Sunday, June 24, 2012

Culture of Analytics: Five Management Aspects of KPIs

 A Key Performance Indicator (KPI) is a strategic metric that always demands a context, indicative of a strategic aspect of the organization.

We can only manage what we measure. A modern business needs to shape fact-based culture, either executive team or front line workers, measure/metrics/KPIs will help to improve productivity, more importantly, it may bring significant opportunities to optimize business process, recognize important patterns, and unleash the potential of business capabilities.

1. Measure, Metric & KPI

 Measure: Anything that is measured. Such as the number of customers, Total Revenue, etc. The key thing is that there is nothing inherently good or bad with a measure, it’s a Value Quantified / Qualified against a standard

Metrics: - Qualitative / Quantitative Measure against a trend; a value typically derived by a combination of two or more measures. Financial Ratios, Total Revenue overtime etc. Metrics do provide the notion of whether the values are good or bad.

KPI: is a Measure selected specifically to evaluate business performance, usually versus a specified target value. (Sales Revenue Growth%, EBIT $, Net Profit %, Market Share, etc.) 

It is a matter of categorization or differentiation that is used to measure and the difference in the level of measurement is whether it is strategic or operational. Strategic objectives are measured by KPI and KPIs are generated from measures.  KPI, metric & measure can be understood in conjunction and also in isolation to each other.

2. KPI --Strategic Aspect of Organization

 A Key Performance Indicator (KPI) is a strategic metric that always demands a context, indicative of a strategic aspect of the organization. It is something by which the organization measures how well it is executing its strategy and how well that strategy is enabling it to meet its objectives.

KPI -are the Metrics that are the "most" important for senior management. Senior executives should be interested in knowing more, as it's directly related to business strategy execution, so the further question is: How many KPIs are effective, sufficient, but not overwhelming? it may depend on the vertical sector and specific business, but the criteria need to be based on "KEY" to business. The scoreboard or dashboard with balanced KPIs will help senior executives make fact-based decisions, visualize the future of business more clearly.

3. Analytic Perspective of KPIs

 From an analytic perspective, corporate strategic goals are used to develop high-level metrics called key performance indicators or KPIs. Typical KPIs are revenue, customer satisfaction, or other important business drivers. These KPIs, in turn, are influenced by business unit metrics, which reflect a business process.

A KPI is simply a metric that is tied to a target. More often than not, a KPI represents how far a metric is above or below a pre-determined target. KPI’s are normally shown as a ratio of (actual: target) and are designed to instantly inform a user if they are on track with their plan, without the end-user having to specifically focus on the metrics being represented.

4. Story Telling with Metrics & KPIs

A business metric is a measurement that is quantifiable and relates to a business activity.. Metrics need to be clear, objective, measurable, transparent, insightful, and actionable. When properly defined, these metrics should relate to each other and tell a story. In other words, they should be orchestrated in such a way that they provide a framework for analysis. Metric is then analyzed and controllable measures are taken in between to achieve the KPI. A good way to test the importance of a metric/KPI is to ensure that it links to a value driver for the company.

Either IT, Marketing, Finance, Customer Service, or HR, KPI-driven storytelling will enhance communication and enable business optimization.

5. KPIs in Performance Management

 Top management looks into KPIs to measure goals and objectives while achieving them is done by several measures in the lower levels.

The middle managers may use a set of metrics (PI) to manage staff’s performance which is evaluated via several measures. METRICs are also measurements of importance to business users. These are things that often directly influence pay and bonuses. They are defined to be of importance by the business.

Measure, Metrics, PI, KPI-- business may need well define them all clearly in order to achieve the best performance result, encourage innovation effort, and unleash talent potential.

Provocative Pondering: Today, there’re 17, 000 KPIs around, a bit overwhelming, let's not forget that there is a "K" in KPI for a reason. We've seen lots of good definitions of PIs - a performance indicator puts a metric or measure into context - but not all PIs are KPIs. The KPIs are the PIs that the organization absolutely must consider, or is obliged to produce for regulation. If too many PIs are called KPIs, then effectively none of them are really key at all. So the principle is: Measure what really matters.  


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