Annual KPI targets alone are not actionable
Every year strategic planners face the daunting task of determining key performance indicator (KPI) targets. Various approaches including industry benchmarking, historical baselining, and vision setting can be used to establish the right set of targets. However, once organizations set annual targets they often prematurely end the process without breaking them down into quarterly or monthly figures.
Establishing annual targets alone can create gaps in the performance management processes. Without quarterly or monthly benchmarks, it becomes impossible to create accountability, foster constructive performance conversations, and drive actionable recommendations to leadership teams.
Monthly and quarterly KPI reporting also force strategic planners to factor seasonality into discussions. During the 2016 holiday season, Amazon’s net sales exceeded $43.7 billion accounting for nearly a third of their annual sales revenue. Despite these figures, seasonality is often ignored in target-setting logic.
How to break KPI Targets down into monthly and quarterly KPI Reports
Many KPI targets are reflected with a flat line and require little thought for monthly and quarterly adjustments. Rates, for example, often have the same target across months, quarters, and years. If a company were to track a Learning and Growth KPI such as “Percent of employees who completed onboarding on-time,” the target likely would reside around 100% regardless of seasonality.
For any sales-driven KPI, the rationale may differ. At ESM, we typically see higher software sales in Q1 and Q3 due to new budgets. Therefore, our “number of customers” KPI should reflect a target line that is higher in those quarters.
Year-to-date is still vital
The primary goal of strategy management systems is to generate effective decision-making. Both year-to-date data and current performance are crucial to that conversation. Without the two, the picture is incomplete.
For raw number KPIs, like “sales” or “number of customers”, it is best practice to create two charts to visualize the data. In the example below, the two charts juxtaposed show the year-to-date and quarterly data. This approach generates insights into current performance and the big-picture.
Balanced Scorecard Immaturity is not an excuse
I’ve heard from several organizations that their BSC process is too immature to handle granular targets, or that target decomposition is part of a later implementation phase. I would argue that it is preferable to have imperfect quarterly targets than none at all. Targets, like KPIs themselves, must evolve in response to new information. Targets should not be fixed or irreversible. They should inform the conversation, and help leadership understand reasonable performance expectations.