10 Characteristics of Effective Performance Metrics

Most businesses understand the value of using metrics to assess the state of their company and validate the company is heading in the right direction. Organizational metrics, sometimes called Key Performance Indicators (KPI), are developed to understand the overall health of an organization. They provide the fundamental element of balanced scorecards and dashboards, which are used to quickly show how well the organization is performing relative to the past, a target, or both. 

Traditional KPI are established within four broad categories: 

Customer. Customers generally consider four broad categories in evaluating a supplier: Quality, Timeliness, Performance and Service, and Value. Customer communication methods are the means to understand the relative importance the customer base places on these categories as well as their general expectations. 

Internal process. These metrics that are strongly aligned with the strategic objectives are best suited. Total cycle time (i.e., time to process the order) and first-pass quality are relevant indicators of internal process performance. Process cycle efficiency, calculated as the value-added time divided by the total lead time, or Overall Equipment Effectiveness (OEE) are relevant Lean-focused metrics for evaluating internal performance and resource utilization. 

Learning and growth. Metrics in this category might focus on the total deliverables (in dollars saved) from continuous improvement projects, new product or service development times, improvement in employee perspective or quality culture, revenue or market share associated with new product, and so on. 

Financial. Many suitable financial metrics are available and widely tracked, including revenue, profitability, market share, and so on. Cost of quality is also recommended. 

The choice of metric is important only so far as the metric is used to guide behavior or establish strategy. Poorly chosen metrics may lead to the suboptimal behavior if they lead people away from the organization's goals instead of towards them. 

To be effective and reliable, the metrics we choose to use need to have ten key characteristics. The following table was adapted from Keebler (1999) which suggest the qualities to look for in indicators. 

A good measure:	Description:
Is quantitative	The measure can be expressed as an objective value
Is easy to understand	The measure conveys at a glance what it is measuring, and how it is derived
Encourages appropriate behavior	The measure is balanced to reward productive behavior and discourage “game playing”
Is visible	The effects of the measure are readily apparent to all involved in the process being measured
Is defined and mutually understood	The measure has been defined by and/or agreed to by all key process participants (internally and externally)
Encompasses both outputs and inputs	The measure integrates factors from all aspects of the process measured
Measures only what is important	The measure focuses on a key performance indicator that is of real value to managing the process
Is multidimensional	The measure is properly balanced between utilization, productivity, and performance, and shows the trade-offs
Uses economies of effort	The benefits of the measure outweigh the costs of collection and analysis
Facilitates trust	The measure validates the participation among the various parties

Creating KPIs forces your organization to clearly define the performance measures that outline how you’ll achieve your big strategic priorities. 

Remember the following: 

1) Define Your Measure – This sounds obvious, but every KPI must have a clear expression of what you need to measure. The more descriptive your performance measure, the better.  You can categorize performance measures into these categories: 

• Activity Measures –This measures activity and can include a percentage, number, currency and activities, or processes. An example of this measure would be the number of leads in your pipeline. 
• Outcome Measure – This measures progress against a defined outcome, often expressed as a percentage increase, change, or results from an outcome. An example of this would be % increase in revenue compared to last year. 
• Project Measure – This measures the progress of a project, often expressed as percent complete, a deliverable, activity, or process the owner can influence. An example would be % complete to complete XX strategic project. 
• Target Structure – These represent a numeric result against a date. A perfect example would be $XXXM in revenue by the end date of a strategic objective. 

2) Define Your Target – Your target is the numeric value you’re setting out to achieve. Targets need to match your measurement type and due date. If your measure is a percentage, your target needs to be a percentage. If your measure is a raw number, the target should be a raw number. 

3) Outline the Data Source – Every KPI needs to have a clear data source. Make sure you articulate where you are pulling your data from and what the calculations are so everyone is on the same page. 

4) Define an Owner and Tracking Frequency – As with any SMART goal, a KPI needs to have a clear owner and defined tracking frequency. So, make sure someone is accountable for pulling the data and updating performance on a defined frequency.  

