Building Key Performance Measures

Join Jed and Bob as they discuss David Parmenter’s work on building good Key Performance Indicators, and how KPIs are different from other measures that are currently in use in many organizations.

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Key Performance Measures

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Every business has some performance measures, but do they have KEY performance measures?  Below we talk about

  • Why all organizations should have Key Performance Measures (or KPIs)
  • The difference between Key Performance Measures (or KPIs) and simply Performance indicators, and Key Result Indicators
  • We discuss David Parmenter’s four foundation stones for implementing and using Key Performance Measures (or KPIs)
  • Parmenter’s 12 step model to developing and using Key Performance Measures (or KPIs)

Why Your Organization Needs Key Performance Measures (or KPIs)

  • You need good measures to know where you stand as an organization.
  • People need to know “their score”
  • Key Performance Measures (or KPIs) are a necessary ingredient of continually improving performance.
  • Many organizations make measurement irrelevant by getting lost in a sea of data and numbers that nobody understands, or that don’t tell a story.
  • Key Performance Measures (or KPIs) are a necessary part of your Balanced Scorecard

KRAs, PIs and KPIs

David Parmenter is one of the foremost thinkers on Key Performance Measures (or KPIs).  Here is how he defines various types of indicators:

  • Key Result Indicators: tell you how you have done in a perspective
  • Performance Indicators: tell you what to do
  • Key Performance Indicators: tell you what to do to increase performance dramatically

Seven Characteristics of True Key Performance Measures (or KPIs)

  1. They are non-financial
  2. They are measured frequently (hourly, daily)
  3. Acted on by the CEO and the Management Team
  4. There is a clear understanding of the measures by all
  5. Assigns clear accountability
  6. It has a significant impact on performance and results
  7. Positively impacts other performance indicators.

Four Foundation Stones for Implementing and Using Key Performance Measures

  1. Partner with staff, unions, key suppliers and key customers for the development of Key Performance Measures
  2. Transfer of power to the front line for the influence and monitoring of Key Performance Measures
  3. Integration of measurement, reporting, and performance improvement.
  4. Linkage of performance measure to strategy.

Twelve Step Model for Implementing and Using Key Performance Measures

  1. Establish and maintain senior Management Team commitment
  2. Establish a Project Team
  3. Establish a “just-do-it” culture and process
  4. Set up holistic KPI development strategy
  5. Market the KPI system to all employees
  6. Identify Critical Success Factors (“CSFs” or Key Result Areas)
  7. Record measures in a database
  8. Pick team level performance measures
  9. Select organizational winning KPIs
  10. Develop reporting framework
  11. Facilitate use of KPIs
  12. Refine KPIs to maintain relevance

David Parmenter describes each of these steps in much more detail in his book Key Performance Indicators:  Developing, Implementing and Using Winning KPIs (John Wiley & Sons, 2007)  OR http://davidparmenter.com/

3 Things to Remember About Key Performance Measures

  1. Don’t let your metrics take on a life of their own.  Having hundreds of measures that people don’t understand or use is a waste of time
  2. You can do this at the departmental or regional level.  If your organization is not ready to use KPIs on a widespread basis, you can do it in your area.
  3. Do not discount Key Result Indicators – you need to understand your results and what you are achieving.  Just ensure you continue to drive those results through the use of Key Performance Measures.

Watch the ‘3-Minute Crash Course’ about Key Performance Measures (CLICK THE ARROW TO START THE VIDEO):

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Optimizing Your Business Process Can Be a Really Bad Idea

Before the industrial revolution, most of us were connected to the outputs of our labor.  We were either farmers or craftsmen in cottage industries where we worked on something for some period of time, and then either harvested, used, or sold the output of all our hard work.

In the 21st century the link between what we toil on daily, and the output of that toil is much more illusive – particularly so in information based jobs and industries.  We behave like some really minor cog, in some great big organizational wheel always feeling at least slightly nervous that if we got hit by a truck, it might take some time before anyone noticed.

As a result, we become focused on a series of tasks, rather than how those tasks contribute to some greater goal.  Several years ago I did a job at a sawmill.  This was before the forest sector in North America got completely spanked, and prior to Americans and Canadians sparring each other, and failing to recognize the much greater threat was coming from outside NAFTA.

