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Soft Key Performance Indicators Are "Mission-Critical" – This is the Way to Develop Them
In this article we will work with a real example of an effective soft KPI that has changed the relationship of a business with its customers. After reading it you will be able to apply the same thinking process to your business.
Setting target service standards.
Business: Professional automotive repair services. The business had an effective KPI model in place.
Clients: Auto repair firms that work with clients and their insurers
Service: Take over repair work, repair at a dedicated specialist location, and return to the customer.
Feature: Frequent questions and complaints about delivery date and time.
The real problem: Jobs are queued up in order of receipt, no matter how difficult it is to fix. Smaller tasks would have to wait because they were carved into the background of larger complex tasks.
First solution: Jobs scheduled to meet a specified date and time; more difficult tasks were planned for the future. The customer is advised of the return delivery and price quote before the work is started.
Did it work? In part. There was no service level target, and no performance measure. It was not associated with a business marketing plan.
Determining target service quality: Ask customers. A quick and dirty phone survey suggested that 48 hours was an acceptable lead time, because what was important was their ability to tell the customer when the vehicle would be ready.
Performance target: A 2-month historical evaluation showed that about 15% of the tasks were difficult and could not be completed effectively within 48 hours. We estimated that 85% would be a good place.
Service Level Target: 85% of jobs must be returned within 48 hours. This was a promise that no competitor could match.
Performance indicator: We hypothesized that, if the target LOS is achieved, complaints and inquiries will decrease to a lower level. The complaints list showed that complaints dropped to zero within 4 weeks of launching the new system and advertising it to customers.
Results: Market share increased significantly as the auto repair industry embraced the new standard and service was perceived to be reliable.
Internally, productivity increased due to better planning. Disturbing questions and special treatment needs were eliminated.
Operating profit increased.
Proof of soft KPI
Three times over the next two years, complaints escalated rapidly. A quick check on the service level showed that it had dropped below 85%. Immediate corrective action returned the incidence of the complaint to its lowest level.
My conclusion: We were lucky that our initial estimate of our desired service level was correct. If customers demand 90% then we will not see the required reduction in complaints.
If customers were 75% happy we would try that and monitor complaints. If they went up we could go back to 85% LOS, but we’d be needlessly annoying some customers, and putting our reputation at risk. Also 75% would be achieved by other competitors, so there would be no competitive advantage.
85% of LOS has worked for everyone, so don’t play with the winning formula.
This is a classic “Soft KPI”.
Measuring it doesn’t help you understand what’s going on. Understanding what is happening does not help you find a solution without measurement. Both are necessary to make good decisions.
Setting soft KPIs
Look for performance indicators that logically influence business performance but where the results are distant in time and space from the cause, and which you cannot connect to your KPI model using an algorithm.
An example is the Labor Movement. Everyone knows that this is very expensive, and high employee turnover has very disruptive effects on business performance.
Is Employee Turnover a KPI?
It can’t be a hard KPI because you can only predict results in profit with varying degrees of uncertainty. You can’t build it into your accounting system though and you may find some of the costs end up buried somewhere in your accounts. Other costs come from the loss of something that drives a difficult KPI, usually in the way that customer loss drives sales declines. The reason is that you cannot estimate the cost of losing one good employee, or the additional benefit of losing one bad employee.
It all depends, but what?
You can correlate employee income with profit, but only in the long run. You cannot define a formula that combines employee turnover with a hard KPI with any confidence.
Employee turnover can be a soft KPI but only for certain businesses. For seasonal businesses that rely on temporary labor the costs of recruiting and training tourists are high, they can be budgeted and managed as an indicator of efficiency.
Compare that to losing a key sales person; The value of their knowledge of your business and their customers is often difficult to estimate and expensive to recover.
So a soft KPI must satisfy some, perhaps all of the following criteria if it is to be useful.
* Clear integration of soft and related KPI.
* A metric that enables performance against soft KPI to be tracked.
* Delete links that are either a driver KPI or an “outcome” KPI that can be tracked. Driver KPIs are key indicators.
* The ability to estimate the range of potential effectiveness.
* Is it an important job? Does it warn of a potentially fatal error.
Can you fit them into the KPI model?
Probably not. That doesn’t mean they are “not critical”. They must be followed.
Product safety issues that drive product recalls are especially important, as Toyota recently found out at its biggest expense. I’m sure Toyota knows what they miss with their hard product KPIs after the event but the soft KPIs that would have highlighted the root cause of the problem were clearly missing.
Threshold results confuse Soft KPI target setting.
Most cause and effect relationships in business are not linear. In some cases there is a threshold effect at work.
The problem of setting the right level of advertising expenditure is a good example. We know that in some markets advertising spend must buy enough space to be seen by consumers. Spending below that level, anywhere, does not increase sales, because below the threshold it is invisible. Above the limit, the results come in,
In the same way, looking at our service example, setting a very low LOS target will not achieve anything in the way of customer satisfaction. Hitting the correct number worked like magic.
Places to look for soft KPIs
Quality and service are critical functions, from which mission critical soft KPIs can be found. As I have shown, marginal effects are common. Both hard and soft KPIs are useful for evaluating product and service quality and it is productive to combine the two types of KPI.
Project management similarly relies on soft KPIs and hard measures. Project estimation is inevitably soft because it uses probabilistic measures; it is very important, but it is difficult only 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 correlation with difficult measures is not as high as we would like. Market share figures are often based on research or industry statistics and these can be unreliable.
Employee behavior and engagement are clearly important and difficult to measure reliably because errors associated with opinion polls confound the results.
You should be aware of the need for leading indicators. These are the most useful, as they enable you to take corrective action before things go off the rails.
Sales forecasts, in fact all forecasts, are soft KPIs, although they are presented as hard numbers. They are KPIs but every forecast should have confidence limits around it so you can assess its reliability. Forecasting is an important goal in many businesses.
Soft KPIs and your management system
Soft KPIs provide so much value to your management system that you should never ignore their presence. That’s because the difference between soft and hard KPIs means you need a different approach to how you develop them and how you use them. If you follow the tips and thought process presented in the story you will be well on your way to identifying your soft KPIs and putting them to work.
Hard KPIs are easier to work with because they have one constant; are mathematically related to measurable changes in business performance.
Soft KPIs are more difficult, because you can see the reasons why they are important to your processes, but there is no algorithm to explain how they relate to business performance.
When you find soft KPIs that are meaningful to your customers, you can refocus your workforce on what really matters, and transform your business.
Soft KPIs are business or sometimes industry specific so find a resource like kpilibrary.com useful to introduce ideas.
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