Once chosen, the metrics must be communicated to the members of the organization. To be useful, the employees must be able to influence the metric through his or her performance, and it must be clear precisely how the employee’s performance influences the metric. 

Regardless of the metrics you use or your method for tracking, make sure to educate your organization on how the metrics are derived, what they indicate, and how they will be used in addition to regularly communicate relevant metrics to your team members. 

The ABC’S of Effective KPI’s

KPIs, or Key Performance Indicators, are metrics used to track the performance of a business, a department, or individuals against goals. When designed and implemented properly they can define the direction of a business, provide essential feedback and help organize individuals, teams, projects or entire businesses to optimize performance. The key is to choose the KPIs relevant to your industry and business goals — focusing on the wrong ones is costly to your company.

One of the most effective ways of evaluating effectiveness and appropriateness of a KPI is considering the ABC’s of the KPI:

Aligned to Objectives

The most effective KPIs are closely tied to strategic objectives and help answer critical business questions. Therefore, a good starting point is to identify the questions that the decision makers, managers, or external stakeholders need to have answers to. Start with the basics and understand what your organizational objectives are, how you plan to achieve them, and who within the organization can act on this information for each outlined goal. The key is to define KPIs that effectively track to that business goal and to scrutinize existing KPIs for relevance to objectives.

Balanced

When selecting KPIs, it is very important to have a clear picture of how the organization is performing, and balancing KPIs will provide a complete overview of organizational performance. Balancing implies selecting KPIs that complement one another. The main balancing approaches refer to ensuring that we measure both:

       ·        Quantity and Quality;

       ·        Subjectivity and Objectivity;

       ·        Efficiency and Effectiveness.

Context-Driven

Effective metrics need to be relevant to individual employees. Relevance ensures the right decision makers are responsible for measuring specific KPIs — increasing the likelihood of a successful outcome.

Decisive

The purpose of having KPIs is to drive action that affects results. Many times I find that companies track, measure and report on a boatload of KPIs every week, but there are only a handful that ever cause anyone on the team to take action. This is a big waste of time for those responsible for collecting and reporting the data, and can easily cause a team to overlook the few that really do matter.

Easy to Understand

A KPI should be simple, straightforward and easy to measure. Everyone involved in a goal should be able to recognize their role in enacting a KPI. If a goal is clear, staff can make practical decisions that lead to achieving the desired outcome.

Few in Number

Having too many KPIs can result in what I call KPI overload. So many organizations think that by having 8-10 KPIs per department, they will be better able to assess the performance of the company. WRONG. (K.I.S.S. Keep it simple, stupid!)

Truth is: when you have 100 KPIs, no one has the time or energy to look at every one of them. All of the sudden, those KPIs become redundant to the company.

Gains Momentum

While KPIs will vary, it is especially important to consider the big picture and think about what’s needed to lead your business to success. Measuring that success is particularly important. It helps you determine if your company is gaining momentum and if your hard work and investments will pay off in the long run.

Has Ownership

It’s imperative that you have clear accountability for how your data is acquired, how it’s being reported on, and who can speak to what occurred during that reporting period. This way, your data truly tells a story, and you can understand why the numbers are the way they are.

Incentive-Driven

It’s no use building business KPIs for the sake of it. Managers should want to build business KPIs that positively affect the company. As such, not only should they be easy to understand, but employees should also know how to achieve an effective outcome. Setting unachievable goals can be a big de-motivator for employees. The more realistic the goal of a KPI is, the more likely teams are to reach it. Employees must be able to look at those metrics and see how they influence those things.

There are thousands of KPIs to choose from and most companies find it hard to select the right ones for their business and instead end up measuring and reporting a vast amount of information on everything that is easy to measure. It’s important to determine which measurements in your business are indicators of true performance. Paying close attention to those measurements, your KPIs, can help identify areas of success and areas for improvement.

In today’s challenging and competitive business landscape it is more important than ever that business leaders and senior executives are able to make better informed decisions, improve performance, and seek out new and novel ways to gain the edge over their competition. KPIs, when properly understood and used effectively, provide a powerful tool in achieving just that. Without them, organizations are simply sailing blind.