How to use targets and KPIs effectively

How can targets and key figures be used in the context of organizational development? First and foremost, it should be checked whether selected measures achieve the desired effects in the organization without getting lost in a sea of key figures. These have an orientation and cognitive function. Number systems that do not fulfill this function are nothing more than a waste of resources.

The purpose of targets and KPIs

Goals and KPIs have a lot in common – but they serve different purposes. Let’s start with the similarities: Typically, both KPIs and targets are quantifiable. There is often talk of qualitative objectives, but in my experience these are often pseudo-objectives, milestones or measures that serve to achieve specific goals. Another common feature is that both targets and KPIs represent control variables in the implementation of strategy. And that brings us to the differences. This is because targets and KPIs are located at different levels of strategy implementation. To understand the concept, it is important to think about the raison d’être of your own organization. There are very traditional approaches in business administration that view profit maximization as the primary long-term goal. This view is now somewhat outdated and there are other approaches. Companies define their raison d’être in the form of a vision. It is a representation of what the company stands for and creates an idea of what the company is striving for and what changes it wants to bring about. Which is not to say that profit is not important, because it enables companies to fulfill their vision.

Goals serve as orientation on the way to the vision

I would like to illustrate the concept using Ørsted’s vision:

“Let’s create a world that runs entirely on green energy”

Let’s think back to the beginnings of the company. In 2006 it was still called “DONG Energy”. The name was created in the course of the merger of “Dansk Olie og Naturgas A/S” (DONG) and several companies in the field of electrical power generation and distribution, which were acquired by DONG in the course of M&A activities in the early 2000s. At the beginning, Ørsted was one of the most coal-intensive companies in Europe. As part of the strategy work, the company management realized that coal-intensive production is not a suitable market for progressive, sustainable growth. The image described in the vision therefore seems a long way off when the company announces in 2008 that it will transform itself into a renewable energy company. In order to master the transformation to a company that contributes to creating a world powered exclusively by renewable energy, it was important to focus the company’s activities. But how do companies and employees know that they are on the right path to realizing this vision? This is where goals come into play. They are like waypoints that are defined in such a way that they can be used to recognize that the company is making progress towards achieving the vision. A simple, classic financial target such as a sales or profit target provides no indication of whether the path taken is the right one. For successful entrepreneurial growth, the goals should be clearly aligned with the vision. With regard to financial targets, it should be noted that capital is a prerequisite for growth. Financial targets should therefore serve to ensure financial performance and be based on the expected investment required to fulfill the growth vision. Goals based on the vision would be, for example:

• “Achieve a share of renewable capacities in total generation capacity of 85% by 2040”
• “Provision of 50 gigawatts of renewable energy capacity by 2030”.
• “Reduction of own greenhouse gas emissions by 98% compared to 2006 by 2025”
• “An increase in Group-wide EBITDA to DKK 50-55 billion in 2030”

Incidentally, the targets mentioned above are targets actually chosen by Ørsted. I have listed further information and links below.

Your strategy is decisive for the KPI system

Based on the defined goals, it is now important to create a strategy. This strategy is a picture of how the company will be positioned in the market in the future and how it will stand if it meets its targets. This picture also helps to define a framework for decisions and changes. It is important to note that there are different strategy options for achieving the desired goals. Each option is defined by selected sub-aspects. Here are some examples, some of which also represent alternatives to each other:

• By expanding into new markets, we are extending our global portfolio of installed capacity
• Our position as the undisputed number one in the offshore wind energy sector enables us to achieve our targets for greenhouse gas reduction and installed renewable energy capacity.
• The company is positioning itself as a market shaper in new energy segments. Increased investment is being made in research and pilot projects for new forms of energy.
• We concentrate on our core business and work in partnership with a small number of selected suppliers to continuously reduce costs.

At this point, the company management is asked to develop and evaluate possible strategy options and alternatives and thus define the strategic framework. How the organization then moves within this framework is a question of strategy implementation. This implementation planning is one of the main focuses of organizational development. It should be developed on a different level than the strategic options. This level, which is closer to the operational business, is then also responsible for creating key performance indicator systems that show whether the chosen strategy can actually achieve the objectives or whether it needs to be adjusted (possibly due to changing conditions in the business environment).

