Strategy Execution: Clearing the Confusion on Metrics and KPI’s

The following ideas are taken from my recent book, FASTBREAK: The CEO’s Guide to Strategy Execution, now available on Amazon.co.uk. (Sorry, not yet available on Amazon.com, but coming).

Fastbreak 2

“What’s measured improves” ~ Peter Drucker

Objectives are by definition high level, qualitative “pictures” of a set of desired end-states that will drive the business forward to fulfilling its Strategic Intent.  However, unless we put specific metrics and milestones onto these objectives, they will be difficult to track and manage, nor can we accurately know on a real-time basis whether our efforts are producing results or how far off track we may be.

My philosophy on the importance of metrics in strategy execution can be summarized in the following quotes:

  • “If you don’t keep score, you are only practicing”
  • “A strategy without metrics is just a wish. And metrics that are not aligned with strategic objectives are a waste of time.”
  • “Be careful what you measure—you might just get it.”  That is, by measuring something, you are declaring to your managers and employees that an activity is important.

Clear, concise and relevant metrics serve multiple purposes within the strategy execution process:

  • Governance: Metrics allow us to manage and govern the overall focus, attention and resources we give to certain business activities.
  • Reporting: This is the most commonly identified function of metrics.
  • Communication: This is a critical but overlooked function of a metric. We use metrics to tell people both internally and externally what constitutes value and what the key success factors are.  People don’t easily see value, but they readily understand metrics.
  • Opportunities for Improvement: Metrics identify gaps (between performance and the expectation). Intervention takes place when we have to close undesired gaps. The size of the gap, the nature of the gap (whether it is positive or negative) and the importance of the activity determine the need for management to resolve these gaps.
  • Expectations: Metrics frame expectations both internally (with your staff) and externally (with our customers). Metrics help form what the customer expects. For example, if we say that we deliver by 9:30 a.m. next day, we have formed both a metric (i.e., did we meet the 9:30 deadline) and an expectation. We will satisfy our customer if the order arrives by 9:30. We will disappoint otherwise.

The first important insight into establishing and using KPIs (Key Performance Indicators) is to understand the difference between a KPI and an Enterprise Metric.  Enterprise Metrics are the real numbers about how well an organization is performing as an enterprise.  These are normally overall Profit and Loss numbers and also those key metrics found on the Balance Sheet. The most common enterprise metrics are revenue, profit, and cash.  These are real numbers, the kind you go to the bank with.

compassKPIs are what we call “directional” numbers or indicators (as the name implies) and give you directional feedback in various areas.  The understanding you are trying to gain about the performance of various parts of the organization determines the KPIs used.

KPIs should be used primarily for organizatonal learning and making performance improvement decisions. An appropriate KPI will provide the required information to assist in navigating towards the desired results.

Healers or Coroners – Leading and Lagging KPIs

An autopsy helps all those concerned (doctors, police, family members), except the victim.

There are two major types of KPIs: leading and lagging. Leading indicators measure activities that give a preview to future performance and upcoming challenges, while lagging indicators measure the output of past activity. Most financial KPIs deal with lagging metrics, while some KPIs, such as number of sales calls scheduled for the next three months, give a forward look at upcoming activities and would be considered a leading indicator of future performance.  Both Leading and Lagging KPI metrics can be useful for effective strategy execution if they give management useful information to make changes that will impact the future outcome.

One important thing to watch out for concerning KPIs is that most managers feel that they should get the perfect metric and as a result, tend to build very complicated metrics.  KPIs should be few and simple and by looking at the KPI it should be obvious to just about anyone what these numbers are telling us about our business initiatives.

At one client, we noticed a nurse keeping track of the number bandaidsof Band-Aids used during the week.  It was curious to her that this particular organization tended to use 10 times as many Band-Aids as the other companies where she had worked.  While this is not a “normal” KPI, we discovered, at the urging of the nurse, that Band-Aid usage was a perfect leading indicator for unsafe work practices, which if unchecked could eventually lead to a lost work-time accident.  By noticing the trend in Band Aid usage it was possible for management to discover potential unsafe work (lack of training, unsafe standards, poorly designed work stations, etc.) and to improve the process before any major accident.

KPIs, if properly constructed, will help you improve your organization’s performance by acting as early warning signals.  Remember, it’s the trend that is important, not the absolute number of Band-Aids, or any other number.

Tight Lines . . .

John R Childress

john@johnrchildress.com

About johnrchildress

John Childress is currently Visiting Professor in Strategy and Culture at IE Business School in Madrid and a pioneer in the field of strategy execution, culture change, executive leadership and organization effectiveness, author of several books and numerous articles on leadership, an effective public speaker and workshop facilitator for Boards and senior executive teams. In 1978 John co-founded The Senn-Delaney Leadership Consulting Group, the first international consulting firm to focus exclusively on culture change, leadership development and senior team alignment. Between 1978 and 2000 he served as its President and CEO and guided the international expansion of the company. His work with senior leadership teams has included companies in crisis (GPU Nuclear – owner of the Three Mile Island Nuclear Plants following the accident), deregulated industries (natural gas pipelines, telecommunications and the breakup of The Bell Telephone Companies), mergers and acquisitions and classic business turnaround scenarios with global organizations from the Fortune 500 and FTSE 250 ranks. He has designed and conducted consulting engagements in the US, UK, Europe, Middle East, Africa, China and Asia. Currently John is an independent advisor to CEO’s, Boards, management teams and organisations on strategy execution, corporate culture, leadership team effectiveness, business performance and executive development. John was born in the Cascade Mountains of Oregon and eventually moved to Carmel Highlands, California during most of his business career. John is a Phi Beta Kappa scholar with a BA degree (Magna cum Laude) from the University of California, a Masters Degree from Harvard University and was a PhD candidate at the University of Hawaii before deciding on a career as a business entrepreneur in the mid-70s. In 1968-69 he attended the American University of Beirut and it was there that his interest in cultures, leadership and group dynamics began to take shape. John Childress resides in London and the south of France with his family and is an avid flyfisherman, with recent trips to Alaska, the Amazon River, Tierra del Fuego, and Kamchatka in the far east of Russia. He is a trustee for Young Virtuosi, a foundation to support talented young musicians. You can reach John at john@johnrchildress.com or john.childress@theprincipiagroup.com
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2 Responses to Strategy Execution: Clearing the Confusion on Metrics and KPI’s

  1. Pingback: Just how healthy is your business? Are you sure? | johnnymaher.com

  2. Pingback: Analysing where your business is right now… | johnnymaher.com

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