Monday, September 29, 2014

Strategic KPIs vs. Operational KPIs

Strategic-operational KPIs alignment gives the organization a powerful tool to use when implementing change.

KPIs are indicators to identify if the adopted strategy, operation, and process, etc is working toward the objective. As such, you don't "adopt" a KPI to "achieve an outcome," you adopt a strategy or operational workflow to achieve the outcome, and you define KPIs to monitor the progress and performance. That’s the name KPI –Key Performance Indicators stand for. The provocative question is: is it possible to link operational KPI's to strategic ones to reflect and track the overall progress in achieving the strategic goals? 

 It is imperative that you link lower level metrics with higher level strategic objectives:That’s what most of the strategy management methodologies are all about; hierarchies that are in alignment and that support the corporate objectives. Most strategies that do fail, it fails not because the fundamental strategy is flawed, but because of poor execution of an otherwise sound strategy, through misalignment and miscommunication. It should be the primary purpose of your measurement framework and metrics dictionary to creating a set of relevant operational KPIs. For example linking your key performance indicators to other performance indicators which should link all the way back to your transactional metrics found in your source systems.

The linkage of strategic KPIs and operational KPIs is NECESSARY: One of the greatest breaks in closing the loop in any organization's CPM system is that what's measured on a frequent basis, what is built into individual performance management objectives, what is tracked and worked toward is separate from the strategic goals of that organization. This makes "strategy" a separate and distinct executive exercise with little relevance to operators, finance, and managers. It also makes it nearly impossible to cascade appropriately to create alignment. So-called Balanced Scorecard strategy maps where there seems to be a certain amount of hand-waving and big words attempt to link strategic objectives with the department, team and individual measures. But if you trace from the valuable products/deliverables, services, and information that the company and its functions must deliver to achieve business goals back to departmental outputs and team/individual work outputs, then the linkage between strategic and operational can be relatively transparent. But it requires that you understand your business from a cross-functional process perspective in some detail.

Business should be able to define and align Operational KPIs to Strategic KPIs for successful tracking of the effectiveness of Strategic KPIs: The effective way to track the achievement of strategic goals is to cascade those down throughout the organization with the use of operational KPIs. The cascaded approach is the best for two primary reasons. First, it allows the KPIs to be actionable when the targets are missed. Since the higher level KPIs are tied to the next lower level you can easily drill down and see which component of the top-level KPI is off target. This allows you to focus your fix efforts. This is particularly critical if you are to get employee understanding of what the strategic goals are and how their work fits into that bigger picture. For instance, a strategic goal might be to improve customer satisfaction levels, which might then break down into sub-objectives. However, this does NOT mean that the only KPIs used are those for the strategy. It also does NOT mean that every level of employee gets the same KPIs, or the same interconnected score card as does the executive team. It DOES mean that at the operation level, there should be some metrics that can be tied directly to achieving strategic goals so that EVERY employee knows how their role fits in, and can be freed up to do what they can to try to achieve the desired strategic outcomes.

Also, don't forget that often the path between strategic and operational measurements is via tactical measures: Put another way, in between your scorecards/dashboards and your operational reports sit your summary, management, and analytical reports. It is possible to connect as well the KPI and the KRI on the strategic level towards the tactical KPI's and KRIs connected to the operational ones so that there is one truth in the company connected to the strategy.
1) At a bare minimum, you have to test to make sure that operational metrics is not in conflict with strategic objectives or with each other among different functional groups. Minimizing customer service call time may be all well and good for department cost objectives, but at odds with higher level customer satisfaction goals. Minimizing product costs in design may be at odds with corporate quality goals. 
2) Lower level operational metrics nearly always fall hierarchically under some higher level general goal, such as profitability, quality, customer satisfaction, time to market, innovation, treatment of employees, etc … if the operational metrics do NOT measurably support a higher level metric or general objective, and/or are not positively correlated with the expected strategic result, then WHY are you tracking them in the first place? Drop them in favor of other metrics that do translate into your strategic goals.

Strategic-operational KPIs alignment gives the organization a powerful tool to use when implementing change. When changing a process or organization, you have to come up with new ways to measure the success of the change. Those new metrics must still tie into the 'parent' KPIs so employees understand better how they fit into the new world. Part of redesigning a process and getting better buy-in from employees is increasing their understanding of why you're changing, and what the benefits are. Being able to show those benefits in hard facts such as measurements helps greatly.


Good article. When I visit large organizations, often best practices for KPIs come up. Your perspective on cross-functional processes is especially relevant here for effective and meaningful strategic KPIs aligned to overall business objectives.

Post a Comment

Twitter Delicious Facebook Digg Stumbleupon Favorites More