TagKPIs

Rethinking The Use of KPIs In The Digital Era

Most companies do not deploy Key Performance Indicators (KPIs) rigorously for review or as drivers of change. This is the overall finding from a recent survey report, Leading With Next Generation Key Performance Indicators, published by MIT Sloan Management Review. The report is biased towards Sales and Marketing functions.

Changes in the business environment such as accelerating technological innovation, intensifying competitive pressure, significant emerging risks, increasing customer expectations, and complex regulations are influencing business models and causing tremendous shifts in the strategic direction of the company.

As a result, executives are struggling to balance tactical and strategic KPIs, including operational and financial KPIs that effectively capture the moment while anticipating the future.

Part of the survey findings include:

  • KPIs are not enjoying special status as either enablers or drivers of change in many companies. Instead of providing value added insight to guide and drive performance improvements, KPIs are more about “tick-box” compliance. Either that gives you a sense of the scale of key decisions made on intuition versus data-driven or it makes you realize that despite the critical role of KPIs in enabling informed decisions, many executives are still not aware of this.
  • Lack of alignment of KPIs with strategic objectives. Only 26% of the survey respondents agreed that their functional KPIs are aligned with the organization’s stated goals and strategic priorities. Such a huge disconnect explains why many companies are struggling to execute their strategy more effectively.
  • Customer-focused KPIs are increasingly becoming more important. Many companies are taking a more customer-centric approach to spur growth. As a result, they are seeking to understand customers in more holistic ways. 63% of respondents say they are now using KPIs (such as NPS, customer segmentation, customer lifetime value, brand equity, churn) to develop a single integrated view of the customer and understand the customer’s experience at each touch point including the aggregated journey.

Based on respondents’ answers to a specific set of questions on how well a company has aligned its use of KPIs, the report authors were able to categorize the companies into three – Measurement Leaders, Measurement Capable and Measurement Challenged.

According to the study findings, six behaviors are common to Measurement Leaders:

  1. Use KPIs to lead, as well manage, the business. Companies falling into this category treat their KPIs not simply as “numbers to hit” but as tools of transformation. KPIs are used to effectively align the organization (people and processes) and also provide predictive insight that help frame strategy and lead the company into the future.
  2. Develop an integrated view of the customer: Respondents falling into this category have shifted their focus beyond traditional financial and customer satisfaction metrics to including externally focused KPIs that enable them to better segment and engage customers. Such measures complement and build upon more internally focused process KPIs. However, an integrated customer view remains an aspiration for many businesses. For example, 41% of survey respondents are still managing digital customers separately from physical customers. Companies that are making progress in this space are experimenting with automation and machine learning technologies to develop a 360-degree view of their customers.
  3. See KPIs as data sets for machine learning: Nearly 75% of executives surveyed expect that ML/AI technologies will help them achieve strategic goals. Instead of viewing KPIs just as analytic outputs for business performance review and planning, organizations can take advantage of ML which empowers software and systems to learn from data-driven experience. This creates opportunities to use KPIs (individually and collectively) and their underlying data to teach ML algorithms to improve and optimize their performance and drive marketing activities. However, care must be taken that the KPIs used as data inputs for ML actually reflect business reality, otherwise the systems will learn from wrong inputs leading to garbage in, garbage out.
  4. Drill Down into KPI Components: Drilling down to a KPIs components is critical for effective KPIs. It helps executives see the underlying data or analytic components that are aggregated into KPIs, determine why specific KPIs have over or under-achieved and prioritize critical business issues. For example, the drilling down can be done according to different customers, segments, channels or different products. Legacy organizations with legacy IT systems and legacy financial reporting processes, however, generally lack this capability
  5. Share trusted KPI data: While it is true that the whole is greater than the sum of its parts, having shared KPIs facilitates effective cross-functional collaboration because managers can see the positive or negative impact of their own KPIs on others. This cause-and-effect relationship also enables opportunistic efficiencies and outcomes. Although transparent, shareable KPIs can create new dynamics, in some cases, conflict may arise within the organization due to overstepping of boundaries in turn affecting accountability.
  6. Aim for KPI Parsimony: There is no magic number of desirable effective KPIs for an organization. However, too many KPIs easily become unwieldy, unmanageable, and create unrealistic expectations. Too few might result in the neglect of critical business issues. In today’s digital world characterized by data proliferation, it is much easier to get carried away and succumb to “KPI creep”. Measurement leaders know what to focus on – a balanced set of vital and valuable KPIs that have massive potential to make a huge difference to their businesses. Instead of wasting resources on ordinary metrics or measures that promote bad behaviours and fail to influence the strategic priorities of the business, they understand that to be effective and account for business success, KPIs must truly be “key” performance indicators.

