Friday, June 19, 2020

Key Performance Indicator Measurement Principles

From a KPI management perspective, the fewer the better, but they have to be credible and relevant also in the eyes of the stakeholders. 

The company’s performance is directly related to the decisions people make every day across functional areas and geographical locations. The purpose of the performance indicator setting is to monitor performance progress. As a matter of fact, setting KPI is one of the most important tasks in performance management.

KPIs should be set according to the strategic strengths of the company, what resources the company has, in which it can fully utilize. It requires a system with components that all work together to close measurement blind spots and provide insight into the validity and reliability of what’s being measured.

A KPI must measure end goals (effectiveness) and process execution (efficiency): The performance measurement is the means to end, not the end itself. The end is how well the organization achieves its business goals at either strategic or operational level. Keep in mind, companies have resource constraints, and that performance management, per definition, is “overhead.” Sometimes, people are obsessed with measuring things and asking for more and more measurements, which becomes the hassle of distracting the management from laser focusing on the most critical business issues. The other pitfall could be that the volume of metrics becomes unmanageable, turns to be the end itself.

The challenge for performance measurement or key performance indicator selection is that they sometimes need a number of measures around the same issue to gain a complete picture. Metrics and KPI management is not an easy task, each new measurement takes some form of time to gather, collate, and interpret. Only through a well-defined set of KPIs, organizations can qualitatively and quantitatively measure value delivery to business objectively. It’s also important to measure the efficiency of process execution because business processes must integrate with and support the final outcome to produce a product or service and generate revenue.

A KPI must be relevant to the hierarchy of the company:
The purpose of KPI measurement is to identify whether the adopted strategy and operations are working smoothly to achieve business outcomes. 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 strategic KPI must be translatable into operational KPIs that can be attributed to departments down in the company hierarchy. Or put another way, at the operational level, there should be some metrics that can be tied directly to achieving strategic goals so that employees across the organizational hierarchy know how their role fits in and can be freed up to do what they can to try to achieve the desired strategic outcomes.

From a long term perspective, if you want to manage measurements effectively, you need to have people at the different levels of the organization understand what those metrics are, what they are trying to achieve, and why you think it is appropriate in that specific context. Otherwise, it causes confusion and resistance in using metrics when people aren't clear about what information they want to collect and how they intend to use the information to support decisions. Goals should be clear and attainable, linking your key performance indicators to other performance indicators that should link all the way back to your transactional metrics defined in your source systems. Regular feedback is a must and incentives should be comparable to expectation set and engage more people as advocates in building the momentum.

A KPI must show what is important to pursue executing the company strategy: Business strategy relates to the high-level definition of an organization’s vision, goals, and the key initiatives that are required to pursue those objectives given a particular starting point. KPIs must act as an early warning system if the strategy is not on track, and show what’s important to improve the success rate of strategy implementation. Focus on resolving problems, increase in the number of problems successfully resolved, and expand the business capacity for seamless strategy execution.

Use metrics as pointers to areas requiring further investigation. With reliable performance data, the management can guide the team to understand the purpose of doing metrics and engage in that, and fix the root causes of the problem. To improve strategy management effectiveness, it is imperative that you link lower-level metrics with higher-level strategic objectives. There is a significant lag between getting important business systems operational, so have enough data to establish a baseline, and then actively monitor the progress. The relevant KPIs should reflect the business outcome that the management cares about.

A KPI must empower people/teams to do "the right thing":
The management wants people to understand what they are doing. The group of KPIs must prevent making it a KPI game. One of the most dangerous parts is when the performance system is connected with the motivation system on an operational level, but disconnected from the strategy management. It could drive wrong behaviors across the organization and bring some significant levels of discomfort to employees, then they could be deemed as bad measurements. For example, people use inappropriate metrics for the situation. People twist metrics to match their agendas or their preconceived notions, etc.

Ideally, a way the KPI is measured needs to be an accurate reflection of the behavior the firm is looking to exhibit. If your KPIs are opposite, they are not aligned to your organization's specific strategy; they are only lagging and financially not being able to tell you anything about the future. Effective KPI measurement empowers people/teams to do "the right thing," and helps you make better decisions to improve performance. The peril of measurement management such as the wrong metrics selection or ineffective measurement practices perhaps further causes management conflicts, resource misalignment, or business stagnation. It’s like that the business wheel keeps spinning without going anywhere.

The organization that didn’t have a systematic approach to measurement and analysis has a giant blind spot that is impairing their business performance and effectiveness. From a KPI management perspective, the fewer the better, but they have to be credible and relevant also in the eyes of the stakeholders. It’s important to measure performance that could tell the full story and ensure the business as a whole is superior to the sum of pieces.


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