Turning a raw log into a two-by-four is a much more complicated process than you might think.  There are lots of moving parts and many people involved before you can go down to the Home Depot and buy some boards to build that eyesore treehouse for the kids in your backyard.  As a result, you’ve got several groups of people that optimize their little part of much larger process without ever putting their head up to see if what they’re doing makes any sense.

Raw logs are scanned by laser on their way into the mill to optimize the use of fibre, and reduce the amount of waste (also known as chips).  The problem is as the timber got smaller and smaller over the course of many years, optimizing the amount of fibre meant that sawmills were producing a whole bunch of lumber with a dimension of 1” X 1” – about the size of a garden stake.

So you can imagine my surprise walking into the lumberyard of a sawmill, and learning that 80% of the space was taken up by garden stakes and bean poles.  Somewhere I had missed the bulletin about the fall of society, and our return to an agrarian economy.  Apparently, the larger lumber dimensions (like the wood you use to actually build things) were no longer required.

This is what happens when people optimize their little part of the business without any regard for the larger organizational goals.  This sawmill was indeed maximizing the amount of fibre recovered from each log – they just weren’t producing anything that anyone needed or wanted.

It would be easy to think this is an isolated case, but there are examples everywhere of people optimizing a piece of the business to the sub-optimization of the whole enterprise.  Ironically, this is often encouraged by well-meaning business improvement people, or high-paid consultants.

The bottom line is to draw a clear path between what each person does every day, and the higher-level goals of the organization.  If this path of vision is obstructed, you may end up with a yard full of garden stakes.

 

Strategy Mapping

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Strategy mapping is a simple tool that individual managers (as well as whole organizations) can use to connect individual effort to higher level corporate goals.  Below we discuss:

  • What strategy mapping is
  • Why individual managers should bother with strategy mapping
  • Examples of strategy mapping
  • Potential pitfalls of strategy mapping

What is Strategy Mapping?

  • A simple technique to connect people’s action to key business drivers.
  • Created by Kaplan & Norton of The Balanced Scorecard fame.
  • It’s the next logical extension of the Balanced Scorecard (click here for a Balanced Scorecard Toolkit)
  • Several books on strategy mapping have been published by Kaplan & Norton, including:
    • The Strategy Focused Organization (2000)
    • Strategy Maps (2003)

Why Use Strategy Mapping?

Strategy mapping is a tool that is elegant in its simplicity that can be used by organizations or individual manager.

  • Strategy mapping creates a clear line of sight between individual efforts and organizational objectives
  • Strategy mapping translates higher level business strategies to operational terms
  • Strategy mapping Aligns people and action
  • Strategy mapping helps put a value on things traditionally viewed as hard to measure

Strategy Mapping Example (Standard categories)

Strategy Mapping Example 1

Strategy Mapping (Example from an HR department)

Strategy Mapping Example 2

For each of the brainstormed categories above, metrics and operational goals would be established.

Potential Pitfalls for Strategy Mapping

Like any other tool, strategy mapping can be used well, or used poorly.  Some potential pitfalls to watch out for:

  • Being unclear on larger organizational goals will cause confusion when strategy mapping.  If it is not clear at the top of your strategy map, it will only get more unfocused as you progress downwards.
  • Not including your people in your strategy mapping exercise.  It is a waste of time to create a strategy map without the participation of the people doing the work.
  • Letting strategy mapping (or the balanced scorecard) take on a life of its own.  Tools need to be used wisely, and not become more important than the work they are supposed to facilitate or clarify.

3 Things to Remember About Strategy Mapping:

  1. Keep it simple.  Strategy mapping works because it is conceptually easy.  Do not make it more difficult than it needs to be.
  2. Put your strategy map front & center.  Once you have created your strategy map, put it where people can see it, and understand how their efforts impact the larger organizational goals.
  3. Adjust the categories to your needs.  Kaplan and Norton suggest four perspectives, and they are excellent starting points for the development of your strategy map.  Don’t feel bound by those categories, however.

Watch the ‘3-Minute Crash Course’ about Strategy Mapping (CLICK THE ARROW TO START THE VIDEO):

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Firing People as a Leading Indicator of Safety

Here’s an extreme example of the power of leading versus lagging indicators: plane crashes.  Every now and then, a plane might just fall out of the sky with no advance warning, but most often the cause was entirely predictable, and could have been caught by some leading indicator of trouble.  The tragic lagging indicator is when a plane hurls into the side of a mountain.

