Annual Plans:  KRIs and KPIs

Last week, I posted about initiatives.  This week I want to talk about measurements.  There are two kinds of measurements used in Plans. 

The first type of measurements are called Key Results Indicators (KRIs).  They measure the results of business activity.  An example of a KRI is Revenue.  Revenue is a result of Sales, which is a primary business activity of every for profit company.  It also is a very important number to the Income Statement and every company should be planning for and setting measurements for Revenue.  I know this seems very basic, but we need to include the impact of any Initiatives in these measurements.  When will the initiative become important?  Will I see benefit from the Initiative in this metric or other ones?

The second type of measurements are called Key Performance Indicators (KPIs).  These measure day to day work that should be driving results to some KRI.  An example of a KPI for Revenue might be the number of Sales Calls that are made.  If you want to drive higher Revenue, then one way to do it is to call on more prospects.  There should be some correlation between these numbers, but the Sales Calls will happen before the Revenue increase.  Depending on your Sales Cycle (the time between first contact and deal closing), you might have a good predictor of future Revenue.

And from that basic approach you can see the idea here.  KRIs are all about what happened in the past.  KPIs are all about what is going to happen in the future.  The goal of planning is to choose the right KPIs for your business and set the goals for them to meet or exceed your KRIs goals.  As you can imagine, this is an imperfect science and the first time you will likely get it wrong.  But it is the exercise of that connection in your business from your activity to your outcome that is important. 

Let me give you an example of a not KPI from my past and how it related to a KRI.  When we bought the former Reltec group in Dallas, their Product Manager showed us a chart.  This chart showed housing starts in some specific geographies to revenue from the company.  He could show a connection between the Revenue the group got with the housing starts from 6 months earlier.  The good news is that this connection was easy to track.  The problem was that the group had no control over it.  And that is what we want out of KPIs.  A level of control by our own actions.  So while this was a valuable tool, it was not a KPI in a business process way.

A better example would be a cost reduction plan that I worked on at AFC.  We stack ranked the products by volume and then took the top 10 to evaluate what could be cut out of the design or out of the manufacturing.  We set a dollar amount that we needed to save through this process and measured it quarterly.  Each group that had responsibility with the top 10 had a goal to deliver on.  That allowed us to track at a lower level how each team was doing.

So, that is a little about measurements and how they can be created to drive business results.

Have a great day! 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

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