Beginner's Guide: Measures, Metrics and Key Performance Indicators [KPIs]
Regardless of what you do each day, you’ve probably realized that you are surrounded by data. The quantity of data that exists in the world grows substantially with every passing hour and it is said that 95% of it has yet to be analyzed. That’s okay, because success in the data and metrics world is not about analyzing data for the sake of analyzing data. It’s about analyzing data to answer a question. There also has to be value in finding the answer to that question or you risk wasting valuable resources (time and money).
Let’s consider a topic that is of interest to all of us and use crime data as an example. We all like to know what’s going on in our neighbourhoods. We want to know where it is safe to be and more importantly, where is it not safe to be. We also like to know which types of crime are occurring and to what magnitude. Lucky for us, much of this data is available on the internet.
But the quantity of specific data does not tell us the entire story. Crime maps may tell us how crime rates are today, but we also want to know how this data trends over time. Is crime in our area getting better or worse?
In the business world, we now compete on data, information and analytics. Keeping a close eye on your business metrics is crucial to your success. But which metrics should you measure for your business? You can find hundreds of articles on the internet regarding this topic, but each one represents a different opinion and a different perspective. The selection of metrics for your business should be as unique as the business itself.
This brief article will help guide you into the simple world of metrics and help you understand the nuances that make that simple world a little bit more complex when applied to the real world.
Terminology: Measures, Metrics and KPIs
Before we get too far into this topic, it’s important to clarify a few terms. Many people mistakenly use the terms measure, metric and KPI interchangeably. In reality, they are different.
What is a Measure?
A measure is a unit-specific term. As a definition, that can be hard to understand, so here are a few examples.
Suppose you are a company that sells two products, you can have a measure of inventory quantities. Perhaps you have 105 units of product #1 and 321 units of product #2 sitting on the shelves in your warehouse.
If you work in Accounting, you can have a measure of outstanding invoices. Perhaps you have 12 unpaid invoices representing $32,000 dollars owed to the company. These are all measures.
What is a Metric?
A metric is a quantifiable measure that is used to track and assess the status of a specific process. Here are a few examples.
In the business we described above, perhaps we are selling 10 units per month of product #1 and 15 units per month of product #2. Over in the Accounting department, perhaps we are resolving 5 unpaid invoices per month. Each of these is a metric which is constructed from measures.
What is a Key Performance Indicator (KPI)?
KPI stands for Key Performance Indicator. With the word “key” included in the name, we get a hint that perhaps a KPI has a certain level of importance to it. A KPI is a metric that measures something significant, like how well a business is achieving its business goals. KPIs can be defined at the overall company level, within departments and teams, or at the individual task level.
How to Select Metrics
Selecting the right metrics takes time, effort and planning. What I often see in companies or departments is that there is a rush to implement metrics in order to be able to claim that metrics are being used. It seems to be viewed as a step toward credibility within a department. The end result is that metrics are selected without a great deal of thought and the company later falls victim to the unintended consequences of the chosen metrics.
Each company will be different and if your organization is large, each area within your company will be different. Metrics need to be aligned to your specific business goals.
Trends and Their Interpretations
Another misunderstanding I see a great deal is in the presentation of metrics. It is of little practical use to know the exact value of a metric if you don’t know how that metric became today’s value.
The trend is usually of more value than the actual number. As another item to learn, you must understand when to call something a trend. If your data shows that sales this year are greater than last year, that’s not a trend. Learn to pick an appropriate timeframe to understand the behaviour of your metrics over time.
The Fundamental Rules of Metrics
If you don’t measure it, you can't manage it.
If you can’t take action on it, why measure it?
People will behave according to the metrics and targets you select.
Learn why these are the fundamental rules I suggest to everyone, regardless of the functional area in which you work. The last rule is greatly absent from most companies and it’s the one that will catch you off guard every time. For some companies, rule #3 has cost them millions of dollars.
