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Metrics Development: Taking It From the Top

The biggest challenge in performance management often comes right at the beginning: metrics definition and development. Here are ideas to get strategic initiatives (and top executives) moving.

In most organizations, business performance management initiatives present a dichotomy. If the finance department is driving the project, the starting point is typically planning and budgeting. If IT is leading the charge, executive dashboards are frequently at the top of the list. The reasons are fairly obvious: IT thinks in terms of improving access to data, whereas finance focuses on improving its processes (particularly the painful ones). And there's nothing wrong with that: however, IT must remember that dashboard development is really more about addressing business issues than it is about technology. Without steady involvement by the business side, IT's dashboard projects are doomed to failure.

In this article, I'll describe some strategic points that are critical to the development of metrics that will truly have a beneficial impact on your organization. After all, that's the goal: there's no sense in embarking on a difficult challenge if the results only frustrate everyone in the end. Success comes when performance management enables everyone involved to take intelligent action toward a better future.

Consensus Definitions

The dashboard is the critical delivery vehicle for performance metrics. But before delving into metrics development itself, let's start with a few definitions. A common definition of dashboard is a tool used by managers and executives to monitor business performance. The key point is that a dashboard is nothing more than a tool: a highly visual interface that includes graphs, color-coded gauges, stoplights, and other cues to highlight variance from performance targets. What's most important is the content: that is, what's being measured and displayed on the dashboard.

The dashboard's content can best be described as a scorecard. A scorecard is a collection of key measures that the organization has determined are tightly linked to its success or failure in executing strategy. While dashboards are becoming a popular way to display scorecards, scorecards can also appear in the form of simple reports. I've seen team leaders use "dashboards" to align an organization by simply pinning the graphical measures to a bulletin board in the lunch room!

FIGURE 1 Top-down approach to developing KPIs and metrics.

Assuming that we agree on the definition of a scorecard, let's drill down one more level, to the key performance indicators (KPIs) that populate a scorecard. A KPI is a metric: but a metric isn't necessarily a KPI. A metric is really a measure of anything (the number of people who read this article, for example). A KPI is a measure that matters and is ideally actionable (for example, the number of people who renew their subscriptions to Intelligent Enterprise based on the quality of its content). A company will have many metrics, but few KPIs. And here we confront one of the toughest challenges: How do you get to that short list of agreed-upon key measures?

Teamwork Matters

IT managers who head up dashboard projects must get their business counterparts heavily involved in KPI development. The more senior the collaborative team, the better. If CEOs or COOs aren't actively involved in KPI development, at a minimum they should sign off on the finished KPI scorecard. The ideal process is to create a senior cross-functional team that touches all major departments; the team should meet regularly until a consensus scorecard emerges.

Several factors increase the likelihood of success. First, going into these meetings, all participants need a clear (and consistent) understanding of the organization's high-level strategies and goals for the short and long term. If these strategies and goals don't exist, end the meeting immediately and inform the executives nearest the top that they have to provide them. There is no substitute. That's why many people strongly believe that executive sponsors are the true key to performance management success.

Second, team success depends on the creation of an open, nonpolitical atmosphere where members can discuss candidly what should and shouldn't be measured. Your own experience has probably shown the difficulty of setting such an atmosphere. Imagine this scenario: The people in the room may ultimately be judged (and potentially compensated) on how they perform against the measures the team is selecting — which is why a third key success factor is frequently obtaining outside help. Running these sessions can be especially difficult for a person inside the company, with the possible exception of the CEO or COO — someone who rarely has the time to head up the team sessions.

Top-Down Drivers

Once you've settled the corporate strategy, chosen the metrics development team, and put a facilitator in place, you can get down to business. The team needs to work down from the strategy to determine the key business drivers. For example, if the strategic goal is to be the number one supplier in the industry, then some key business drivers might be the number (and effectiveness) of the distribution channels, the quality of the sales force, and your organization's ability to retain and reference existing customers.

If those are your primary business drivers, what measures will tell you how your organization is performing? To continue our example, your team might select KPIs such as channel growth (revenue as well as quantity), client satisfaction level, client retention rate, and sales win rate (as a reflection of sales staff quality).

Working from strategy to drivers to KPIs is a useful way of developing an effective scorecard. I've seen companies try a bottoms-up approach. Starting with a huge collection of metrics, team members ask themselves, "which of these are the most important?" There are several problems with this approach. One is that what someone defines as "most important" may not tie directly to the company's current strategic direction. Another risk is that the group only looks at existing measures. If you don't already measure client satisfaction, for example, it won't even be up for consideration as a KPI. The top-down approach helps ensure that the KPIs are in fact a measure of strategy execution.

Conversely, one of the challenges of the top-down approach is that you may come up with KPIs that you aren't currently tracking as metrics. In other words, the organization may not have the underlying data necessary to perform the calculations to support the KPI. What do you do then? Throw the KPI out? Wrong answer. What most companies do is manually enter the data for the KPI. Let's imagine the measure is sales win rate.

Even if the system doesn't currently capture such data, the head of sales probably already tracks it in a spreadsheet. Obviously, sales management has a vested interest in making this number look good: so an impartial manager from another area ought to review the raw data and enter the KPI. This is a clumsy procedure, but it's better than not tracking the key measure at all. In many companies, unfortunately, the only clean data is financial. Therefore, unless such clumsy approaches are taken, managers would never be able to measure themselves based on nonfinancial metrics.

Creating Effective KPIs

Now we come to an important point: KPIs should offer a good mix of financial as well as operational measures. Certain methodologies, such as Balanced Scorecard, force you to think beyond financial measures. Even if you don't follow a particular methodology, a good approach is to give your scorecard a mix of financial and nonfinancial measures — in fact, a 50/50 split would be optimal.

Financial measures generally look at the past: that is, at how the organization has performed historically. Nonfinancial measures frequently offer a good indicator of the future — in other words, how the financial measure might look in time. For example, if client satisfaction is trending down today, it's very likely that future revenue streams will move in the same direction as clients either fail to renew maintenance agreements or refuse to be references for new prospects.

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