Even if you have set KGIs (Key Goal Indicators) and KPIs (Key Performance Indicators), you often don’t know what to do to reach those goals. Additionally, it is not uncommon for it to take longer than expected to achieve KGIs and KPIs, or for bottlenecks to be discovered along the way. A KPI tree is extremely useful for clarifying the path to achieving KGIs and KPIs and predicting obstacles in that process in advance.
In this article, we will explain the overview of KPI trees, their advantages and disadvantages, and how to create KPI trees. KPI trees are extremely useful for running your business efficiently. If you want to run your business efficiently, please refer to this article.
What is KPI tree?
Below, we will explain the KPI tree and explain how it differs from the logic tree.
What is KPI tree?
A KPI tree is a diagram in which the KGI is placed at the top and the KPIs of the elements necessary to achieve the KGI are placed in stages. Since the KGI is the apex and various KPIs are set around it, it is called a KPI tree, which resembles the trunk and branches of a tree.
The details will be explained later, but KPI is like an intermediate goal to be achieved in order to achieve KGI. In order to achieve that KPI, there are also KPIs that must be achieved. By creating a KPI tree, which is a diagram that connects them into a single flow, you can clearly confirm the path and necessary elements to achieve KGI.
KPI tree example
First, place the final goal (KGI) at the top, and then move downwards to subdivide the elements (KPIs) that make it possible to achieve the goal. For example, let’s say your ultimate goal is to increase profits by 20%. We will set achievable KPIs for what we need to do to achieve our ultimate goal of increasing profits by 20%.
The first thing you can do is to set two KPIs: “5% cost reduction” and “15% sales increase” if you expect cost reduction and sales increase. From there, we further branch out the KPIs and consider what we need to do to achieve a 5% cost reduction and 15% sales increase.
Furthermore, we were able to set the KPIs of “reducing costs by 5%,” “reducing labor costs by 2%,” and “reducing paperless costs by 3%,” which are more achievable. Also, after thinking about what we should do to achieve a 15% increase in sales, we considered what we could do at the moment, and decided to increase the unit price of products by 5%, expand sales channels and increase the unit price per customer by 10%. I was able to set the KPI.
In this way, set the KPI by subdividing from the top KGI placed at the top downwards.
Differences from logic tree
A logic tree is a framework for solving problems and causes. Find a solution by writing out the problems and causes of a certain problem in a tree format. As a problem-solving framework, it visualizes the measures necessary to solve problems and causes, and analyzes and manages the process.
It is used in a form similar to a so-called mind map. On the other hand, a KPI tree is the same as a logic tree in terms of achieving goals, but the difference is that it sets achievable numbers. While the logic tree is an indicator that provides a rough overview of the overall picture, the KPI tree analyzes the elements that lead to achieving the KGI using achievable numerical values.
At the same time as this difference in granularity exists, the logic tree is a framework for analyzing and managing the process up to problem solving, while the KPI tree sets numerical goals each time and evaluates the results until goal achievement. Another difference is that it is a framework.
What is KPI?
KPI is expressed in Japanese as “Key Performance Indicator” and is an indicator that must be achieved in order to achieve KGI. In order to achieve KGI, it is necessary to follow an appropriate process, and setting appropriate KPIs is extremely important.
Be sure to set quantitative KPIs. For example, when determining KPIs related to sales, indicators include “number of contracts,” “number of leads obtained from the website,” and “number of visits.” By using numerical indicators, you can tell whether you have achieved your goals or not. Therefore, if the target is not reached, course corrections can be made quickly.
Meaning of KPI
KPIs play an important role as indicators to measure the rate of progress toward achieving goals. It has the meaning of an “intermediate indicator” that is set at key points until the final goal of “KGI” is achieved. It is set up with the purpose of quantitatively understanding whether the necessary processes for each section are being implemented properly and whether there is a prospect of achieving the KGI in the future.
If you don’t set KPIs, you won’t be able to see your progress at key points, and there’s a high possibility that you’ll fail before you know it. Furthermore, it is not possible to identify the cause of the failure, and it is impossible to develop measures to improve the failure. Setting KPIs is extremely important to avoid these risks.
Difference with OKR
OKR is a framework for setting and managing goals. The abbreviation for “Objectives and Key Results” allows companies, teams within companies, or individuals to work toward the same issue by setting two elements: “Objectives = goals” and “Key results = main results.” It will look like this. Mainly by clarifying organizational goals, it is effective in improving cohesion between companies and individuals.
The purpose of OKR is not to achieve a goal, but to improve each person’s skills and revitalize communication by building an environment where everyone works toward the same issue. Because of these characteristics, goals are often set for individuals with a high degree of difficulty to achieve, and ideally the actual achievement rate is around 60% to 70%.
