 is the threshold for blood pressure. That means systolic blood pressure is 140 or less, and diastolic blood pressure is 90 or less. If you take your blood pressure and get 120/80, congratulations, you're in the normal range. If you measure it, it's 160/90. You have to be careful. But 160/90, is that the number you care about? Not really. What you care about is being healthy. Cardiovascular and cerebrovascular health is the goal; Blood pressure, on the other hand, is just an Indicator of cardiovascular health.

What if your SBP is 139? What's the difference between 139 and 140? 140 is nervous. 139 is not scared? So, don't put too much weight on the numbers. What should be looked at is cardiovascular health. This is what you want to achieve behind your back.

Indicator = Observation tool ≠ Assessment standard

We'll use the Indicator, but don't use it for assessment. 140/90 is a human invention, but this invention, on the contrary, many people misunderstand health. Think of it as a test. Once you get below 140/90, you're a good employee. Once you get above that, you're out. That's not right. If you know BMI, you can measure it, but you don't necessarily use it. Why is that? Because, sometimes, the way you "see" can go wrong.

On November 13, 2017, the American College of Cardiology redefined hypertension. The line for measuring blood pressure health, they say, should not be 140/90 but 130/80. That means the company has changed its assessment criteria by the end of the year. This line is going down. And you know what that did? There was an immediate 14 percent increase for people with high blood pressure. Over 100 million people worldwide, overnight, develop high blood pressure. These people weren't hypertensive one night, they wake up the following day, and they're like, gee, I'm hypertensive. But there had been no change in their health during the night. Their real goal has not changed, but how he is assessed has. The meaning of KPI has not changed, but the assessment result has changed.

Sometimes, the problem is not the KPI but the mistake of taking some "standards" to evaluate employees. KPI is used to indicate performance but is not necessarily suitable for assessment. Always remember, metrics, it's not assessment. What kind of KPI will be used for evaluation? It depends on the business situation. As far as the company is concerned, revenue, profit, or any number, are important indicators, but they are not your goals. The healthy growth of the company is the real goal. It would help if you found the right hands for your health right now. As for the moment, what matters most is revenue, revenue growth, profit, or margin. It's your choice. And how much income, how much profit is healthy? That's how you use Indicator.

How do you find your indicators？

So, how do you find your indicators? How to measure your business? Let me give you an example.

Imagine you have a transportation company that operates in the trucking business and employs several drivers to transport goods to different cities. What Indicator would you use to measure your transportation costs?

The process of thinking about this question reflects on what dimension you are measuring your transportation costs from. For example, truck prices are an essential component of transportation costs. A truck has a useful life, and over time, that loss will spread to the cost of transportation. But that's not the only Indicator.

In addition, there are gas prices, driver's salaries, highway tolls, truck maintenance costs, etc. With so many expenses, how do you put them all together? This shows that the accurate Indicator to measure a truck's transportation cost does not exist.

We can only create this Indicator. Many KPIs are made and not visible from the financial statements.

Finally, you have to figure out what is it that directs your business? If you think the cost of transportation is essential, what dictates it? The answer is the cost per ton per kilometer. Trucking companies measure transportation costs, and the ultimate KPI should not be those numbers but the cost per ton-kilometer. But the cost per ton is not in your financial statements. It's not even on any of the reports. Only this number can indicate your core competence as a trucking company. If your cost per ton/kilometer is lower than others, you have a competitive advantage in the market. This number shows how competitive you are and gives you an idea of where you stand in the market. Then, indicate your business and behavior.

Conclusion

It would be best to learn to use KPI to check your goals as a manager. However, remember that indicators are not used to measure. They are used to indicate. The role of indication is far more than the role of assessment. The choice of Indicator reflects the wisdom of the manager. Only when you find suitable KPIs will you understand your business. Indicator changes, how you see them, and how you control them define your business analytics skills.

Need more help? Check out the Zentao blog. They have more articles on project management tools, software management, building cross-functional teams, and so much more.

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Author bio :

Liu Run - Founder of Runmi Consulting
Liu Run, founder of Runmi Consulting, the principal of "5-Minute Business School", is a well-known business consultant in China, providing strategic consulting services for many well-known enterprises such as Haier, COSCO, Henderson, Baidu and so on.