Now, to be fair, the airline industry has an outstanding safety record, and their ability to catch problems before they turn into catastrophe is something many other industries would be well-advised to study.

However, a recent news article by the Detroit Free Press got me to thinking about leading indicators of airline disaster.  The article was about an Air Traffic Controller who was caught watching a movie (Cleaner, starring Samuel L. Jackson, if it matters), rather than tending to the airplanes he was supposed to be watching.  I am going to go out on the limb here and say that the number and amount of movies watched while on duty by Air Traffic Controllers is a pretty clear leading indicator of plane crashes.

Once this was made public, the United States Federal Aviation Authority naturally took steps to suspend the Controller in question and his boss (even though they should have fired them both), and has launched an investigation.  And the pundits have all started to weigh in on the impact of goofing off at work.

In November of 2010, Salary.com did a survey that revealed that 36% of us waste two or more hours at work every day.  If you think your organization has any significant number of people making up that 36%, then it should be a pretty clear leading indicator of your pending implosion as a viable organization.

But back to the Air Traffic Controllers.

Jonathan Spira, an analyst that has studied goofing off at work (sounds like a fun job) said about this situation: “Clearly, if someone is watching a movie, they are bored, tired, distracted or somehow unable to perform his job.”

What Mr. Spira missed is that the person goofing off might just be an idiot who needs a kick in the ass.  Such as is the case with this Air Traffic Controller.  If this problem is widespread (which the US FAA is investigating currently), then I am going to suggest another leading indicator for airline safety:

The number of Air Traffic Controllers disciplined or fired is a leading indicator of improved air traffic safety.

Who says Ronald Reagan is dead?

Now if you really want to know what happens in the control tower, click on this week’s video clip, below:

 

Lagging and Leading Indicators

What are lagging vs. leading indicators, how to use them wisely, and why you should bother to measure at all.

Watch the ‘Lagging and Leading Indicators’ Video (14 mins 5 sec):

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Lagging and Leading Indicators

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When considering measures and metrics, every organization should have a blend of lagging and leading indicators.  Below we discuss why you should measure, the definitions of lagging and leading indicators, and how to use them wisely.

Why Bother to Measure?

Organizations need metrics to effectively operate their businesses.  Here are some specific reasons as to why organizations need both lagging and leading indicators:

  • People need to know their score. Unlike previous centuries, people are often separated from the output of their labour.  As a result, there is a strong desire by most people to have some idea of where they stand, and what their results are.
  • Lagging and leading indicators can be used to improve a business.  It is very difficult to initiate improvement, if you do not know where you currently stand.  Lagging and leading indicators should both be used to establish baselines for both results and processes that need to be improved over time.
  • Lagging and leading indicators can identify trends that can be used to better understand the business, and make better business decisions.
  • Lagging and leading indicators can help ensure people in the organization are not working at cross purposes

Lagging Indicators

Of lagging and leading indicators, it is usually the lagging ones that are better established in organizations:

  • Follow an event or measures the outcomes of past activity.
  • Often measures results or output.
  • Can confirm a pattern, or that an event is about to occur.
  • Most financial indicators are lagging (a result of past performance).
  • Examples of Lagging Indicators:
    • Unemployment rates
    • Net Income
    • ROI
    • Output measure such as production

Leading Indicators

Organizations struggle more often with Leading Indicators when they are setting up their measurement systems:

  • Often measure activities or sometimes processes
  • Indicators that signal future events
  • Measures the drivers of business results (whereas the results themselves are represented by lagging indicators)
  • Examples of Leading Indicators:
    • Bond yields
    • R&D dollars invested
    • Patents filed or pending
    • Employee satisfaction
    • Training or qualification levels

How to Use Lagging and Leading Indicators

Many organizations embark upon a measurement program by establishing lagging and leading indicators.  However, there are a few easy tips that will ensure the time spent on lagging and leading indicators is time well spent:

  • Don’t let your lagging and leading indicators take on a life of their own.  Measurement systems should make your business easier to manage, and make business decisions easier to arrive at.  If your metrics are not doing this, it is being done improperly.
  • Have a mix of lagging and leading indicators.  Most organizations have lots of lagging indicators, but fail to establish or track any leading indicators.
  • Track some things for a while, and monitor to see if they are useful.  Your measures will change and evolve over time.  To begin, you should measure what is readily available, and see if that is helping you to manage the business.
  • Change your lagging and leading indicators as the business (or measurement of the business) evolves.  Don’t become too committed to certain indicators.  Change them as necessary over time.