To obtain greater value and returns from their KPIs, the report recommends companies to identify their top 3 enterprise and top 3 functional KPIs, create a process for ongoing enterprise-wide discussion of KPIs, and treat KPIs as a special class of data asset.

Additionally, I believe company leadership should also:

  • Acknowledge that effective performance measurement requires a cultural shift. The fish rots from the head. If there is no executive sponsorship, chances are high that the use of KPIs to drive growth will remain relegated to the lower rungs of the ladder.
  • Integrate performance management with risk management. The former looks at KPIs and the latter looks at Key Risk Indicators (KRIs). Business success is also a result of making informed and intelligent risk decisions
  • Start with the WHY of data collection. While it may be true to say that data and analytics are the raw ingredients of KPIs, a company’s data needs must be supported by the key performance questions raised. It is therefore imperative to ask critical questions before accessing any new data.
  • Understand that technology is just a means to an end and not the end itself. A company does not necessarily need to invest in new technology to reap returns from its KPIs. Just because “experts” are preaching the gospel of ML/AI as the solution to modern business problems, first evaluate if your business is in dire need of such technology and cannot survive without it.

Why KPIs Alone Do Not Drive Results

No matter how small or big a company is, all companies aspire to achieve superior business performance that beats the odds. Meeting after meeting, they map out a road map for achieving this success. KPIs are brainstormed and a select critical few to focus on defined for monitoring.

Designed to track performance against targets and drive results, KPIs help managers and executives establish whether performance is improving, deteriorating or remaining stagnant. This then allows them to take corrective action where necessary.

The problem we see in many companies today is lack of KPIs ownership and accountability. Yes, they are tracking the right metrics but the process ends there. There is no individual who is responsible for the performance of that metric.

KPIs Need People Ownership and Accountability

KPIs alone do not drive results, they need people ownership and accountability. Ownership is key to ensuring successful adoption of performance management across the organization. Lack of buy-in and engagement makes it difficult for employees to manage their performance.

On the other hand, accountability ensures that individuals, teams and management are held responsible for their performance against specific initiatives. Having said this, you need to empower your employees to drive performance and not micromanage them.

If employees are not given autonomy to manage their performance, in the event of faltering results, they will most often enter into a fight-or-flight mode which by default is counterproductive.

When it is clear who owns the results, management can make follow-ups with responsible individuals or teams, provide visibility of how they are performing and how their performance is impacting the top-level business metrics. This helps create awareness of any performance problems that need addressing at the earliest convenience.

One of the reasons why companies are facing KPIs ownership problems is because of a lack of shared understanding of the meaning of performance measurement. So often, performance measurement is associated with punishment and rewards. Hit the targets and you get rewarded. Miss the targets and you get punished.

This shouldn’t be the case. Rather, performance measurement should act as an improvement tool that propels the organization forward.

A Culture Focused on Performance is Needed

In order to drive company-wide adoption and buy-in, organizations must develop a culture of performance. What do I mean by this? All employees must go through training on “what is performance management?” and how to do it.

This is key to ensuring that everyone speaks the same language concerning KPIs and performance improvement. It is imperative that employees have a shared understanding of how performance is managed and communicated, both at individual and team level, and how this influences overall objectives.

In addition to training opportunities, organizations should also provide tools that enable employees to embrace this culture. The environment should be supportive of this cultural shift, otherwise all efforts will end up being fruitless.

Improving corporate performance starts with individuals and entails a cultural and mental shift. Thus, employees should be able to see the cause-and-effect relationship between their actions, business performance and rewards. One way of creating this awareness involves identifying performance champions within the organization and granting them the responsibility and resources required for transforming the culture.

For example, performance champions play a critical role of continuously reinforcing the right habits in one another so that performance improvement is on their minds all the time. They also help explain the significance and value of using KPIs or metrics of success in their everyday work.

Once individuals and teams have a clearer understanding of the “why” part of KPIs, it completely changes the way they view performance management and also the importance they grant to the process.

Execution is Key to Business Performance Improvement

Although KPIs provide focus and act as a road map for strategic success, we should not ignore the important role people play in this entire process. There is a huge difference between tracking performance and tacking action. Performance management goes beyond monitoring of key metrics.

To be effective and enable better decision making, KPIs need to be evaluated against a target. This helps establish whether the outcome is acceptable or not, at the same time allowing corrective action to be taken.

