In this video tutorial, accounting professor Kay Stice explores the right number of key performance indicators (KPIs) a company should have. He uses the Pareto Principle, or 80/20 Rule, to determine 10 to 20 KPIs are ideal for an organization.
- Can an organization have too many key performance indicators, or KPIs? Well, of course it can. The word key means that the organization has gone through a selection process to identify a few key measurements out of the many possible ones that are the most important. So how many is too many? Well, in 1956, the year I was born, George Miller, a professor of psychology at Princeton University published a paper titled The Magical Number Seven, Plus or Minus Two: Some Limits on Our Capacity for Processing Information.
Well, I like this title, because it tells you just about everything you need to know about the results of Professor Miller's research. The title itself is an embodiment of the idea of summarizing a complex set of data into a few key measures, seven, plus or minus two. Professor Miller's research indicated that the human brain can store seven items of information in working memory. A couple more for numerical digits and a couple less for complete words. So as we consider the question of whether an organization can have too many KPIs let's keep this number seven in mind.
Now let's talk about the Pareto Principle. This principle is named after the Italian economist Vilfredo Pareto, who found that 80% of the land in Italy was owned by just 20% of the people. Now this 80, 20 rule has been found to work in many different situations. For example, about 80% of the profit in a regular company comes from just 20% of the products. 80% of the student related problems at a university are caused by just 20% of the students. 80% of the users of a piece of software use just 20% of the software features.
That's the Pareto Principle, 80, 20. Now with respect to KPIs this suggests focusing on a few key measures. The measures that reflect the essence of the most important organizational drivers. The 20% of factors that drive the 80% of the results. So how many KPIs should an organization have? The consensus seems to be that the number of KPIs should be somewhere between 10 and 20. Yes, this is more than Professor Miller's seven, plus or minus two, but here we're taking advantage of the fact that we can write these numbers down or put them on a computer screen, so that they don't have to be stored in the short term memory of our brain.
With too few KPIs you're missing measurements that can tell you something important about your complex organization. You're like the pilots in our example who want to try to fly the plane by looking at just one instrument reading. But with too many KPIs you are overwhelming the human brain. And an overwhelmed brain tends to just start blocking things out randomly. It is better to strategically go through a set of potential KPIs and identify the most important ones, rather than have a manager's overwhelmed brain randomly focus on a few items.
So what's the best number of KPIs? Somewhere between 10 and 20. The Balanced Scorecard is a way to organize these 10 or 20 KPIs into coherent groupings.
In this course, accounting professors Jim and Kay Stice explain what KPIs your business should consider in a balanced scorecard, from financial goals to employee and customer satisfaction. They describe how to craft a clear mission statement that complements your KPIs, and how to tie performance to incentives. Plus, get a look at KPIs in action, as Jim and Kay break down a case study examining a trucking company's balanced scorecard.
- The importance of KPIs and measuring performance
- Financial goals and measure
- Customer needs and satisfaction
- Employee growth
- Creating an effective mission statement
- Linking measurements and rewards
- Examining a KPI case study