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Soft Key Performance Indicators Are "Mission-Critical" – This is the Way to Develop Them
In this article, we discuss a real-life example of a working soft KPI that changed a company’s relationship with customers. After reading this, you can apply a similar thought process to your business.
Setting target service levels.
Field of activity: specialized auto parts repair services. The company had a working KPI model.
Clients: Auto repair companies that deal with consumers and their insurers. So
Service: acceptance of repair work, repair in a special institution and return to the customer.
Symptom: Frequent requests and constant complaints about delivery date and time.
The real problem: jobs were on a first-come, first-served basis, regardless of the complexity of the repair. Small simple jobs would wait because they were queued behind big complex jobs.
The first solution: jobs must respond on a specified day and time; complex works would be planned for later. The customer was informed about the return work with a quote before starting the work.
Did it work? Partially. There was no target service level or performance measure. It was unrelated to the company’s marketing strategy.
Set service benchmarks: Ask customers. A quick and dirty phone survey revealed that 48 hours was an acceptable time frame because their ability to tell the customer when the vehicle would be ready was critical.
Performance Goal: Evaluation of the 2-month history showed that about 15% of the jobs were difficult and could not be reasonably completed in 48 hours. We thought 85% might be the right point.
Service target: 85% of jobs are returned within 48 hours. It was a promise that no competitor could match.
Performance Indicator: We predicted that complaints and inquiries would drop to low levels once the target LOS was met. The complaints log showed that the number of complaints dropped to zero within 4 weeks of launching the new system and introducing it to customers.
Results: Market share increased dramatically as the auto repair industry adopted the new standard and word spread that the service was reliable.
Internally, productivity increased due to better scheduling. Annoying inquiries and requests for special treatment were virtually eliminated.
Operating profit increased.
Soft KPI proof
Three times in the next 2 years, the number of complaints suddenly increased. A quick check of the service level showed that it had dropped below 85%. Prompt corrective action returned the complaint rate to its normal low level.
My conclusion: We were lucky that our first estimate of the level of service we wanted was correct. If customers required 90%, we would not have seen the desired reduction in complaints.
If customers were satisfied with 75%, we could have tested it and tracked complaints. If they went up, we could move back to 85% LOS, but we would have needlessly upset some customers and put our goodwill at risk. 75% would also have been achievable by some competitors, so there would be no competitive advantage.
85% LOS worked for everyone so don’t mess with the winning formula.
This is a classic “Soft KPI”.
Measuring it doesn’t help you understand what’s going on. Understanding what’s going on won’t help you find a solution without measuring it. Both are necessary to make sound decisions.
Setting soft KPIs
Pay attention to KPIs that logically affect business performance, but whose effects are far removed from the cause in time and relevance, and for which you cannot link to your KPI model using an algorithm.
An example is labor turnover. Everyone knows that it is very expensive and that high labor turnover has a very disruptive effect on business.
Is labor turnover a KPI?
It cannot be a hard KPI because you can only estimate its impact on profitability with varying degrees of uncertainty. You can’t build it into your accounting system, though you’ll find that some expenses end up buried somewhere in your accounts. The remaining costs come from losing something that drives a hard KPI, usually such that the loss of a customer causes a drop in sales. That’s because you can’t predict the cost of losing one good employee or the additional profit from losing one bad employee.
It all depends, but on what?
You can relate labor turnover to profitability, but only over a longer period of time. You cannot definitively define a formula that relates labor turnover to a hard KPI.
Labor turnover can be a soft KPI, but only in some companies. In highly seasonal businesses that rely on casual labour, the costs of recruiting and training casual workers are high, budgetable and managed as a hard performance measure.
As opposed to losing a key sales person; the value of their knowledge about your business and your/their customers is always difficult to assess and expensive to replace.
So a soft KPI must meet some, perhaps all, of the following criteria to be useful.
* Soft clear correlation with associated hard KPI.
* A metric to track performance against a soft KPI.
* Clear links to either a driver KPI or a “consequence” KPI that can be tracked. Manager KPIs are leading indicators.
* Ability to estimate a threshold that may work.
* Is it mission critical? Does it warn of a potentially fatal error.
Can you fit them into the KPI model?
Probably not. That doesn’t mean they aren’t “mission critical.” They must be observed.
Product safety issues that lead to product recalls are critical, as Toyota recently found out at 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 interfere with setting soft KPI targets.
Many cause and effect relationships in business are not straight correlations. In some cases, there is a threshold effect at work.
A good example is the problem of setting the right level of advertising spend. We know that in some markets advertising costs must buy enough space to be visible to customers. Spending below this threshold level, wherever it is, will not increase sales, because below the threshold you are invisible. Above the threshold, the results flow in,
Similarly, looking at our service example, setting the target LOS too low would accomplish nothing in terms of customer satisfaction. Hitting the right number worked like magic.
Places to look for soft KPIs
Quality and service are important functions where you will find mission-critical soft KPIs. 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 these two types of KPIs.
Project management also depends on both soft KPIs and hard measures. The predictive element of project forecasts is necessarily soft because it uses probability measures; critical, but only hard after the event.
In sales and marketing, metrics like customer satisfaction are confusing, finding reliable metrics is a challenge, and correlations with hard measures are not as high as we would like. Market share numbers usually depend on surveys or industry statistics and can be quite unreliable.
Employee morale and engagement are clearly important and difficult to measure reliably, as errors in opinion surveys confound the results.
You should be attentive to the need for leading indicators. They are 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 despite being presented as hard numbers. These are KPIs, but every forecast should have confidence limits so you can judge its reliability. In most companies, forecasts are of course critical.
Soft KPIs and your management process
Soft KPIs provide enormous 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 to how you develop and use them. If you follow the tips and thought process illustrated in the story, you’ll be well on your way to identifying your soft KPIs and putting them to work.
Hard KPIs are easy to work with because they have one immutable characteristic; they are mathematically related to measurable changes in business performance.
Soft KPIs are a bit more complicated because you can identify the reasons why they matter to your processes, but there is no algorithm that defines the way they interact with business performance.
By finding the soft KPIs that matter to your customers, you can focus on what really matters to your employees and transform your business.
Soft KPIs are company or sometimes industry specific, so a resource like kpilibrary.com can be useful for ideas.
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