Business scorecards and management dashboards are part of almost every organizational performance measurement system; however most of the attention has been paid to the technology behind various business dashboard systems.
This quick guide for managers focuses on the best practices for selecting, developing and managing your key performance indicators (KPIs) and business metrics. After all, no technology can help a manager do a better job and achieve better performance unless the manager monitors and manages the most effective KPIs for the business.
The most important point is that business scorecards, metrics, dashboards, KPIs…. are all part of performance management system. Performance management is the disciplined methodology and process of monitoring organizational results and comparing them against predefined, specific and quantified goals, targets, objectives and internal and external benchmarks. In addition performance management helps managers focus on the right KPIs and set appropriate goals and strategies.
Dashboards and scorecards are visual tools to help managers better manage the performance measurement process by giving them the right information at the right time and help them focus on what really drives their business performance. In addition these business reports are very effective communication tools for communicating the strategy and current performance progress.
KPIs and metrics in business are critical tools to link and align organizational strategies and processes. Understanding of this simple principle is crucial for management.
As your strategy changes over time you need to review and audit the KPIs you monitor. Do they reflect your strategy (what you try to achieve) and do they align company wide (effective performance management in place). People in organizations from executives to line workers need focus and clarity – so your KPIs and metrics are critical for your business success.
The critical component, when reviewing and planning your performance measurement and management system, are your stakeholders. It is very common for organizations to develop metrics that support and satisfy certain stakeholders while ignore other important stakeholders (ideal KPI system should consider all stakeholders internally and externally as well as formal and informal) which is more of an art than it is a science.
Unfortunately in many cases the role of planning the KPIs and metrics for the business is delegated to technical / IT people who in many cases have a very narrowed and sub optimized focus on performance management.
For example, if you look at the balanced scorecard methodology – one of the major benefits is that it focuses on multiple stakeholders (in addition to the benefit of balancing financial and non-financial metrics) – owners, investors, customers and employees. Considering and satisfying all critical stakeholders is crucial requirement for successful KPI management system.
It is important to always keep in mind that KPIs are part of performance measurement system – ways to quantify goals and objectives and convert them into measurable targets. They measure the productivity (efficiency) and the rate of achieving the required results (effectiveness). The same approach works at the overall organizational level as well as at department or group level like marketing, safety, production, sales, finance, quality control, operations….
5 ways to evaluate and improve your current KPIs and metrics:
1. Lagging vs. leading metrics
Do you use the right mix of leading and lagging KPIs?
Leading indicators help decision makers anticipate and forecast future performance. On the other hand, lagging indicators are the already delivered results based on past developments. By relying on lagging metrics without using any leading indicators decision makers make assumption that no internal or external changes impact the business performance.
For example, while your current lagging indicators show above average performance, leading indicators like customer satisfaction index, new offering by a competitor or economic indicators can alert drop in revenue for the next quarter.
Leading indicators alert managers to adopt and make immediate adjustments and changes to optimize overall performances.
2. Tactical vs. strategic metrics
Do you have a balance of strategic and tactical KPIs and metrics?
Is there a logical flow between your tactical and strategic metrics?
Think of cause and effect relationship when you evaluate your business metrics. Tactical or operational decisions and actions should be linked to the required strategic outcomes. This means that they should be evaluated holistically in order to prevent and avoid any potential sub-optimization.
Managers of any position and background face this as a critical challenge to streamline operations in a way to maximize strategic value through appropriate tactical measures and strategies.
Examples include marketing, supply chain, production, logistics and just about any type of operation and process in any organization.
3. Financial vs. non-financial measures
Is your main focus on your financial measures?
While financial metrics, ratios and KPIs are critical for every business most of them are just historical and statistical numbers.
Non financial measures such as trends in customer metrics, employee metrics and business development metrics move the business forward and help you better anticipate future performance and manage your business better.
The balanced scorecard methodology uses a mix of financial and non-financial measures as a strategic management and business development tool.
4. Internal vs. external focus
Internal benchmarks are the foundation of any performance management system. Every business compares performance between different time periods to identify trends, developments and best practices.
However, external benchmarks can reveal a brand new perspective and fresh insight for management.
For example, one of the most common metrics for retail chains is sales per square foot so they measure and compare same-store sales per square foot, compare the metric among stores, regions…. Fact is that all these numbers are internal benchmarks driven by the performance of the company itself. Now comparing these internal benchmarks with external benchmarks such as retail industry leaders, similar retail chains, similar size stores…. can definitively reveal new perspective for managers.
Get familiar with your industry benchmarks and organize a way to monitor these external benchmarks continuously.
5. Good-to-know information vs. actionable metrics
What are actionable metrics?
Those metrics and indicators you can act on and change their performance level.
Most operational metrics are actionable – for example in production environment most metrics are actionable. However, when it comes to leading indicators, too often users face challenges. What you need to do is structure your leading metrics in an actionable way.
For example, when developing your customer survey questions, the words you use in your questions as well as the response options you develop for the respondents give you the flexibility you need to make the responses actionable for your business.In reality, unfortunately (having worked with hundreds of customers in just about any industry) fact is that many business reports, scorecards and dashboards are nothing more than summary of information about past performance and nice-to-have presentation. They have nothing more than informational purpose and do not offer actionable tool for the users.
As a summary, when creating your management dashboard from scratch or reviewing your existing reports make sure you audit and evaluate your metrics.
Come up with your top metrics first and go through the 5 steps to improve them. How to improve them? Make sure you include financial and non-financial measures, lagging and leading metrics, make sure your metrics are structured to be actionable, identify external benchmarks to use in your reporting and make sure your tactical metrics support your overall strategic key performance indicators.
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Print and use this simple PDF template to evaluate and plan your balanced metrics and KPIs.
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