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KPIs and Metrics are similar but different. Metrics represent the whole range of things which are appropriate to measure within an organisation. They can be financial, operational, customer related, R&D focussed, linked to investors or other stake holders. KPIs are what they say: Key Performance Indicators. KPIs will be small in number and have the following characteristics:
- Aligned with the competitive advantage of the organisation
- Be forward-looking (lead indicators) that predict future outcomes
- Focus on performance drivers rather than outcomes
- Often be a ratio to allow combinations of metrics
Since KPIs are defined as measuring the heartbeat of the business it is crucial that the KPIs used are aligned with the competitive advantage that the organisation is trying to achieve in the market place. This is another way of saying that KPIs must be aligned with corporate strategy. If the strategy is to be the lowest cost producer of a service then cost relative to the nearest competitor is a good KPI. If an organisation is focussed on being the quality manufacturer, commanding a price premium, then KPIs reflecting quality failures and a measure of added value for the additional quality may be appropriate.
What is absolutely fundamental is that a KPI framework for a company will be unique to that company, because to be successful it must reflect the outlook of the company. Although experiences from other companies are useful, they must be tailored to meet the specific organisational needs.
Furthermore as a Company evolves and its strategy changes so the KPIs must evolve too. Often KPIs will be demoted to metrics, and new KPIs designed to reflect the new direction and competitive focus of the organisation. KPIs are tools to help improve performance; they are not set in stone and should be allowed to evolve with the organisation.
Forward-looking, or lead, indicators are those which predict how the organisation will perform financially in the future if the KPI is improved now. This means that if the indicator is turning down there is time to improve the indicator before the impact is felt. A good example of this is on time delivery. If an organisation delivers on time to its customers then there is a greater likelihood of repeat business. If an organisation provides poor service then the customer is likely to go elsewhere.
Linked to this is the concept of process related and outcome related KPIs. The outcome of a process is, for example, the on time delivery mentioned above. However what drives on time delivery? What is the process for achieving the outcome? By identifying a key performance indicator which predicts the lead outcome then more time is available to fix the problem. It is important, though, to have a balance between process related and outcome related KPIs. The reason for this is to ensure that with the focus on the process, the organisation doesn’t lose sight of the outcomes – after all organisations deliver outcomes not process.
Ratios are important in both metrics and KPIs. Ratios make for good KPIs if they are correctly defined since they reflect the movement of two numbers (or more) in relation to each other. When viewing the metric it is key to allow the user to expand the KPI into its component parts as well as to the next level of supporting detail.
Data accuracy is important, and this has to be balanced against cost and complexity. When a metric is close to 100% then being accurate to say 1% is key, but at the 50% level precise accuracy adds little value and the trend is more important.
KPIs are usually displayed on a dashboard; metrics will use scorecards, although other analytic tools are possible.
See the relevant pages for further information, but a key feature of this mechanism is to enable ‘bubble-up’ KPIs. What this means is that a KPI viewer will show those relevant to a particular level, but this can hide exceptions at lower levels, and so these need to ‘bubble-up’ to be visible on the first view without more clicking with the mouse.
The precise tools used to display KPIs are not important. Some companies use Excel, whereas others will use specialist products. However the real benefit accrues from carefully designing your KPIs and metrics, aligning them correctly, measuring them accurately enough in real-enough time and then ensuring that decisions are made on the outcomes. The data will indicate where decisions need to be made, but the recipients of KPIs and metrics need to make the actual decisions.
With metrics and KPIs it is a good idea to have a formal process for defining and refining them, involving people from all levels of the organisation, and from beyond. Altimus has worked with many different organisations to assist in KPI design and this type of experience both on the actual KPIs and the processes for defining them can be invaluable to an organisation. An external facilitator can often draw more from the people involved in the design process.
To find out more about KPIs and Metrics and how they can benefit you, call Altimus on 0800 804 6442 and speak to one of our experts, or contact us through Information Request
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