In other words, setting goals that can be achieved 100% is low in difficulty and is an inappropriate value for OKR. On the other hand, KPI is a framework set to ensure that an organization achieves its ultimate goal, KGI.
In other words, it is set for the company and the target achievement rate must be 100%. In addition to these differences, there is also the difference that OKRs are common and shared goals for the entire company, while KPIs set numerical targets for each department or management team.
What is KGI?
KGI is translated into Japanese as “Key Goal Achievement Indicators,” and refers to the final goals of a business expressed in quantitative numerical targets. Since KPIs are determined based on KGI, KGI must be quantitative and clear. Be sure to clarify “by when,” “what,” and “how much.”
For example, a vague goal such as “becoming a company loved by customers” is inappropriate for KGI. Let’s analyze what kind of company is “a company that is loved by customers” and incorporate it into quantitative goals such as the ones below.
■Achieve a repeat rate of 50% by the end of the fiscal year in October 3 years from now
This makes it easy to set KPIs, and it is clear “by when”, “what”, and “how much” should be achieved, so it is appropriate as a KGI.
Benefits of creating a KPI tree
Up to this point, we have explained the KPI tree and its constituent elements, KPI and KGI. A KPI tree is extremely important for running a business efficiently. The advantages of creating a KPI tree are as follows.
I will explain each in turn.
You can check overall KPIs
By creating a KPI tree, you can check the overall required KPIs as a way to achieve KGI. If you aim to achieve KGI without creating a KPI tree, you will often end up with inappropriate KPIs or omissions in checking necessary KPIs, resulting in losses in achieving KGI.
In the business world, you need to invest your time, effort, and money efficiently to achieve your goals. This is possible by creating a KPI tree.
The number of steps required to achieve the goal becomes clear
By creating a KPI tree, you can check the KPIs that need to be achieved, as well as the man-hours required to achieve each KPI. When running a business, it is not uncommon for unexpected delays to occur while achieving goals. By understanding the required man-hours in advance using the KPI tree, you can prevent unexpected delays.
It is also possible to visualize bottlenecks
A bottleneck is an obstacle or barrier that occurs when achieving a KPI or KGI. By creating a KPI tree, the process for achieving KGIs and KPIs becomes clear, so bottlenecks can be identified in advance. Since you can identify bottleneck points in advance, you can take countermeasures in advance and proceed with your business smoothly.
PDCA can be easily implemented
By clarifying the path to achieving KGI and visualizing bottlenecks, it becomes easier to run the PDCA cycle. Even when you don’t get the results you expected, you can go back to the lower levels of the KPI tree to find the cause, making it possible to investigate and resolve the root cause.
Disadvantages of creating a KPI tree
So far, we have explained the benefits of creating a KPI tree. While it is important to create a KPI tree to advance your business, there are also disadvantages to creating a KPI tree. There are two main disadvantages to creating a KPI tree:
I will explain each in turn.
It is difficult to create new measures
A KPI tree is like a pre-assembled roadmap for achieving KGI. Proceeding with your business based on a KPI tree means proceeding with your business along the rails you have drawn in advance. As a result, they become fixated on achieving the KPIs set in advance, making it difficult to create new measures.
If you need flexible ideas, KPI trees can be a drag. Keep this in mind when creating your KPI tree.
There is a risk of creating unnecessary KPIs.
While creating a KPI tree, there is a risk that unnecessary KPIs will be created. When someone with little experience in business design creates a KPI tree, they tend to focus on setting KPIs in detail. There is a concern that unnecessary KPIs will be created in this process, and that the efficiency of the business will be reduced.
Unnecessary KPIs run the risk of obscuring the path to achieving KGIs. When creating a KPI tree, be sure to ask yourself the necessity of the KPIs you are setting.
Points to note when creating a KPI tree
So far, we have explained the advantages and disadvantages of creating a KPI tree. If you want to accelerate your business with a KPI tree, you need to create a KPI tree properly. From here, we will explain the points to keep in mind when creating an appropriate KPI tree.
You can’t finish it just by making it once.
Many people create a KPI tree once and are satisfied with it. However, it is important to modify and add to the KPI tree many times. This is because it is not uncommon for unexpected delays and obstacles to occur during business operations.
By objectively understanding the current situation and resetting KPIs each time, you can proceed with your business efficiently. It is a good idea to frequently review the KPI tree and make corrections after comparing it with the current situation.
Can’t be made by just one person
When creating a KPI tree, be sure to have multiple people create it. If you create a KPI tree by yourself, you may become complacent and end up setting KPIs that are impossible to achieve.
If various departments are moving towards KGI, it is desirable for the people in charge of each department to gather together. By gathering knowledgeable people from each department and working together to create a KPI tree, it becomes possible to set realistic and efficient KPIs.
