Most of the Measures developed so far in Strategy Blueprint, Strategic Business Plan and 'Individual Goal Sheets' are mainly outcome oriented. For example Operations function might have the Measures like 'Number of products delivered', 'turnaround time between order and delivery', 'Cost of the product' etc.
However, for one to manage performance and build effective scorecards, Dashboards/MIS etc, one has to be look at lot many input, in-process Measures as well. In this topic we shall dwell upon the subject of Measures.
A well defined objective drives the right performance measure
Any objective OR sub-objective can have tens of different measures to define it success. The trick is to choose the right ones. More than 50% of the work of defining the measures is done, when you rightly define an objective (OR a sub-objective). A well-defined Business objective provides good boundaries on what a measure can be. For example ' Retain high value customers' is not as good as ' Retain at least 80% of high value customers having over USD 10000 annual purchase with us should still be with us over next 12 months'.
What are different kinds of performance Measures
- Indicator - A defined variable OR a synonym to measure.
- Measurement - An observation OR the data of the measure.
- Performance Indicator (PI)- A measure, which gives an indication of performance. Typically a performance indicator is an outcome measure and not an input OR in-process measure.
- KPI: Key Performance Indicator- Some performance indicators are more important than others. Performance Indicators, which are the key to strategy and execution are called KPIs
- Standards - Standards are the expected value of the measure, which will define success. For example TAT is a measure and 7 days is the standard.
- Lagging Indicator- Indicator, which talks about what has happened. For example 'sales orders processed' is the lagging indicator for sales performance.
- Leading Indicator' Drivers'/ Performance Drivers- Indicators, which help process the future performance. For example ‘Sales Leads under process' is the leading indicator of sales performance.
- Quantitative Indicators- Indicators, which deal with pure mathematics and numbers.
- Qualitative Indicators- Indicators, which can’t be quantified, for example 'Good Will', 'brand perception'
Imperatives & Best Practices for Performance Measures and Indicators
- Consistency- Provides a consistent value with each measurement.
- Ease – Easy to measure in terms of effort and simplicity. Complex measurements put off the people and reduce acceptance.
- Balanced level Precision—Value generated is precise enough for an actionable information. There is no point of measuring the turn around time in hours OR in weeks, when the objective is too reduce the same from 14 days to 8 days.
- Right level of Accuracy—Provides the real information.
- Cost effectiveness—Is not too costly to measure and should support a business case. There is no point of implementing the key-stroke speed measurement tool of USD 200000 , when we need to improve the productivity of a team of thirty 'USD 100 a month' data entry operators in India.
- Right frequency – Should be having a frequency, which should allow and action. For example there is no point of measuring the turn-around time of issuing a credit card on a daily basis, as any action you take to reduce the turnaround will take at least few weeks to implement.
- Balanced Leading vs. lagging- Only lagging indicators will not allow you to see the future performance and risks etc. Only leading indicators would make you too speculative as the future projections have to be validated with past performance.
- Optimum number of measures – Too many measures will clutter the visibility and too little will limit the visibility.
At all level of SBP, SBP etc, measures for any objective will be falling with in the following categories, with example of lets say sales related objectives:
- Volume – The numbers. For example Sales Volumes. Key performance indicators can be the Sales Orders Previous-month, % Change Sales Orders vs. Previous Month, Sales Orders Previous Quarter, Sales revenue per order.
- Cost --indicates how well operating costs are managed. For example sales cost per lead, Sales cost per order, Sales cost as a percentage of revenue, Sales cost as a percentage of total budget, and actual sales cost compared to budgeted cost.
- Efficiency—This is productivity. It indicates output for each full-time equivalent (FTE) employee. For example Sales orders per FTE.
- Effectiveness--indicates quality of outcome. For example- error rate in the application forms, the sub-standard OR high risk cases, the more profitable products, number of leads converted into sales order.
- Cycle time--indicates the duration to complete a task. These key performance indicators are measures in units of time and may include processing time and time to close the transaction. For example- Cycle time from lead
Profit & Loss vs. Balance Sheet Measures
All the measures can be divided into two categories:
- The measure of the current state. (Equivalent of a balance-sheet)- The orders in queue at the end of the month, the bank balance etc.
- The measurement of the activity across a period- Total number sales order during the month.