The most common elements between most performance management frameworks are setting objectives, measuring performance, and managing all related activities. A performance indicator or key performance indicator is just one type of performance measurement. There are many performance management frameworks that are both similar yet different. Each of these frameworks brings forward elements that can be pulled together to help drive success backed by data. Let’s dig i
Step 1: Aligning Business Strategy
A popular theme in startups these days is the One Metric That Matters (OMTM). The key takeaway from this simple, yet extremely powerful tool is that you have to have a thorough understanding of your business model in order to hone in on that metrics and get the entire organisation aligned.
Many will argue that sales is the most important metric when it comes to measuring the success of a business. The challenge with this metric is the measured outcome.
Ask yourself: What is the one metric that would help drive more sales?
One answer to this question could be tracking the number of customers who have integrated your product with 3 other applications. This measure would be indicative of level of engagement, and their probability of churning would likely be reduced.
The reason being that once customers are locked in, they churn less which then creates the right unit economics for the company to grow. So in this case instead of looking at sales numbers, we would only count a customer if, and only if, they connected with 3 apps.
This is merely an example, and doesn’t mean that there is only one metric you should care about! This framework helps with keeping everyone focused on the one thing they should care about most.
Step 2: Cover all of your bases
With business comes trade offs.
You have probably heard the saying, “You can have cheap, good, or fast. But you can only pick 2”.
Let’s start with a classic framework that helps to navigate these trade offs. The Balanced Scorecard (BSC) helps you break down the key areas of your business (perspectives) where activities need to be monitored.
The four perspectives that need to be in balance are:
- Financial Perspective
- Customer Perspective
- Internal Business Process Perspective
- Learning and Growth Perspective
These four key areas of your business are intertwined and all must be aligned. When one is impacted, there is impact on another, in other words, there will be a trade off.
Step 3: Putting your BSC strategy framework into action with OKRs
The Balanced Scorecard (BSC) strategy suggests that for each perspective you develop objectives, measures (KPIs), set targets (goals), and initiatives (actions). A more recent framework that is getting popularised is the OKR (Objectives and Key Results) Framework. Popularised by its use at Google, the OKR (objectives and key results) framework is used to define and track objectives and their outcomes. Many would argue that this framework sits in between a KPI strategy and the Balanced Scorecard approach.
OKRs are used as a performance tool that sets, communicates, and monitors goals in an organization so that all employees are focused in the same direction. The system encourages employee success through clear work objectives and desired key results. The beauty of the system is that it provides a simple, practical, and straightforward framework for defining, tracking, and measuring goals, both as something to aspire to and as something that can be measured.
Step 4: Monitoring with a KPI Dashboard
A KPI dashboard provides you with an at-a-glance view of your business performance in real-time so you can get a better picture on how the entire organization is doing.
Common terms found in these frameworks that are worth understanding include:
Key risk indicator (KRI): a measure used in management to indicate how risky an activity is. Key risk indicators are metrics monitored by organizations to provide an early warning of increasing risk exposures in various areas of the business.
Critical success factor (CSF): is a management term for an element that is necessary for an organization to achieve its mission. Critical success factors should not be confused with success criteria. Success criteria is most commonly used in project management to determine if the project was a success or not. Success criteria are defined with the objectives and can be quantified by using KPIs.
Performance metrics: measure an organization’s behavior, activities, and performance at the individual level and not organizational level. For example, an individual who works in a call centre may have performance metrics such as Number of Calls Answered, Average Wait Time, Number of Successful Calls Processed, and Average Length of Call.
Creating good KPIs for your organisation is an iterative process.
10 criterion to consider when designing key performance measures.
Consider this list of criteria when building out your key business performance measurement systems:
- Be based on quantities that can be influenced, or controlled, by the user alone or in cooperation with others
- Be objective and not based on opinion
- Be derived from strategy and focus on improvement
- Be clearly defined and simple to understand
- Be relevant with an explicit purpose
- Be consistent (in that they maintain their significance as time goes by)
- Be specific and relate to specific goals/targets
- Be precise – be exact about what is being measured
- Provide timely and accurate feedback
- Reflect the “business process” – i.e. both the supplier and customer should be involved in the definition of the measure
Let’s use Tesla as an example
Step 1: Tesla’s One Metric that Matters is number of new cars delivered per quarter. This is a hot topic for investors to measure their success.
Step 2: To build as many cars as possible, while still maintaining quality, Tesla needs to balance their core assets from their balance scorecard.
Financially: They may make the decision that delivery of cars is more important than profit in cars.
Customers: Customers have submitted their orders and are waiting for their delivery, the longer it takes the less excited and more likely they will cancel. So keeping customers happy is extremely important.
Step 3: Now that we have set some objectives with KPIs we need to set key results
One KR for customers that is a standard measure in supply chains could be: Deliver performance (DP) is set at 90% measured as the fulfillment of a customer promised delivery date.
Step 4: Using a KPI Dashboard to monitor key results
Dashboards often provide at-a-glance views of KPIs relevant to a particular objective or business process.