Setting targets for Performance Indicators should be well thought through. This should not be an exercise in looking at the historical average (unless that is specifically relevant) and then apply 10% as the desired increase. You will want to review history, but you need to understand the goal. It is also important to define the KPI clearly.
For example, let's use the retail market's target of sales to sales last year. Retail has traditionally looked at this on a daily basis, as well as rolled up to the week, month, quarter, and year. I have two primary concerns with this:
- If the weather was bad, we ran a promotion, or some other contributing factor, we may not know it and are really not comparing apples to apples. Additionally, what if last year was really bad? Beating that number doesn't do much for us.
- If we are reviewing this on a daily basis, we loose institutional knowledge due to the repetition. What if we miss a day? Is there any repercussion? What if we miss three days in a row? What if we miss 10 days out of 14? Were there enough days in there of good performance to hide the fact that a trend is occurring?
What would make more sense to me would be to look at this number as a rolling average, or take the total sales for the last 365 days / 365 on a daily basis. Here we can very quickly identify a positive or negative trend, as we don't have to look at numbers that swing wildly by the day of the week. Instead of talking about a couple of bad days, we understand that even though we had a couple of bad days, the overall trend is above the goal. We can also integrate our sales goal and show it relative to the trend line.
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Coming up with the targets should be an outcome of a highly interactive planning session where setting the targets for 1 month, 1 year or 3 years out should be evaluated for overall impact to the business. I have seen where companies will put targets in place that when added up equal unrealistic numbers. A planning application and exercise will show how the numbers align within context of other numbers.
For example, if you set your target for sales to be $5MM per quarter and your model shows that you need to have staff of 5 sales professionals to achieve that, the planning model will note that you might need to up your target for headcount, or possibly increase the # of campaigns to a specific demographic.
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