3 Things to remember

  1. Don’t spend more time measuring work than doing the work.  If your measurement system is too time consuming or onerous, it’s value diminishes quickly.
  2. Don’t get hung-up on labeling an indicator “leading” or “lagging”. Some indicators will be both lagging and leading indicators, and some may fall into each category for various purposes.  Don’t agonize over the label.
  3. You need some leading indicators. You likely already have a number of lagging indicators.  However, past performance is not always an indicator of future results, so you need to give some thought to what your leading indicators are.

Watch the ‘3-Minute Crash Course’ about Lagging and Leading Indicators (CLICK THE ARROW TO START THE VIDEO):

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What Gets Measured, Gets Mismanaged

Well, that title should upset a few people – particularly the folks in finance that love their spreadsheets more than they do their children.  Don’t get me wrong… I like the idea of measuring things so you know where you stand.  My problem is the way in which some organizations execute their metrics.

Performance metrics often provide an excellent illustration of how a really good idea can be made difficult and useless by poor implementation.  It’s a lot like watching your favourite sports franchise consistently snatch defeat out of the jaws of victory.

Usually it goes down like this:  someone in some position of authority will read the first fifteen pages of a book about measurement.  Without reading the following 250 pages, he concludes that his organization needs to get everyone on the measurement bandwagon.  Then he strikes a committee, or hires a consultant to go forth and make this happen.

Fast forward in time six months, and a significant portion of everyone’s work week becomes dedicated to counting the number of paper clips they have consumed since last week, and calculating the annual impact of that paper clip consumption.  They then have a meeting to discuss how to reduce paper clip consumption, thereby reducing annual operating costs by $48.50, or roughly 1/100th the cost of the first meeting about paper clip consumption.

OK… that might be a bit harsh.  But here are some actual examples of performance metrics gone horribly wrong:

  • The technology company that measured sales success exclusively on dollar volume at the end of each quarter.  THE RESULT:  A whole bunch of clients went somewhere else because they were tired of being sold things they really didn’t need.
  • The grocery retailer that measured check-stand effectiveness by calculating the frequency of cashiers using customers’ names.  THE RESULT:  the customers went to stores where they measure how much time was spent waiting in line – something the customer actually cares about.
  • The restaurant owner that attempted to reduce cost by reducing the number of paper napkins provided to each customer.  THE RESULT:  I don’t know… probably sticky fingers and dirty tables – this one just seemed really silly to me
  • The lumber manufacturer that measured how much fibre it recovered from each log, as opposed to how much money they made on different dimensions of lumber.  THE RESULT:  Very few wood-chips, but a yard full of garden stakes that no one would buy (and a whole bunch of trees unnecessarily harvested)

Some people will tell you all that matters at the end of the day is how much money you make.  Not true – if you focus exclusively on this, you are in a never-ending cycle of sub-optimized decisions that forbid any long term success.  Most obviously, if you ignore safety while focusing exclusively on how much money is make, it is only a matter of time before you injure or kill someone, which beside being ethically reprehensible, is very expensive.

Here’s the bottom line about measurement:  The great thing about measuring performance is that people will adjust their behaviours to affect the outcome of the measure.  Unfortunately, the really scary thing about measuring performance is that people will adjust their behaviours to affect the outcome of the measure.

So measurement (like other recreational drugs) should be used cautiously and in moderation.  Second, you should never have only one number you are tracking.  And finally, you need to understand why numbers are trending the way they are, as opposed to (over)reacting to one data point.

Let’s be careful out there.

The Balanced Scorecard Approach

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The Balanced Scorecard approach is a system of measurement, that when implemented properly is brilliant in its simplicity.  Below we discuss the four standard perspectives of the Balanced Scorecard approach, and how you can implement it in your organization or department.

About the Balanced Scorecard Approach

The Balanced Scorecard approach was created by Robert Kaplan and David Norton in the early 90s.  Kaplan was a professor at Harvard with a background in accounting and finance, and Norton was a consultant that worked primarily in the Information Technology field.

The original article on the Balanced Scorecard approach, “The Balanced Scorecard – Measures that Drive Performance” was published by Harvard Business Review in 1992, and was voted one of the ten most influential articles of all time.  Several more articles and books followed entrenching the Balanced Scorecard approach into standard business lexicon.

