Saturday, January 10, 2015

CIO as Chief Improvement Officer: How to Connect the Dots between PI vs. KPI

The use of KPIs is meant to improve and transform organizational performance.

Performance Indicators (PI) measure progress across a broad range of intended outcomes (goals, objectives, even outputs) and are used at all levels of the organization. Key Performance Indicators can be a subset of PIs, or they can roll several PIs into one (an index). KPIs are used to measure overall progress of the organization toward its mission and primary goals -- they are high-level indicators that everyone in the organization can relate to. KPIs are often used to create corporate dashboards; they can be used in PR documents and other reporting tools to present an organization's outcomes to the public.

All indicators must be related to the outcomes identified in the organization's strategic plan -- collecting extraneous data that no one will use is a waste of your organization's human and technological resources. When implementing KPIs usage, it is important to ensure that they are aligned to the overall strategy and operations of the business; you select the critical few and the KPIs are a combination of leading, lagging, financial and non-financial indicators.

It's got something to do with correlating over time, which ones tend to correlate soonest and best with metrics that matter most to overall effectiveness. Keep KPIs to a much smaller set (generally less than ten); these KPIs are often associated with company incentive compensation systems. Unless your organization has experience with using KPIs (and an ability to collect measurement data), minimizing the number of KPIs to start and review annually to see what to add/revise based on the goals of the upcoming planning process.

The use of KPIs is meant to improve and transform organizational performance. The more metrics you have, the more difficult it is to tell which KPIs are important for driving business performance and signaling success. Identifying the “critical few” metrics is, therefore, important because this helps bring clarity, alignment and focus on what is important.  Thus, the selected KPIs should motivate employees not only to achieve them but also to improve.

Good Performance Indicator helps you make better decisions to improve performance. If your KPIs are the opposite, they are a long list copied from the industry database; are not aligned to your organization's specific strategy; are only lagging and financial not being able to tell you anything about the future; drive wrong behaviors across the organization and bring some significant levels of discomfort to employees, then they could be deemed as bad measurement. Bad KPIs can be described as those that do not reflect progress against the long-term goals of the firm. The other problem is usually in the measurement approach itself. The way the KPI is measured can be inaccurate or not really a reflection of the behavior the firm is looking to exhibit.

KPIs must be carefully selected to fit your teams and operations. So a cost KPI might be suitable for executive review but may not work on the production floor. KPIs must be carefully selected to fit your teams and operations. Keeping in mind the specific use.if it doesn't help you make a decision, then it's not a KPI.
1). KPIs must be things that can be accurately measured in a timely fashion. Holding teams responsible for KPIs that have the significant errors in their measurement is impossible.
2). KPIs must be meaningful to those who are being measured. For example, using a cost KPI to try to motivate a production team to achieve if the production team cannot control a significant portion of the cost (materials costs) doesn't work. So if the goal is to improve the cost factors for a production team then use a productivity measurement, such as units produced per man-hour. This gets them thinking about line efficiencies and labor, which they should be able to control.

As the saying is going, you can only manage what you measure. However, selecting PIs & KPIs need to follow SMART principle - be specific, measurable, action, realistic and timely.


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