What goals, ball exchanges, and won tackles are in football, Key Performance Indicators (KPIs) are in the business world. They indicate how the organisation is performing, reveal opportunities, and signal the need for a change of direction. Anyone who wants to use KPIs to measure progress toward corporate goals works best with a strategic KPI framework.
The Foundation of a KPI Framework
To identify strategically relevant metrics for a KPI framework, two aspects are particularly important: the business model and the growth or corporate strategy.
Business model
Who are the customers? What is the company's value proposition? What does the value chain look like, and what is the monetisation mechanism? Answering these four essential questions about a company's business model provides indications of the central metrics.
Strategy
The business model describes the current state; the strategy describes the target state and the path to get there. Some dimensions of the business model may be particularly important in light of the strategy. In some cases, the business model is also to be supplemented or changed. These changes also find their way into the KPI set.
In the case of strong growth strategies, particularly in the technology environment, developing a flywheel can provide additional insights. Which processes and metrics reinforce each other? These particularly central components should in any case find their way into the strategic KPI set.
5 Dimensions of Strategic KPI Systems
To structure KPIs, five dimensions are recommended in order to reflect both the strategic and the operational level.
1. Culture KPI
This KPI often makes the corporate vision or the central value proposition measurable. It captures the essence of the company that every employee should know. Netflix has defined its value proposition as "See what's next. Watch anywhere. Cancel anytime." The number of available series or films, or the availability of content across different devices, can serve as central cultural KPIs here.
2. Business model metrics
This is where the KPIs derived from the analysis of the four dimensions of the business model are found. Metrics that do not change or change only slightly do not necessarily need to find their way into the KPI set.
3. Growth metrics
These KPIs relate to the scaling factors and further factors that measure progress toward strategic goals. They do not necessarily have to be the same as those derived from the business model.
4. Functional KPIs
The various functions within the company such as marketing, operations, product, and others need their own KPI sets to make progress visible. These KPIs are defined on the basis of the company's key figures.
5. Financial metrics
Revenue, margin, and profitability are among the most important KPIs indicating the financial situation of a company.
The goal is not to include every factor that is relevant in some way to corporate success. The focus should be on the essential factors, those that require management attention. Key factors, Key Performance Indicators, so that the framework is meaningful.
The Roadmap to a KPI System
We approach the development of a KPI system in four steps that have proven effective in our work with clients.
1. Business model and strategy
The first step is to properly understand the company's own business model again and to build on the existing strategy work. Which metrics are important, and which are already being measured? We then review together what the strategic goals are and which business dimensions contribute to them. Should the business model change in the future? If so, this must be reflected in the KPI model. From this first step, hypotheses for relevant metrics are derived.
2. Status quo review
As a second step, we conduct a series of interviews with key players in the organisation. This includes the management team, but also other influencers who perform important functions. What principles do they manage by? Which metrics do they look at? How do they think about scaling? The goal is to gain a consistent picture of the organisation and to create transparency: what is currently being measured, and what should be measured?
It is also worth thinking about what the core activities of the different departments are: is the marketing team primarily responsible for lead generation, or should it be driving brand awareness? Depending on the answer, a different set of metrics will be needed.
Based on the findings and on the review of strategy and business model, a series of workshops takes place. In these, we work together with the company to progressively narrow down which KPIs are truly important, until the absolute core metrics have been identified.
3. Development of the integrated KPI system
Based on the business model, strategy, and status quo review, the KPI system is developed along the five core dimensions.
4. KPI reporting and processes
Once the KPI system has been defined, it must be implemented in reporting. Together with BI and potentially a reporting team, the relevant dashboards are built and reporting routines are established.
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