Be aware of the “SMART” law
When determining KPIs, it is important to incorporate a framework called “SMART”, which is a combination of the first letters of the following words.
Specific
KPIs must be clear and understandable to everyone. Care must be taken when adopting unclear indicators, as the objectives may become unclear and, as a result, employees may become demotivated. When it’s specific, it’s easier to share within your team and take effective action toward a common goal.
Measurable
In order to achieve the KPI goals, it is necessary to check the progress and verify whether each step is progressing appropriately. By choosing measurable KPIs, such as those that can be expressed numerically, it will be easier to take countermeasures when delays in progress or problems occur.
Achievable
KPIs that are not realistically achievable run the risk of reducing employee motivation. It is important to refer to past data and achievements and set goals that are actually achievable. It is also important to choose KPIs that employees can understand.
Relevant
KPIs need to be linked and related to other KPIs and KGIs.
Time-bounded
KPI is set with the aim of achieving KGI. Time limits are essential as each task must be completed in a timely manner.
Avoid setting KPIs that cannot be quantified
KPI is a framework that is effective by setting numerical goals. In other words, if you set a KPI that cannot be quantified, there is a high possibility that it will not be possible to measure it, and there is a high possibility that progress will stop at that KPI.
For example, uncertain factors such as customer satisfaction, market awareness of your brand, and employee engagement are difficult to quantify, making them inappropriate as KPI indicators. If it is not possible to express the progress or degree of achievement numerically, we believe that setting KPIs should be avoided.
Avoid setting KPIs that you cannot control
“Uncontrollable = impossible to improve no matter how hard you try,” making it an inappropriate indicator for achieving KPIs. KPIs must be elements that can be controlled by the company and that can lead to improvements by taking action.
For example, “order rate” is often set as a KPI, but on the other hand, even if “number of orders” is set as a KPI, employees will not be able to take action and there will be no room for improvement. The number of orders received is a reflection of the customer’s purchasing behavior, and is not something that can be controlled by the company.
On the other hand, KPIs such as the number of sales from inquiries and the number of visits have uncertainties, making them unsuitable for setting KPIs. In the first place, customer inquiries themselves are not something that can be controlled, and cannot be improved through sales efforts. It can be judged that it is inappropriate to set KPIs in a phase where such control is not possible.
Avoid setting KPIs that are prone to failure
By keeping in mind the “SMART” rule when creating a KPI tree, you can create an efficient and effective KPI tree. In other words, by considering the inverse of the “SMART” law, you can find KPIs that are prone to failure. The reverse of the “SMART” law is mainly as follows.
“Specific” → “vague”
The opposite of concrete is abstract. The word abstract means “vague and unclear,” whereas the word concrete means “easy to understand in detail.”
The more you judge things subjectively, the more vague the KPI settings will become, and the more the purpose of setting KPIs will be lost. In order to avoid setting vague KPIs like this, it is necessary to set objective KPIs firmly based on your company’s data.
“Measurable” → “Unmeasurable”
Setting KPIs that cannot be measured or measured should be avoided. KPIs only work as a framework if they can be quantified. For this reason, collect as much information as possible, set only measurable data as KPIs, and avoid using unmeasurable data.
“Achievable” → “Unachievable”
When setting KPIs, one of the important things is to “set achievable numbers.” By setting achievable numbers and completing tasks in an orderly manner, you will increase the possibility of achieving KGI.
If you set unachievable numbers and the project stalls there, there is no point in setting KPIs. For this reason, it is necessary to take a bird’s-eye view of your company’s production capacity and set realistic numbers based on past performance and data.
“Relevant = having an appropriate relationship” → “Inappropriate relationship”
Hierarchical maps such as KPI trees and logic trees have the characteristic of gradually approaching the goal by creating appropriate relationships between each KPI.
Therefore, if you set even one KPI that is not relevant, there is a high possibility that progress will stop at that KPI. By setting specific and achievable numerical values for each KPI and providing appropriate relationships, you can expect good progress.
“Time-bounded = time limited” → reverse “no time limit”
KPIs allow projects to proceed efficiently and effectively by clearly defining the period. By deciding in advance “by when and in what period” to achieve the set KPIs, you can keep the work progress in check.
This will prevent you from continuing to go through phases in which you are unable to achieve results. In addition, if you are unable to achieve your goal, you can temporarily stop the work and find out the reason why you were not able to achieve your goals, allowing you to develop new measures.
How to create a KPI tree
When creating a KPI tree, it is important to follow the correct procedure while observing the above points. The steps required to create a KPI tree can be broadly divided into three steps.
We will explain each step in turn.
Configure KGI
First, let’s configure one KGI. As mentioned above, when setting up KGI, be sure to clarify three things: “by when”, “what”, and “how much”. Since KGI is the ultimate business goal, it is inappropriate to use indicators such as “number of business negotiations” or “number of new acquisitions.” Be sure to use business goals such as “sales” and “profit” as indicators.