If there is no pre-defined target to measure actual results against, how can we expect decision makers to take immediate remedial actions? Positive actions and results are a product of consistent, relevant and reliable information being shared across the organization.

Despite more and more data being tracked, reported and communicated in today’s analytics world, many decision makers are still lacking the necessary business insights to improve performance. They are repeatedly receiving insignificant information, which unfortunately, they are unable to act upon to drive business performance.

Once information is consistent, relevant, reliable and communicated throughout the organization, it can be acted upon. It is therefore important to make sure that the information that is being communicated and presented is in a format that is quickly and easily understandable and consumable.

You can have well-defined KPIs but what matters most are not the indicators or how many you have, but what your employees and teams do with these indicators.

KPIs Should Actually Reflect Business Reality

KPIs are an important tool to help us explain progress towards our stated goals and strategic priorities. Despite their usefulness in helping us understand where we are coming from and where we are going, KPIs are not well understood in many business settings. The key part is the one that is a significant problem. One of the first challenges faced by management and executives is determining what makes a performance indicator key.

Not every performance indicator is key. For a measure to be considered key, it must focus on what really matters to the decision makers, prompt action when things have gone wrong, alert when performance is fading, and motivate when everything is going well. The fact that you have a list of measures that you are tracking on periodic basis does not necessarily mean all of them matter. For me, KPIs are those critical few measures that drive the achievement of strategic objectives.

In other words, KPIs represent the measures that an organization relies on to monitor and drive business performance. Since these key metrics are relevant to a particular company, management should not feel compelled to create KPIs with the sole intention of replicating those reported by their peers. Although there are standard measures for each industry or sector, not all companies have the same strategy, objectives, initiatives, priorities, capabilities, data sources etc.

As a result of these differences, companies prioritize metrics differently and assign different weights to their objectives. Thus, the key to unlocking performance measurement potential is linking the process to your organization’s strategy and objectives. Considering the fact that your value proposition and business drivers are unique to you, your KPIs should also be unique to your organization.

Linking KPIs to strategy enables you to assess whether the strategies adopted by the company have the potential to succeed or not and this allows you to proactively take corrective action where and when necessary.

In current times of increasing economic uncertainty, digital disruption, changing business models, constantly shifting customer habits, rising regulatory pressures and increased competition and complexity; new strategies and objectives emerge questioning the relevance of KPIs used to monitor performance in previous periods.

The KPIs chosen to track performance and provide decision support must continue to be relevant over time and help executives develop a deeper understanding of the business. Thanks to developments in new technologies, organizations now have access to new and more critical information which in turn is facilitating reporting of new KPIs that accurately represent the organization’s strategy, the performance against which determines success.

Since KPIs helps us identify, explain and resolve critical performance issues that are instrumental for the overall success of the business, functional managers should regularly question the significance of the current set of KPIs and determine if they are actually supporting executives in making effective strategic decisions. Performance indicators that are useful cover all business areas and activities, and empower decision makers to conduct an impartial review of the business.

They also allow collaboration between functional teams and support synergies by underlying the impact of decisions taken by others on the overall performance of the company.

It is no secret that today we are living and working in an information age where information overload has become the norm. There is so much information out there to the extent that decision makers are also experiencing this information overload and don’t know what to do. In some organizations, functional teams are obsessed with measurement and have now forgotten the true meaning and objectives of metrics. The temptation to measure everything that can be measured is significantly high.

We cannot measure everything just for the sake of measuring. We need to measure only that which is critical and are able to actually do something about it. Managers or those individuals tasked with creating and monitoring performance metrics should regularly ask themselves one of these two questions – (1) Are our KPIs presented in isolation from the organization’s strategy or objectives? (2) Are our KPIs adapted to their target audience?

You don’t want to waste ample time and resources measuring those metrics that lack any insights for strategic decision making. In most cases, when KPIs are developed in isolation that is when companies end up watching a long list of measures. What you need instead is to focus on only a few metrics that are actionable, bearing in mind that the number of KPIs to measure depends on your target audience.

Executive and operational scorecards normally have a different number of KPIs to focus on. However, understanding how executive metrics and operational metrics align and support each other is crucial. This helps address the problems arising from redundant or contradictory metrics.

Defining the right KPIs and linking them across all levels of the organization to drive consistent execution is key to achieving breakthrough performance.

Remember, not everything that is measured is managed.

 

 

 

 

Developing Objectives for the Employee Learning & Growth Perspective

Previously, I focused on developing objectives for the Financial, Customer and Internal Process perspectives of the strategy map. In this post I will conclude on the four-part series “creating objectives for your organization’s strategy map perspectives” by focusing on the Employee Learning and Growth perspective. In the preceding posts, I emphasized on the importance of balancing the objectives of your strategy map as this gives a clear indication of the main drivers of your business’s performance. How balanced are the objectives on your corporate strategy map? Most organizations make the huge mistake of focusing only on financial objectives at the expense of other non-financial objectives.

