Monday, July 29, 2013

Key Organizational Metrics and How to Make Them Effective

Most businesses understand the value of using metrics to assess the state of their company and validate the company is heading in the right direction. Organizational metrics, sometimes called Key Performance Indicators (KPI), are developed to understand the overall health of an organization. They provide the fundamental element of balanced scorecards and dashboards, which are used to quickly show how well the organization is performing relative to the past, a target, or both.

The choice of metric is important only so far as the metric is used to guide behavior or establish strategy. Poorly chosen metrics may lead to the suboptimal behavior if they lead people away from the organization's goals instead of towards them.

To be effective and reliable, the metrics we choose to use need to have ten key characteristics. The following table was adapted from Keebler (1999) which suggest the qualities to look for in indicators.

A good measure:
Is quantitative
The measure can be expressed as an objective value
Is easy to understand
The measure conveys at a glance what it is measuring, and how it is derived
Encourages appropriate behavior
The measure is balanced to reward productive behavior and discourage “game playing”
Is visible
The effects of the measure are readily apparent to all involved in the process being measured
Is defined and mutually understood
The measure has been defined by and/or agreed to by all key process participants (internally and externally)
Encompasses both outputs and inputs
The measure integrates factors from all aspects of the process measured
Measures only what is important
The measure focuses on a key performance indicator that is of real value to managing the process
Is multidimensional
The measure is properly balanced between utilization, productivity, and performance, and shows the trade-offs
Uses economies of effort
The benefits of the measure outweigh the costs of collection and analysis
Facilitates trust
The measure validates the participation among the various parties

Traditional KPI are established within four broad categories:

Customer. Customers generally consider four broad categories in evaluating a supplier: Quality, Timeliness, Performance and Service, and Value. Customer communication methods are the means to understand the relative importance the customer base places on these categories as well as their general expectations.

Internal process. These metrics that are strongly aligned with the strategic objectives are best suited. Total cycle time (i.e., time to process the order) and first-pass quality are relevant indicators of internal process performance. Process cycle efficiency, calculated as the value-added time divided by the total lead time, or Overall Equipment Effectiveness (OEE) are relevant Lean-focused metrics for evaluating internal performance and resource utilization.

Learning and growth. Metrics in this category might focus on the total deliverables (in dollars saved) from continuous improvement projects, new product or service development times, improvement in employee perspective or quality culture, revenue or market share associated with new product, and so on.

Financial. Many suitable financial metrics are available and widely tracked, including revenue, profitability, market share, and so on. Cost of quality is also recommended.

Once chosen, the metrics must be communicated to the members of the organization. To be useful, the employees must be able to influence the metric through his or her performance, and it must be clear precisely how the employee’s performance influences the metric.

Regardless of the metrics you use or your method for tracking, make sure to educate your organization on how the metrics are derived, what they indicate, and how they will be used in addition to regularly communicating relevant metrics to your team members.

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