“IT is part of a complex ecosystem that is in constant movement and we need some great mechanism to understand if we are on the right track – on our journey to achieve our strategy and objectives. IT often starts the journey with no compass and hope to reach the final destination by chance. Not good enough in the digital age!”
A couple of years ago, I was asked by a CIO to head up the new Performance Management unit in a large IT organization. It was a completely new function and frankly, we did not have a good understanding of what Performance Management actually was. So, I asked the CIO about his expectations on Performance Management – and he came back to the same story over and over. For him, Performance Management was about reducing the number of KPIs from 25 to 5. It seemed like simple task but required a completely new way of think around strategy and governance. So, how do you set great and focused KPIs?
Let us start with the most common mistake – the definition. A Key Performance Indicator measures the organizational performance against a strategy, objective or expectation. Meaning that a KPI that is isolated from strategy, objectives or expectations have no value. I see many organizations measuring things “for fun” in the organization in a quite unfocused way with no reference to strategy or objectives – not good enough! Every KPI must be primarily be linked to a strategy or objective – and secondly to a situation (SWOT) influence the performance and value creation of the IT organization.
I am often asked to review organizational KPIs and here is a list of the most common mistakes:
- To many KPIs! Not unusual with 20 – 30 KPIs – must be reduced to maximum 6 to achieve strategic focus!
- KPIs with no reference to strategy or objectives – obstacle for value creation.
- KPIs with too long life expectancy (3- 5 years) – not possible in an industry high impact of digitalization and unpredictability.
- Only top-down KPIs – no freedom for units to optimize their way of delivering value. Needed for self-governance and trust!
- Internal KPIs measuring “IT for IT” and not “IT for business”. It is stated in research (Gartner) that IT organizations measuring “external” metrics are more cost efficient, value creation, and innovative. Always translate the IT KPI into a business context!
- High belief in standardized KPIs and scorecards. Don’t buy the book of “1,000 golden KPIs every IT organization needs” and try to implement it. There are no shortcuts to great KPIs!
A conclusion from working with KPIs for a long time is that we often underestimate it importance and try to stress the work in the organization. We often start too late with the work and it is not seen as an integrated part of strategic planning. If the strategic planning is weak – then you will with all certainty have weak KPIs. Simple as that!
I am sometimes asked about the importance of KPIs. “Why do we have KPIs at all? Isn’t it unnecessary?” Well, it obviously depends. I see IT as part of a complex ecosystem that is in constant movement due to digitalization, globalization and new customer behavior. Also, our work to achieve the objectives is always challenged by misunderstandings, resource conflict and new directive. Still we have strict targets to reach. My point is that we constantly need to check if we are on the right path to success as our environment is constantly changing. Imagining driving from Stockholm to Gothenburg where the roads are re-built everyday – and no map in the world can anticipate how the roads will change from one day to the next. So, either you can drive “happy go lucky” and hope the roads have not changed this particular day – or you constantly check if you are on the right track. The KPIs are the checkpoints on our journey towards our agreed strategic objectives. The KPIs will give us quick indications if we are on the right track or not.
Ok, I understand the need for KPIs but how do I do this? Based on my experience, I have developed six simple steps to great KPIs. It is an easy framework to guide It organization in setting the right KPIs to achieve the strategic objectives.
- Understand the ecosystem and level of unpredictability. What are the workings of the ecosystem and how fast does it change? What is the life expectancy of each KPI?
- Focused IT strategy and strategic themes. This is the most critical step and we need to quality assure the IT strategy. Do we have a focused strategy with clearly prioritized themes (maximum three themes)? If not – we need to rework the IT strategy!
- Guiding principles for the KPIs. Here we need to define and agree on common principles for the KPIs. For example, common vocabulary, roles and responsibilities, number of KPIs, deadlines and deliveries, tools and processes, and need for benchmarking.
- Building great KPIs! Build the “KPI bible” including definitions, where to get the data for reporting, its strategic significance, and who to validate the figures. No more than six KPIs are allowed. An idea is to already here breaking down each KPI to understand how each theme and KPI are achieved. If we are not achieving a KPI – what are the most likely reasons for this and where to start looking for a solution.
- Setting targets! We need to set target to set the ambition level of the IT organization.
- Communication! Set up a communication plan to define who will get which performance information when. Is performance data available for all or for a few?
In most cases, the main problem is in step 2 with a focused IT strategy. A majority of the IT strategies I have examined does not include any focused and prioritized strategic themes based on a strategic analysis – but rather the quick “vision to action” association. It is a strategy where the vision of the IT organization is described with high ambition and then a number of strategic initiatives (> 20) to fulfill the vision. The problem is that it does not say anything about the change journey, how we deliver business value, how to allocate resources and investments, and why change is needed. This “vision to action” strategy is impossible to implement and set meaningful KPIs to. What shall we measure? Should we measure the implementation of strategic initiatives? I don’t think so.
My point of view is that “performance” become a “buzzword” that many IT managers use but without the full understanding of its complexity. Therefore, KPIs and “performance” have been very misused during the last 20 years. We are happy to measure – but pay little attention to what we measure and the impact to measuring the wrong things. Image the situation if our objective is to drive to Gothenburg (from Stockholm) in the fastest time, and we measure “gas consumption per kilometer” as our key performance indicator. By optimizing the gas consumption, we will probably not end up at our target in an acceptable time. The problem is that our passengers (business) will not be happy (promised a quick ride to Gothenburg). Do you see the point?
- When embarking on a journey to implement KPIs in your organization – spend some time to understand what this means. What are the pre-requisites for great KPIs and the most common failures?
- Study the “Six steps to great KPIs” to understand the best way forward. Do not underestimate step 2!! Understand that it will take time to achieve great KPIs.
- Contact Sofigate – we are experts in the field of KPIs and Scorecards! We will help you to set up great KPIs for your unique organization!
To set up 25 KPIs to randomly monitoring the IT organization is easy (with little value) while setting up only 5 KPIs is difficult (with high value). The message from my CIO was absolutely correct but it took a couple of years to understand its implication. Moving from 25 to 5 KPIs will impact the strategic planning, the structure of the IT strategy document, governance and general leadership. To implement great KPIs is a matter of maturity in the CIO office (or IT governance) that will determine how IT contributes to business success in the digital era. To have great KPIs in no longer a “nice to have” but rather essential for the greatness of the firm. The question is – are your ready to challenge your strategic planning, IT strategy and governance to become the business superstar? It will hurt on the way – but the reward is enormous! Time to take the first step!
Sofigate: Senior Advisor