Objectives in the Employee Learning and Growth perspective of the strategy map are really the enablers of the other perspectives. Remember the whole idea of constructing the strategy map is to communicate the strategy and identify the cause-and-effect relationships between organizational processes responsible for effectively executing that strategy and driving business performance. In today’s knowledge economy, it is critical for managers to know and understand that intangible assets are the main drivers of value creation. In the last two decades or so, the value of intangible assets in contributing towards business success has increased tremendously outpacing the contribution of fixed assets. These intangible assets of the business can be split into three distinctive areas of capital – human capital, information capital and organizational capital.

Human capital refers to skills, talent and know-how necessary to support the execution of the business strategy. Motivated employees with the right kind of skills, know-how and tools are the key ingredients in driving process improvements, meeting customer expectations and ultimately driving financial returns. Since people are any organization’s most critical source of value, having the right mix of human capital objectives in the Employee Learning and Growth perspective is critical. Possible objectives relating to human capital include “Close the skills gap in strategic positions”, “Train employees for success” and “Recruit and retain the best and the brightest employees”. Be clear though what you mean by “best” and “brightest” as these terms are relative.

When it comes to closing the skills gap in strategic positions, it is crucial to understand that not all jobs are created equally. At the same time, not all jobs being filled within the company are critical to achieving your strategy. It is therefore important to match your best people with the most strategically critical jobs. The starting point involves identifying those positions that are pivotal to ensuring the successful execution of key processes as set forth in the Internal Process perspective of your strategy map. This will ultimately drive your customer value proposition and in turn ensure you achieve your stated financial objectives.

Organizations that have successfully managed to close the skills gap in strategic positions have done so through training and retaining current key staff, tailoring recruitment of new employees to the strategic needs of the organization and putting in place effective succession planning programs to help capture the knowledge of long-term employees and pass it on to the next generation.

Training employees for success goes beyond simply counting the number of training hours per month, per quarter, per half year or per full year. This is unlikely to lead to sustained business success. What managers need to do is, after the training program, assess and evaluate a change in behaviour; a demonstration of the new skills or knowledge in action and an improvement in results. This helps determine the effectiveness of the training program, focus future training in specific areas to bolster skills and knowledge and ultimately improve the company’s future performance.

Information capital refers to the information systems, networks and infrastructure required to support the strategy. Today, technology is an enabler of business strategy. It is the engine that keeps companies and entire industries moving forward and remaining competitive. Thus having the right mix of information capital and aligning IT with strategy is critical to executing strategy effectively and achieving sustainable business performance. Given the pervasive influence of technology in today’s modern economy, almost every organization should consider information capital objectives on its strategy map. Possible objectives relating to information capital include:

  • Improve the organization’s technology infrastructure.
  • Leverage technology to manage risks, execute strategy and drive business performance.
  • Increase knowledge management and information sharing within the organization.
  • Create, share and use information effectively for better decision-making.

It is therefore critical to consider the linkage between technology and strategy in business. The objectives you choose under this class of capital should reflect the contribution of IT you require in order to successfully execute your business strategy.

Organizational capital focuses on the ability of the organization to rally and sustain the process of change required to deliver the strategy. When it comes to organizational capital, there are two key elements to consider – culture and alignment. How are things done at your workplace? Do you support team work, positive feedback, and innovation or a combative management and meeting style prevails? Every now and then, you need to gauge your organization’s current culture and determine whether it is aligned with your strategic direction. Should you wish to fully exploit the advantages of intangible assets such as culture and knowledge, it is therefore critical to ensure the actions of your employees are aligned with the organization’s mission, values, vision, and most ultimately, strategy. Thus employees should have a clearer understanding of the building blocks of the organization’s mission, values, vision and strategy.

Having the right culture that is aligned to the strategy can be achieved through:

  • Recruiting and selecting people you believe embody the culture you are attempting to either maintain or create.
  • Intense socialization and training initiatives which demonstrate what you expect from employees.
  • Utilizing the organization’s formal reward systems to advance culture. For example, if you value teamwork, customer-centric approach and attitude and innovation, those traits should be tangibly rewarded in an effort to have that culture deeply entrenched.

Misalignment of culture and strategy can lead to disastrous results. To ensure alignment, you ought to review the cascaded Balanced Scorecards from throughout the organization. While most of your scorecards will rightly contain unique objectives and measures, they should be aligned toward a common corporate strategy.

