When we start learning about effective performance management, our first step is to search online or ask around. After a while, we'll receive a lot of advice. One of those pieces of advice is to build KPIs.
2 COMMON METHODS FOR BUILDING KPIs
1. METHOD 1: BSC-KPI
- Build KPIs using a "waterfall" approach from top to bottom. Some places play on words and call it topdown. Includes:
+ Step 1: Define the strategy based on 4 balanced aspects
+ Step 2: Define strategic KPIs based on 4 balanced aspects to create a BSC (Balanced Scorecard)
+ Step 3: Allocate strategic KPIs down to departmental KPIs
+ Step 4: Allocate departmental KPIs down to positional KPIs
- Disadvantages:
+ If implementing KPI building using the pure BSC-KPI method like this, we will encounter at least two problems: Some positions have too few or no KPIs, or employees and leaders suffer from the "Uh uh uh… I don't know how to do it" syndrome.
2. METHOD 2: JD – KPI
- Build KPIs from the job description. This method is called bottom-up KPI building. The steps are as follows:
+ Step 1: Determine the organizational structure
+ Step 2: Determine job descriptions (KRA – Key Result Areas)
+ Step 3: From the tasks in the job descriptions, determine KPIs
- Disadvantages
+ Implementing the JD-KPI method, we will encounter the problem: “Employees achieve KPI results but the organization may not necessarily achieve its goals. Employees receive bonuses but the organization incurs losses.”
MIXED METHOD BS – JD – KPI
PHASE 1: TOPDOWN
- Identify the strategic flow
- Define the strategic map
- Identify strategic metrics and indicators
- Integrate strategic metrics and indicators into the Balanced Scorecard (BSC)
- Complete the company's BSC:
+ Weighting of perspective and components
+ Units
+ Frequency of control
- From the completed BSC, allocate indicators to departments according to the CTH principle (C: Main responsibility, reporting and explaining; T: Participating in the workflow; H: Supporting and providing information)
PHASE 2: BOTTOMUP - FROM THE BOTTOM UP
- Receive allocated indicators from the company
- Treat the company's indicators as departmental goals. - Break down departmental goals into smaller objectives to make them easier for the department to achieve. - Define the functions, responsibilities, and positions of the department.
- Identify performance metrics and work targets from the department's functions and processes.
- Gather these metrics and targets into an allocated target table to create a KPI (Key Performance Indicator) library.
PHASE 3: COMPLETING KPI CARDS FOR THE PERFORMANCE MANAGEMENT SYSTEM
- Reduce and select appropriate KPIs for each position.
- Modify and add/remove metrics to address weaknesses when applying KPIs.
- Build a measurement and reporting system.
- Develop a performance evaluation and compensation policy to motivate KPI achievement.
- Test the policy before implementation.
PHASE 4: IMPLEMENTING KPIs IN PRACTICE
- Plan the work.
- Implement the measurement. - Assess and identify areas of weakness requiring training.
- Implement a compensation system.
Source: Blognhansu
