Softkey Performance Indicators Are “Mission Critical” – Here’s How To Build Them
BusinessIn this article we will work through a real life example of an operational soft KPI that changed a company’s relationship with its customers. After reading it, you’ll be able to apply a similar thought process to your own business.
Establishment of target service levels.
The business: specialized auto component repair services. The company had a KPI model in place.
The Clients: Auto repair companies that deal with consumers and their insurers.
The service: Collection of repair work, repair at a dedicated specialist facility and return to the customer.
The symptom: frequent inquiries and constant complaints about the date and time of delivery.
The real problem: Jobs are queued in the order they are received, regardless of the complexity of the repair. Small, simple jobs would wait because they were queued behind large, complex jobs.
The first solution: Jobs scheduled to meet a specific day and time of return; complex jobs would be scheduled for a later time. The customer was informed of the execution of the return delivery with the price quote before the work started.
It worked? Partially. There was no target level of service, no measure of performance. It was not tied to the corporate marketing strategy.
Set target level of service: Ask customers. A quick and dirty phone survey suggested that 48 hours was an acceptable delivery time, because the bottom line was their ability to tell the customer when the vehicle would be ready.
Performance Target: An evaluation of 2 months’ history showed that around 15% of jobs were complex and could not reasonably be completed within 48 hours. We guessed that 85% might be the correct point.
Target service level: 85% of jobs will be returned within 48 hours. This was a promise that no competitor could match.
Performance Measure: We predicted that if the target LOS was achieved, complaints and inquiries would be reduced to a low level. The complaint log showed that complaints dropped to zero within 4 weeks of launching the new system and disclosing it to customers.
The results: Market share increased dramatically as the auto repair industry embraced the new standard and word spread that the service was reliable.
Internally, productivity increased due to better scheduling. Disturbing queries and demands for special treatment were virtually eliminated.
Operating profit increased.
Soft KPI Test
On three occasions over the next 2 years, the complaints suddenly increased in volume. A quick check of the service level showed that it had dropped below 85%. Prompt corrective action restored the incidence of complaints to its normal low level.
My conclusion: We were lucky that our first estimate of the desired level of service was correct. If customers needed 90%, we would not have seen the desired reduction in complaints.
If customers had been 75% satisfied, we could have experimented with that and monitored complaints. If they increased, we could go back to 85% LOS, but we would have unnecessarily annoyed some customers and put our goodwill at risk. Also, some competitors could have reached 75%, so there would be no competitive advantage.
85% LOS worked for everyone, so don’t play with a winning formula.
This is a classic “soft KPI”.
Measuring it doesn’t help you understand what’s going on. Understanding what is going on does not help to find a solution without measuring. Both are necessary to make sound decisions.
Soft KPI setup
Look for performance indicators that logically influence business performance, but where the effects are distant in time and place from the cause, and where you can’t link them to your KPI model using an algorithm.
An example is job rotation. Everyone knows that this is very expensive and that high job turnover has highly disruptive effects on business performance.
Is job turnover a KPI?
It can’t be a hard KPI because you can only estimate the effects on profitability with varying degrees of uncertainty. You can’t incorporate it into your accounting system although you may find some of the costs eventually buried somewhere in your accounts. The rest of the costs come from losing something that drives a hard KPI, usually in the same way that losing a customer leads to a drop in sales. The reason is that you can’t predict the cost of losing just one good employee, or the extra gain of losing just one bad employee.
It all depends, but what?
You can correlate job turnover with profitability, but only over an extended period of time. You can’t define a formula that links job turnover to a hard KPI with confidence.
Job turnover can be a soft KPI, but only in some companies. In highly seasonal businesses that rely on casual labor, the costs of hiring and training casual workers are high, can be budgeted for, and managed as a strong indicator of performance.
Compare that to the loss of a key vendor; the value of your knowledge of your business and your customers is always difficult to estimate and expensive to replace.
Therefore, a soft KPI must satisfy some, perhaps all of the following criteria in order to be useful.
* Clear correlation of the soft KPI with a related hard KPI.
* A metric that allows you to track performance against the flexible KPI.
* Clear links to a driver KPI or a trackable “consequence” KPI. Controller KPIs are leading indicators.
* The ability to estimate a threshold that can operate.
* Is it mission critical? Warn of a potentially fatal error?
Can you fit them into a KPI model?
Probably not. That doesn’t mean they’re not “mission critical.” They must be tracked.
The product safety issues driving product recalls are mission critical, as Toyota recently discovered to its great cost. I’m sure Toyota knows what their hard product recall KPIs told them after the event, but the soft KPIs that could have highlighted the cause of the problem were clearly missing.
Threshold effects confuse the setting of soft KPI targets.
Many cause and effect relationships in business are not a linear correlation. In some cases, there is a threshold effect at work.
The problem of establishing the correct level of advertising spending is a good example. We know that in some markets the investment in advertising has to buy enough space to be visible to customers. Spending below that threshold, wherever you are, does not increase sales, because below the threshold you are invisible. Above the threshold, the results flow,
Likewise, looking at our service example, setting the target LOS too low would do nothing for customer satisfaction. Hitting the right number worked like magic.
Places to look for soft KPIs
Quality and service are essential functions, where mission-critical soft KPIs can be found. As I have shown, threshold effects are common. Both hard and soft KPIs are useful in evaluating product and service quality, and it is productive to link the two types of KPIs.
Project management similarly relies on soft KPIs and hard measures. The predictive element of project forecasts is inevitably soft because it uses measures of probability; critical, but only hard after the event.
In the field of sales and marketing, measures such as customer satisfaction are confused by the challenge of finding reliable measures, and the correlations with hard measures are not as high as we would like. Market share figures usually rely on industry surveys or statistics and these can be quite unreliable.
Employee morale and engagement are clearly important and difficult to measure reliably because the inherent errors associated with opinion polls confound the results.
You must be alert to the need for leading indicators. These are the most useful, because they allow you to take corrective action before things go off the rails.
Sales forecasts, in fact all forecasts, are soft KPIs, even though they are provided as hard numbers. They are KPIs, but each forecast should have confidence limits so you can assess its reliability. Forecasting is, of course, mission critical in most companies.
Soft KPIs and their management process
Soft KPIs offer great value to your management process, so you should never ignore their existence. It’s just that the differences between soft and hard KPIs mean you need a different approach in how you develop them and how you use them. If you follow the advice and thought process illustrated in the story, you’ll be well on your way to identifying your soft KPIs and putting them to work.
Rigid KPIs are easy to work with because they have one characteristic that doesn’t change; they are mathematically linked to measurable changes in business performance.
Soft KPIs are a bit more difficult, because you can identify the reasons why they are important to your processes, but there is no algorithm to define how they interact with business performance.
When you find the soft KPIs that are meaningful to your customers, you can refocus your staff on the things that really matter and transform your business.
Soft KPIs are business or sometimes industry specific, so you may find a source like kpilibrary.com helpful for brainstorming.