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).
“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.
KPIs 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 of 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