How to Classify Metrics
Metrics come in different classifications since there are multiple aspects of a business that you can measure. Often, you will need several metrics of different classifications to fully understand how you are performing regardless of whether you’re measuring internal or external performance.
How To Prioritize Metrics
In the practical world, you will often find that the list of desired metrics within a company or department is far more than is practical to measure. It is important to have a simple method for prioritizing the implementation of metrics. This prioritization method should be based on the concept of effort and value.
Five Popular Mistakes when Picking Metrics and KPIs
Given the time pressure that everyone feels in the corporate world, it is very tempting to assign the task of KPI selection to one individual and ask them to suggest a list of metrics for the company or business area to use as KPIs. However, KPI selection is not a task and all metrics are not KPIs. KPI selection is an activity that requires careful planning or you will not obtain desirable results.
In this article, I will focus on five popular mistakes when it comes to the topic of KPIs. I could list dozens of potential mistakes but those who read my work know that I prefer to get my point across quickly… and I like my lists to be prime. I’m certain that five examples will be more than enough to convince you to plan ahead.
Mistake #1: Not involving the right people in selecting the KPIs
No one person can be assigned the activity of selecting the key performance indicators for a business or business area. It will require a team to get the selection right. Who the team members need to be depends on the business area that is seeking to establish their KPIs.
For example, if Human Resources wishes to establish a list of KPIs, it needs to recognize that it is a service and the other areas within the company are its internal customers. These areas of the company need to be interviewed in order to determine the key challenges they face and how HR contributes to solving these challenges. Every challenge does not need to be addressed. Using the 80-20 rule is highly recommended.
As another example, suppose you are a Supply Chain department seeking to establish your KPIs. The same approach is recommended because you are also a service function and the other business areas are your customers. What is it that your internal customers need most and how can you align your KPIs to measure your success in serving their needs?
Mistake #2: Failing to align your KPIs to business objectives and strategy
KPIs should be aligned to what you are trying to accomplish, i.e., to your business objectives. Those objectives were (hopefully) aligned to your strategy. For example, if the primary feedback that the business areas provided back to the supply chain department mentioned above was that they have great concerns over cost and delivery, the supply chain KPIs should align to those aspects of serving your internal clients. If no-one’s mentioning supplier quality, quality can be monitored by the supply chain professionals that manage each supplier. There’s no need to make that a reportable KPI.
Mistake #3: Failing to consider the unintended consequences
Hopefully the corporate world has learned a valuable lesson from the Wells Fargo incident in recent years. If you missed this incident in the news, the selection of certain metrics and targets resulted in hundreds of employees opening unauthorized customer accounts. Sadly, this is the most frequent mistake I observe and companies find themselves having to adjust their KPIs when the behaviour they observe is not the one they intended to encourage.
Mistake #4: Failing to assess impact versus effort
As you work your way through KPI selection, you will reach a point where you have your desired list of KPIs. However, an additional step is needed before you move ahead to implement the regular reporting of this information. The step that many teams miss is the step of assessing practicality. Are there KPIs on your list where the amount of effort to produce them far exceeds the value they provide?
Mistake #5: Failing to act on what your KPIs are telling you
One final mistake I will mention is one where teams fail to act. The whole point of KPIs is to keep a close eye on key measurements in your business so you can act on them when they begin to trend in an unfavourable way. Unfortunately, if no-one is accountable to act on these KPIs, they remain a pretty chart or table, lose their value instantly and serve no purpose other than to use up valuable resources.
Practical guidance on metrics can be found in the eBook entitled “The Strategy of Metrics & Key Performance Indicators: 2nd edition.” This eBook can be found on Amazon .
Tracey Smith is an internationally recognized analytics expert, speaker and author. Her hands-on consulting approach has helped organizations learn how to use data analytics to impact the bottom line. Tracey’s career spans the areas of engineering, supply chain and human resources. She is CPSM certified through the ISM. If you would like to learn more, please visit www.numericalinsights.com or contact Tracey Smith through LinkedIn. You can check out her books on her Amazon Author Page.