KPIs form an early warning system and make the effectiveness of teams visible

KPIs and targets are both quantifiable, so there is a certain risk of confusion in practice. We already know the purpose of the goals. Of course, there may also be derived targets for individual divisions, countries or teams. However, these are always linked to the above-mentioned strategic objectives. In contrast to this, KPIs are used to measure short-term performance in the implementation of the strategy. As the name suggests, these are “performance indicators”. They form a cockpit and allow the performance of teams to be made visible so that they can recognize whether their activities and ideas are having an effect on achieving the goals. This takes into account the fact that each team or division has different ways of implementing the chosen strategy and contributing to the achievement of objectives. Here is another small example: Assume that the specialization strategy and cooperation with suppliers becomes part of the corporate strategy. Suitable key figures could be, for example:

• Reduction in the number of suppliers used (makes sense until a set sub-target, namely the number of suppliers for certain commodities and services, is reached)
• Number of supplier meetings held to optimize costs
• Number of improvement measures developed with suppliers
• Cost savings achieved through implemented improvement measures

These or similar key figures are based on both the strategy and the overarching goal of achieving EBITDA of DKK 50-55 billion by 2030. Alternatively, this key figure could also be adjusted and not only talk about cost savings with specialized key suppliers, but also about possible CO2 savings. The key figure “reduction of suppliers used” is only particularly relevant in the phase of reducing suppliers. If you have achieved the associated sub-goal, this key figure could be omitted. However, the “number of existing suppliers” could continue to be a key figure that you might look at in ad-hoc evaluations or that has a raison d’être as an operational “process performance indicator”. But it loses some of its importance as the key to pursuing and achieving the strategic goals. This clarification should also make the distinction between KPIs and other key figures clear once again.

Conclusion and practical tips

The effective use of targets and key figures is a decisive criterion for success in organizational development. By using this concept in a targeted manner, you can not only track your organization’s progress towards your goals, but also measure the effectiveness of your strategies and activities. Here are some important notes and practical tips for use:

1. Link to the vision: Goals should always be aligned with your vision. Make sure that each goal contributes to achieving the vision. This includes financial and non-financial targets.
2. Clear and measurable goals: Use clear and measurable goals. This creates transparency and focus throughout the entire organization.
3. Strategic orientation: Key figures should be closely linked to the strategic orientation. Each KPI should help to measure the success of your chosen strategy.
4. Number of key figures: Unless you deliberately want to introduce an additional aggregated key figure or want to show causalities, you should rely on key figures that are as independent as possible. If the same conclusion can be derived from two key figures, check whether you actually need both. If in doubt, choose the one that is easier to collect.
5. Regular review: Regularly review your targets and key figures. Analyze progress, identify possible deviations and adjust your measures if necessary.
6. Flexibility and adaptation: Your environment can change, and with it the conditions for achieving your goals. Be flexible enough to adjust your goals and strategies as new information becomes available or market conditions change.
7. Communication and motivation: Share your goals and progress with your team, your organization and your stakeholders and customers. Preferably not in the form of sent reports, but in the form of easy-to-understand dashboards in offices, corridors or on the intranet. This not only creates transparency, but also motivates people to work together towards a common goal.
8. Continuous improvement: Use the knowledge gained to continuously work on improving your measures and strategies. The analysis of key figures can provide valuable information on optimization potential.

Sources:

1:
Our Vision & Values | Ørsted (orsted.com) 2: Why Are We Called Ørsted? | Ørsted (orsted.com) 3: Unsere grüne Transformation | Ørsted (orsted.de) 4: Capital Markets Day: Ørsted confirms its ambition of ~50 GW renewable capacity by 2030 and strong financial outlook (orsted.com) 5: Ørsted Capital Markets Day 2023 – YouTube

Bildnachweis: Parradee / stock.adobe.com