After normalization, development of the category dimension is the next critical step. The potential options include several variations such as direct, percentage, ratio, index, composite and statistical categories:
Direct: The actual raw data value as measured (e.g., sales levels).
Percent: The comparison of the changes in performance of one value relative to the same value at a different time, geography, etc. (e.g., percentage change in sales vs. last year).
Simple Ratio: The comparison of one value relative to another to provide a benchmark for comparison of performance (e.g., average sales per day).
Index: A combination of several separate measures added together that result in an overall indicator of performance (e.g., (company sales growth)/(industry sales growth) for a specific geography).
Composite Average: The addition of the weighted averages of several similar measures that result in an overall composite indicator of performance (e.g., customer satisfaction composite is mixture of results from surveys, focus groups and product returns).
Statistics: Multiple measures such as mean, variance, standard deviation and variance that capture the spread and distribution of the performance measures (e.g., sales distribution by demographics, geography, channel).
Keep in mind that the evolution of effective ratios, indexes and composites is as much art as science. In most situations, the direct data elements that need to be incorporated in a specific KPI are quite apparent up front. The real challenge is in translating the data elements into meaningful derived metrics that reflect true business drivers.
The KPI Focus Dimension
After incorporating the perspective, family and category dimensions into the development of KPIs, one needs to consider the final overlay - the focus. The focus dimension reflects an eclectic mixture of views that further balance the development and selection of KPIs: Time Horizon - short-term vs. long-term, Planning - strategic vs. tactical, Indicator - lead vs. lag, Type - qualitative vs. quantitative, View - internal vs. external, Level - process vs. outcome, Purpose - planning vs. control.
It is important to screen the final KPIs to ensure that they are not all skewed toward short-term, quantitative, tangible and lag indicators, which are easiest to develop. For example, tangible assets such as investments, real estate and inventories are a lot easier to "dollarize" than intangible assets such as employees' skill, talent, knowledge and teamwork. Values for the latter are much more difficult to capture, but they are typically a much better indicator of the company's future potential.
The bottom line is that the creation of effective KPIs requires an extensive commitment in time and resources. The effort can be streamlined by incorporating the dimensions explored here.
Kent Bauer is the managing director, Performance Management Practice at GRT Corporation in Stamford, CT. He has more than 20 years of experience in managing and developing CRM, database marketing, data mining and data warehousing solutions for the financial, information services, healthcare and CPG industries. Bauer has an MBA in Statistics and an APC in Finance from the Stern Graduate School of Business, New York University. A published author and industry speaker, his recent articles and workshops have focused on KPI development, BI visioning and predictive analytics. Please contact Bauer at kent.bauer@grtcorp.com.
Be the first to comment on this post using the section below.