Key Organizational Metrics and How to Make Them Effective

In Lean Management
July 29, 2013
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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.

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

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.

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
communicating relevant metrics to your team members.