Your KPI should not be SMART – your target should

When implementing performance management solutions for our clients, I often encounter some variation of the phrase: “we want our key performance indicators to be SMART”. However, the notion of a SMART KPI does not make a whole lot of sense. Let me elaborate.

First, let us agree on the basics. A key performance indicator, which is often presented as the acronym: KPI, is a performance measure. That is, some variable that a business can track over time in the hopes of understanding, and ideally predicting, some part of organizational performance.

For each KPI, you can measure a baseline: the initial level of the measure which you will measure against. That is, the baseline is the initial state of the KPI which allows you to identify whether the KPI decreases, stagnates, or increases going forward.

Having established a baseline, you can set a target indicating the desired future state of the KPI. Thus, a target is a short- or long-term goal for the level of a KPI at some point in the future.

To sum it up:

• A key performance indicator is a measure
• A baseline is an initial value for a key performance indicator
• A target is a desired value or goal for a key performance indicator

Here are two examples.

Now that the definitions are covered, let me explain why the notion of a SMART KPI is flawed.

Why SMART are improper KPI design criteria

The SMART criteria are a: “mnemonic acronym giving criteria to guide the setting of objectives”. This definition alone indicates that the concept relates to the setting of objectives, i.e., the definition of a goal or target if you will. So here is my main point: since a key performance indicator is not an objective in itself, it does not make sense to say that it should be SMART. Your target for the KPI however is an objective, and thus should ideally be SMART. Let me elaborate.

"Since a key performance indicator is not an objective in itself, it does not make sense to say that it should be SMART. Your target for the KPI however is an objective, and thus should ideally be SMART."

The most common use of the SMART acronym includes:

• Specific: something that is defined clearly and unambiguously
• Measurable: something that can be measured in a coherent and standardized way
• Achievable: something that can realistically be achieved/attained
• Relevant: something that has meaning to the involved parties
• Time-bound: something that has a clear start and end point in time

Consider the five criteria in relation to a key performance indicator, e.g., EBITDA margin. Does it make sense to say that this is specific and measurable? Yes, definitely! A KPI should be clearly defined and measured in a coherent and standardized way. What about relevant? Also, yes – at least sort of! A KPI must be relevant to specific business stakeholders, otherwise why waste time on tracking it. However, relevance is meaningless if the KPI is impossible to influence. That is, if the stakeholders who are measured by the KPI have no way to impact it, it makes little sense to present it. Thus, it is more precise to say that a good KPI must be influenceable. More on this later. 

However, let us consider the remaining two criteria, since this is where the logic fails. Does it make sense to say that a KPI should be achievable and time-bound? Not at all. Unless you dissolve your business, you will always achieve some level of almost any KPI. Whether you are successful or not, you will always have achieved some EBITA margin (even if it is negative). Thus, it does not make sense to talk about a KPI being achievable. Furthermore, as a KPI is a mere measure, it does not make sense to say that it should be time-bound either. Of course, you must record the KPI across equivalent periods in time to ensure a relevant comparison, e.g., do not compare a one-day EBITDA margin to that of an average across a month or quarter. However, it does not make sense to say that the measure itself must be defined by a start or end date.

On the contrary, if you consider the five criteria in relation to a target for your KPI– a future objective/goal for the KPI – you will see that it makes much more sense across all the dimensions.

Alternative KPI design criteria

So, if the SMART criteria are less than ideal as KPI design criteria, what is a better alternative? In my opinion, the following criteria is a better place to start. For the sake of simplify, let us call these the TAMIL criteria.

TRANSPARENT

A KPI must be easy to understand for everyone involved. That includes the KPI calculation, the data sources, and how to interpret the results. There must be no doubts about how the KPI came to be, and what it indicates. As such, this first criteria covers the specific and measurable part of the SMART criteria.

ALIGNED

A KPI must be aligned to the overall organizational objectives. That is, the KPI must represent a small piece in the large puzzle that is the organizational strategy. By anchoring all KPIs to the organizational strategy, employees are more likely to move collectively towards a common goal. This is what is referred to as cascading of KPIs.

MOTIVATING

A KPI must convey a relevant purpose that instills a desire to act amongst those who can influence it. That is, to drive engagement, you must ensure that the target audience understands the reasoning for improving a given KPI. Without an understanding and acceptance of the fundamental purpose, the KPI will not motivate anyone to act differently.

INFLUENCEABLE

A KPI must be driven by something that the target audience can realistically influence through a change. That is, target audience must know how to impact the KPI for the better through adjusted work processes and behavioral change. A floor manager might not be able to improve company earnings directly, but by measuring his/her SOP adherence, you provide a way for the floor manager to influence a KPI that might in turn affect the overall company profits in the long run.

LEADING

A KPI must be indicative of future performance rather than a reflection of past performance. That is, the KPI should indicate where performance is heading, and not what already happened in the past. Leading performance indicators allow an organization to proactively react and mitigate before performance drops, rather than merely react when something has already been negatively impacted.

Final remarks

Performance management is a broad and complex topic, and the ideas presented here are a mere drop in the ocean of best practice related to the topic.

Fore more inspiration, visit my other performance management articles or see the links below:

• KPI Management And Best Practices: How To Find The Perfect KPI Solutions?
• Best practices for picking the right KPIs for your business
• What is a KPI? Measure your performance against key business objectives.
• How to Write KPIs - 4 Step Approach