The Four Standard Perspectives of the Balanced Scorecard Approach

There are four standard perspectives to the Balanced Scorecard approach:

  1. Financial Perspective:  How do we look to shareholders?
  2. Customer Perspective:  How do customers see us?
  3. Internal Business Perspective:  What must we excel at?
  4. Innovation and Learning Perspective:  Can we continue to improve and create value?

Examples of Each of the Four Perspectives of the Balanced Scorecard Approach

The Financial Perspective of the Balanced Scorecard Approach

  • Financial perspective does a lot with profitability, growth, and shareholder value
  • Tends to look “backwards”
  • Shareholder Value Analysis is an attempt to help financials look forward
  • Such things as:
    • Return on capital
    • Cash flow
    • Profitability
    • Reliability
    • Sales
    • Return on equity

The Customer Perspective of the Balanced Scorecard Approach

  • A complete blend of time, quality, performance and service, which are of more concern to the customer
  • Benchmarking is sometimes used for industry comparison
  • Ensures your business is not excelling at something that has no value to the customer
  • Such things as:
    • Quality
    • Service levels
    • Timeliness
    • “Walletshare” of key customers
    • % of sales from new products (proprietary products, etc.)

The Internal Business Perspective of the Balanced Scorecard Approach

  • Business processes that have greatest impact on customer satisfaction
  • Often measures are “deconstructed” to a local level
  • This is where information systems and tracking become critical
  • Such things as:
    • Cycle time
    • Unit cost
    • Yield
    • Efficiency measures
    • Schedule versus plan
    • Safety
    • Risk Management
    • Loss control

The Innovation/Learning Perspective of the Balanced Scorecard Approach

  • Incorporates notion of continuous improvement
  • Setting targets for improvement and continual learning
  • Measures company’s ability to innovate, learn, and improve
  • Such things as:
    • Time to innovate next product
    • Time to market
    • Employee retention
    • Employee satisfaction
    • Employee skill levels

Implementing a Balanced Scorecard Approach

Organizations make a few critical mistakes when they first attempt a Balanced Scorecard approach:

  1. Don’t make it more complicated than it needs to be.  Start with the data you have on hand, and refine it as you go along.  If you are spending more time measuring your work, than you are doing your work, you’ve got it wrong.  The Balanced Scorecard approach is most effective when it is clear and simple.
  2. Adjust the perspective to meet the needs of your department or organization.  The Balanced Scorecard approach should be tailored to your situation, however the standard perspectives are an excellent starting point.
  3. Don’t forget about “leading” indicators.  When implementing the Balanced Scorecard approach, many organizations have no problem with the financial, and service measures, but when they get down to the innovation and learning perspective, it becomes much more difficult for them.  Do your best to find predictive indicators as well as lagging indicators.

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The SMART Goals Acronym, BHAGs, and Other Silliness

“My goal now:  to be the all-being ruler of time, space and dimension….  And then, I want to go to Europe.” – Steve Martin

For the low price of about $5000, you can spend the weekend with some screaming hucksters (who you would run far away from in a normal social setting), who will guide you to the perfect collection of personal and professional goals that will change your life, and provide the happiness that has always alluded you.  Your registration also includes a coffee mug, and a handsome leather portfolio for all your hand written notes.

It seems that the SMART acronym (Specific, Measureable, Attainable, Relevant, Time-phased) is not the stuff of which great goals are based.  You can also dispense with BHAGs (Big, Hairy, Audacious Goals) made famous by Jim Collins.  Nope, the only way to achieve greatness is to pay your $5000, and lose a weekend of your time.

I’m thinking about advertising on the same forum a one-hour seminar on how to avoid rip-offs, but only charging $2500.  I would assume I would be marketing to the same clientele.

Don’t get me wrong – I think goals are important.  However, I don’t believe their commodification is necessary.  You can write your goals in whatever format you wish on the back of a napkin, and get everything out of it your would by paying your $5000.  The reason most goals fail to be achieved is because people lack the discipline to follow up on their goals – not because of how they are written.

I do believe everyone should have goals, and I do believe you should write them down.  The SMART acronym can help you write higher quality goals, and Jim Collin’s idea of BHAGs can help you to write something inspired.  If you don’t buy into either of these, write them as you see fit – just write them.

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