To sum up, your strategy map should help you identify the specific capabilities in your organization’s intangible assets that are required for delivering exceptional performance in the critical internal processes.

I hope you enjoyed this four-part series on creating objectives for your organization’s strategy map. I welcome your thoughts and comments.

Developing Objectives for the Internal Business Process Perspective

My previous two posts focused on developing objectives for the financial and customer perspectives. Once an organization has a lucid depiction of these financial and customer objectives, the next step is developing objectives for the internal processes and learning and growth perspectives. In this post, I will dwell on the objectives in the internal perspective.

Value is created through internal business processes. In other words, internal processes create and deliver the value proposition for customers. Thus objectives in your strategy map’s internal process perspective must describe how you intend to accomplish your organization’s strategy. There are so many processes operating in an organization at the same time, each creating value in some way. It is therefore important to focus on those processes that allow you to deliver on your strategy and differentiate your organization from its rivals.

The challenge for most organizations is selecting those critical few processes that exceptionally drive value for their customers and enable them to achieve the desired financial results. Robert Kaplan and David Norton, the originators of the Balanced Scorecard, have identified and grouped internal business processes into four categories. These categories are common to almost any business undertaking and can assist you to identify and focus on those critical few processes that result in the differentiation of your strategy. The four categories are:

  • Operations Management Processes. These relate to the basic day-to-day processes you use to produce your existing products and services and deliver them to your customers. For example acquiring raw materials from suppliers, converting these raw materials to finished goods, distributing the finished goods to the market and managing business risks. Thus you could have objectives such as Increase throughput, Maximise yield, Attract channel partners and Minimize risk appearing on your strategy map under the internal processes perspective.
  •  Customer Management Processes. These are the processes that enable you to grow and strengthen relationships with targeted customers. Today, customers hold more power than suppliers and have an extensive say about the company’s products and services. It is therefore more critical to understand your customers and their behaviours in order to win in the marketplace. The critical processes involved in managing customers involve:
    • Customer Selection: Identifying customers based on a set of customer characteristics that describe an attractive customer segment for your company and for which the company’s value proposition is most attractive. Attributes that can be used to define your customer segments include income, wealth, age, family size, lifestyle, price sensitiveness, early adoption and technical sophistication.
    • Customer Acquisition: Acquiring the targeted customers through generating leads, communicating to new potential customers, choosing the right entry-level products, pricing the products and closing the sale.
    • Customer Retention: Retaining customers by offering them excellent services and being responsive to their requests.
    • Deepening customer relationships: This can be achieved through managing existing relationships effectively, cross-selling multiple products and services, and establishing your organization as the most trusted adviser and supplier.
    • Having objectives such as Increase customer retention, Cross-sell products to customers and Maximise share of customer spending on your strategy map.
  • Innovation Processes. These are the processes that focus more on creating new products, processes and services which ultimately help the company to infiltrate new markets and customer segments. In today’s fiercely competitive environment, an organization must be creative and have the ability to identify opportunities for new products and services. It must clearly understand its industry, engage its employees and customers to generate new ideas and apply innovative technologies in order to outshine the rivals. Having identified opportunities for new products and services and generated ideas, a decision has to be made on whether to finance the projects internally, work with joint ventures or outsource entirely. The next innovation sub-process includes design and development of the new products and services with objectives related to the introduction of new products to the market. Finally, the new products and services are delivered to the market. It is important to note that the innovation process, for a particular product or service, wraps up when you have achieved your sales and production targets at the desired levels of functionality, quality and cost.
  • Regulatory and Social Processes. These help the organization to repeatedly earn the right to operate in the communities and countries in which they produce and sell. National and local regulations inflict standards on companies’ practices. Instead of just complying with the least standards established by regulations, companies must strive to go beyond the minimal standards and perform better. Having an excellent reputation for performance along regulatory and social dimensions will help the company attract and retain high-quality employees. Also, avoiding or lowering environmental incidents and improving employee health and safety improve productivity and lowers operating costs. Thus companies should have objectives such as Exercise best-in-class governance, Maintain health and safety of employees, Become more involved in our community and Encourage community prosperity on their strategy maps.

Given the vast number of processes available to create value, managers must identify and focus on just the critical few processes that will allow them to execute their strategy effectively. The selected strategic processes should also be selected from all four categories above. This way, the value creation process is balanced between the short and long term and this also ensures that growth in shareholder value is sustainable over time.

Watch out for my next post on developing objectives for the employee learning and growth perspective.

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