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Soft Key Performance Indicators Are "Mission-Critical" – This is the Way to Develop Them
In this article we will work through a real example of an operational soft KPI that changed the relationship of a business with its customers. After reading it you will be able to apply a similar thought process to your own business.
Setting target levels of service.
The Business: Specialist auto component repair services. The business had a working KPI model in place.
The Customers: Auto repair firms dealing with consumers and their insurers.So
The service: Pick up of repair jobs, repair in a dedicated specialist facility, and return to the customer.
The symptom: Frequent enquiries and constant complaints about delivery date and time.
The real problem: Jobs queued in order of receipt, 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 specified day and time of return; complex jobs would be scheduled for a later time. The customer was advised of the return delivery run with the price quote before the job was started.
Did it work? Partially. There was no target level of service, and no measure of performance. It was not linked to the business marketing strategy.
Setting the target level of service: Ask the customers. A quick and dirty phone survey suggested that 48 hours was an acceptable lead-time, because the critical thing was their ability to tell the customer when the vehicle would be ready.
Performance target: An assessment of 2 month’s history showed that around 15% of jobs were complex and could not be reasonably completed in 48 hours. We guessed that 85% might be the right point.
Target Level of Service: 85% of jobs to 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 enquiries would drop to a low level. The complaints log showed that complaints dropped to zero inside 4 weeks of launching the new system and publicizing it to the customers.
The results: Market share increased dramatically as the auto repair industry adopted the new standard and the word got around that the service was reliable.
Internally, productivity rose due to better scheduling. Disruptive enquiries and demands for special treatment were virtually eliminated.
Operating profit increased.
Proof of the Soft KPI
On three occasions over the next 2 years, complaints rose in volume suddenly. A quick check of the level of service showed that it had dropped below 85%. Prompt corrective action restored the complaint incidence to its normal low level.
My conclusion: We were lucky that our first estimate of the desired level of service was correct. If the customers needed 90% then we would not have seen the desired reduction in complaints.
If the customers would have been happy with 75% we could have experimented with that and monitored complaints. If they rose we could move back to the 85% LOS, but we would have upset some customers unnecessarily, and put our goodwill at risk. Also 75% would have been achievable by some competitors, so there would be no competitive advantage.
The 85% LOS worked for everyone, so do not fiddle with a winning formula.
This is a classic “Soft KPI”.
Measuring it does not help you understand what is going on. Understanding what is going on does not help you find a solution without measurement. Both are necessary to make sound decisions.
Setting Soft KPIs
Look out for performance indicators that logically influence business performance but where the effects are distant in time and place from the cause, and where you cannot link into your KPI model using an algorithm.
An example is Labour Turnover. Everyone knows that this is very costly, and that high labour turnover has highly disruptive effects on business performance.
Is Labour turnover a KPI?
It cannot be a hard KPI because you can only estimate the effects on profitability with varying degrees of uncertainty. You cannot build it into your accounting system even though you can find some of the costs eventually buried somewhere in your accounts. The rest of the costs come from loss of something that drives a hard KPI, typically in the way loss of a customer drives a downturn in sales. The reason is that you cannot predict the cost of losing a single good employee, or the extra profit from losing a single bad employee.
It all depends, but on what?
You can correlate labour turnover with profitability, but only over an extensive time period. You cannot define a formula that links labour turnover with a hard KPI with any confidence.
Labour turnover may be a soft KPI but only in some businesses. In highly seasonal businesses dependent on casual labour the costs of recruiting and training casuals are high, can be factored into the budget and managed as a hard performance indicator.
Contrast that with the loss of a key sales person; the value of their knowledge of your business and your/their customers is always hard to estimate and expensive to replace.
So a soft KPI must satisfy some, perhaps all of the following criteria if it is to be useful.
* Clear correlation of the soft with a related hard KPI.
* A metric that enables performance against the soft KPI to be tracked.
* Clear links to either a driver KPI or a “consequence” KPI that can be tracked. Driver KPIs are leading indicators.
* The ability to estimate a threshold that may operate.
* Is it Mission Critical? Does it warn of a potentially fatal error.
Can you fit them into a KPI model?
Probably not. That does not mean that they are not “mission critical”. They must be tracked.
Product safety issues that drive product recalls are mission critical, as Toyota recently found to its great cost. I am sure that Toyota know 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 straight-line correlation. In some cases there is a threshold effect at work.
The problem of setting the right level of advertising spending is a good example. We know that in some markets advertising spend has to buy enough space to become visible to customers. Spending below that threshold level, wherever it is, does not increase sales, because below the threshold you are invisible. Above the threshold, results flow in,
In the same way, looking at our service example, setting the target LOS too low would achieve nothing by way of 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 assessment of product and service quality and it is productive to link the two types of KPI.
Project management is similarly dependent on soft KPIs as well as hard measures. The predictive element of project forecasts are inevitably soft because it uses probability measures; critical, but only hard after the event.
In the sales and marketing field measures like 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 numbers are usually dependent on surveys or industry 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 surveys confound the results.
You should be alert to the need for leading indicators. These are the most useful, because they enable you to take corrective action before things go off the rail.
Sales forecasts, in fact all forecasts, are soft KPIs, despite being provided as hard numbers. They are KPIs but every forecast should have confidence limits around it so that you can assess its reliability. Forecasts are of course mission critical in most businesses.
Soft KPIs and your management process
Soft KPIs offer huge value to your management process so you should never ignore their existence. It is just that the differences between soft and hard KPIs mean you need a different approach to the way you develop them and the way you use them. If you follow the tips and the thinking process illustrated in the story you will be on the right track to identify your soft KPIs and put them to work.
Hard KPIs are easy to work with because they have one unchanging characteristic; they are mathematically linked to measurable changes in performance of the business.
Soft KPIs are a bit more difficult, because you can identify the reasons for their importance to your processes, but there is no algorithm to define the way they interact with business performance.
When you find the soft KPIs that are meaningful to your customers, you can refocus your staff on the really important things, and transform your business.
Soft KPIs are business or sometimes industry specific so you may find a source like kpilibrary.com useful to prompt ideas.
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