When reviewing or revising your operational Key Performance Indicators baselines are fundamental to your thinking.
What is a baseline?
Baseline data is the results of whatever the measurement is from past performance. This will then be used to determine future targets and compare against future performance.
A baseline is traditionally calculated by collating the values for the data points required for the performance measures over a required time period. It's good practice to set a low baseline and a high baseline value and some sort of weighted average of these over time.
Of course your historical data needs to be sufficiently well understood so that you don't introduce bias into your baseline. For example understanding varying performance conditions or reasons (such as weather or operational conditions) that might mean performance has changed as a result. Typically organisational change can also impact a baseline if teams were working in different ways or delivering against changing expectations.
Performance against a baseline can vary very significantly. It is important to use enough performance measure values to calculate the baseline and not use any more than you actually need. A realistic minimum number of values is probably five but it all depends on how well understood the data points and past performance area.
For some data you may need to use up to three years of baseline data. Too little data might leave a statistically insignificant sample size to work from. Too much baseline data might obscure critical trends within the past few years.
Using baselines to set KPI targets
We find that target-setting with operational KPIs tends to be more of an art than a science; there is a need to find the “sweet spot” where targets result in optimal levels of employee motivation to try to achieve them but it can take some back and forth to find it. Targets that have some level of stretch but still feel realistic to those who are doing the work are ideal; with operational employees feeling confident that they can produce the desired business performance results but with some element of effort, uncertainty, and managed risk.
There are typically different types of targets that you can set from your baseline data, including:
- Financial – Where the balanced scorecard relates to budgetary and financial measures it makes sense to apply the budget targets to the relevant indicators on your balanced scorecard or KPI dashboards in order to ensure alignment
- Pre-Determined – Some of the industries we work with will have pre-determined targets set by a regulator with associated penalties or incentives for their achievement
- Best Practice – Such targets tend to relate to performing the best in industry or against a competitor in order to maintain position or take the lead in the market on measures that are of importance or differentiation
- Incremental – One of the most typical approaches to target setting focuses on collecting historical performance data and then setting targets that represent an incremental to moderate level of improvement; such a target tends to require hard work to achieve improved performance levels but within a manageable risk and existing capabilities
- Stretch – This approach is the most likely when focused on significant change and transformation focused on enhanced levels of performance in order to achieve transformational results in a short amount of time. We tend to find that field service organisations set stretch targets for the majority of KPIs in order to incentivise over achievement, although clear communication is needed on which targets are being targeted at which point
What to do next
If you are thinking about how to develop your own operational measures, KPIs or balanced scorecard dashboards we can help you.
We'll write more about the value of a strong performance management system in some of our future blogs. Whilst you're here, why not have a look around some of our other blogs on Business Transformation, Change Management and Operations Management.