Assemble using four arithmetic operations
After setting up KGI, we can finally create the logic tree. First, identify the elements necessary to achieve KGI and add the elements one layer below. The KPI tree is completed by repeating the process of adding elements necessary for achieving the goal below that element.
At this time, it is important to assemble using four arithmetic operations. A simple example is below.
In this way, directly below each KGI or KPI, put elements that can be assembled using four arithmetic operations. By doing so, you will be able to identify all the elements necessary to achieve the KGI and KPI.
Specify specific numbers
Once you have decomposed the elements to achieve KGI and KPI using the four arithmetic operations, specify the specific numerical values for each. By specifying specific numbers, you will be able to clearly see whether you have achieved your goals or not, and will be able to run the PDCA cycle appropriately. An example of specifying a specific value is as follows.
■KPI (Number of customers: 5,000) → Elements under it “Number of new customers: 3,500”, “Number of repeat customers: 1,500”
By specifying a clear numerical value like this, it will be easier to investigate the cause if the target cannot be achieved. Using the above as an example, if the number of customers is less than 5,000, check which of the lower tiers, the number of new customers or the number of repeat customers, has not been achieved. By checking the lower levels of those who have not achieved the goal, it is possible to approach the root cause of non-achievement.
Break it down as much as possible
We are conscious of breaking down KPIs into as many parts as possible, and breaking them down to the point where they cannot be broken down any further. Due to the characteristics of KPI, the more subdivided the elements, the closer it becomes to the actual task, and the work required to achieve the indicator becomes clearer.
For example, in marketing, “order rate” is often set as a KPI, but by going one step further and setting KPIs for the number of orders and proposals, without stopping the segmentation, if the order rate has not been achieved. This makes it easier to identify the cause.
If you can understand whether the number of orders received was insufficient or whether the number of proposals made to customers was small, you can easily review your measures. If the number of orders received is insufficient, measures can be taken such as making the product or service more attractive, or if the number of proposals made to customers is low, actively increasing the number of proposals.
Examples of tools useful for creating KPI trees
The following tools are useful for creating KPI trees:
Excel
EXCEL already contains data called a “hierarchical structure,” and you can easily create a KPI tree using this function. For companies that store business-related data such as business progress management sheets and procedure manuals in EXCEL, there is a great advantage of being able to create KPI trees in EXCEL.
If the materials used in these operations are stored in multiple software or different files, using and managing them becomes a burden not only for administrators but also for field personnel. In such cases, if the files used to create the KPI tree can be centrally managed on Excel, management and updating will become easier.
How to create a KPI tree in EXCEL
1. Open EXCEL and click Insert from the menu
2. Click on the image from the menu and click “SmartArt”
3. Click “Hierarchical Structure” from the items on the left
4. Multiple tree-like hierarchical structure samples will be displayed, so select according to your purpose.
XMind
XMind is a highly functional tool that allows you to create all kinds of tree-like maps, including KPI trees, mind maps, project management tables, and to-do maps. It also has features not found in other services, such as automatically generating animated transitions depending on the content you create.
XMind is paid, but you can also use it for free. In the free version, a watermark is added when exporting, and some functions are limited, but you can still create a simple treemap.
Mind Meister
MindMeister allows multiple people to create maps while sharing them at work or within a team. In addition to realizing efficient work through workflow automation, there are no restrictions on integration or collaboration, so it can be freely shared within the company. The maps you create can be exported to Word, PowerPoint, etc., so you can efficiently create presentation materials.
Coggle
Coggle makes it easy to visualize and share even the most complex data within your company or team. You can freely increase the number of sharing members and create the same map simultaneously in real time. You can also easily add unlimited images to create beautiful KPI trees.
The creation of loops and the joining of branches, which are the key to hierarchical maps, are intuitive and stress-free. Multiple different completed treemaps can be exported instantly without any hassle using the batch export function.
Miro
Although we provide the service as a visual workspace, you can also use the hierarchical map creation function that allows you to create tree maps, mind maps, etc. You can intuitively and freely connect arranged items in a loop, reducing work errors.
The whiteboard-style interface is visually easy to use and can be shared online. The free version limits the number of whiteboards that can be edited, but the paid version allows unlimited use and allows you to set access permissions.
summary
In this article, we explained the purpose, advantages and disadvantages of a KPI tree, and even explained how to create a KPI tree. By properly creating a KPI tree before conducting business, you can efficiently run your business through the PDCA cycle.
Also, by rewriting the KPI tree according to the current situation, you will get into the habit of regularly assessing the current situation and revising your business plan. Why not use this article as a reference to create a KPI tree and use it for your business?