KPIs – The Metrics that Drive Performance Management
Although selection of the appropriate visuals and graphs contribute to the effectiveness of a business performance management (BPM) dashboard, the true "soul" of the dashboard is the key performance indicators (KPIs). KPIs measure the business health of the enterprise and ensure that all individuals at all levels are "marching in step" to the same goals and strategies. They also provide the focal point for enterprise-wide standardization, collaboration and coordination. In this column and in subsequent months, we will discuss the important role of KPIs in the performance management process, provide guidelines for choosing the most appropriate and meaningful KPIs, and leverage Six Sigma techniques to facilitate KPI development and prioritization.
The KPI Definition
Selecting and defining KPIs is not as easy as it sounds. In the current marketplace, any time you purchase business intelligence (BI), enterprise resource planning (ERP), supply chain management (SCM), customer relationship management (CRM) or business performance management (BPM) systems, you have the dilemma of choosing 15 to 20 KPIs from the several hundred (or thousand) metrics that are included in the package. How do you differentiate KPIs from "just" plain ordinary metrics? How do you ensure the selected metrics are critical business drivers? How do you validate that the selected metrics lead to enterprise rather than localized optimization? How do you balance the short- and long-term goals? Do you have the available data to support the metrics?
In our quest to answer these questions, let's start our KPI journey with a basic definition. KPIs are quantifiable metrics which reflect the performance of an organization in achieving its goals and objectives. KPIs reflect strategic value drivers rather than just measuring non-critical business activities and processes. KPIs align all levels of an organization (business units, departments and individuals) with clearly defined and cascaded targets and benchmarks to create accountability and track progress. KPIs accelerate seamless and collaborative planning across the organization to ensure that everyone is operating from the same playbook. The success of any performance management program is thus contingent on selecting the correct KPIs. Selection of the wrong KPIs can result in counterproductive behavior and suboptimized results. It is important to bear in mind that although all KPIs are metrics, not all metrics are KPIs. The trick is discerning between the two.
The Primary KPI Challenges
It has been well-documented in existing management literature that "what is measured is managed," and, conversely, "what is not measured merits little or no attention." Consequently, it is critical that the KPIs measure those vital few activities and processes that monitor the health of the organization. There is also a need to ensure that KPIs are not defined in functional or siloed terms but rather as cross-business enterprise standards. In addition to these concerns, you need to address the following issues in the KPI definition and development process:
- What should you measure?
- How many metrics should you have?
- How often should you measure?
- Who is accountable for the metric?
- How complex should the metric be?
- How do you normalize the metric?
- What should you use as a benchmark?
- How do you ensure the metrics reflect strategic drivers?
Before we can even begin to discuss numbers and types of metrics, the first and most important challenge is to ensure that that the metrics reflect strategic drivers and are consistent with the vision and goal of the enterprise. In other words, KPIs must emanate from the vision level and cascade through the organization. In the strategic alignment pyramid (see Figure 1), we can see that translating the enterprise vision into KPIs and key action initiatives requires several intermediary steps - creating strategies, objectives and critical success factors. It is not sufficient to just know "where you are headed" and select relevant KPIs. The vision of the future (mission) must be supported by the how (strategy), the what (objectives), the focus areas (critical success factors), the metrics (KPIs) and the action plan (key action initiatives) to realize full actuation. There needs to be comprehensive and consistent alignment up and down the pyramid. Next month, we will continue our discussion on KPIs and the framework for developing effective KPIs.
Figure 1: Strategic Alignment Pyramid