The Value of Key Performance Indicators

The Value of Key Performance Indicators

If winning isn’t everything, why do they keep score?

???????????????????????????????????????????????– Vince Lombardi

The quote above embodies the purest notion about the nature of work.?There is a scale by which success is measured, and someone is always keeping score.?For 21st century leaders, this means there is a scale by which the consequences of our decisions and actions are constantly evaluated.??We hope we do right by those who entrust us with decision-making authority.?In a profit seeking organization, the shareholders, employees, and customers measure the outcomes of the decisions we make and the actions we take.?In government, this task is given to the voting public.?For non-profits, managers are brought to account by fundraisers, contributors, and the beneficiaries of the organization’s services.

Why Measure?

This writer can think of at least 100 reasons why a leadership team should design and deploy a system of Key Performance Indicators (KPI’s) and Metrics.?For the goals of this article, we will concentrate on the most important reasons.?First, a leadership team should deploy a measurement system to reinforce the organization’s mission.?A common joke about measurement systems is, “If we didn’t measure things, we wouldn’t know how good we are at measuring the things we are measuring!”?Yes, a measurement system should have a purpose.?Second, a leadership team should deploy a measurement system to promote operational excellence.?A study recently conducted to identify the impact of defects found that warrantee returns, lost customers, rework, and errors can cost a company 25% of operating cost and almost 30% of gross sales.?Finally, a good system of KPI’s will bring about a culture of responsibility from a company’s workforce.?Purpose, effectiveness, and accountability are three natural by products of a healthy performance measurement system……but the number one reason a company should deploy key performance indicators can be summed in one word………PRODUCTIVITY!

Productivity – A Leadership Team’s Magic Bullet!

Now, more than ever, companies need to embrace the economic value proposition of improving productivity. ?A quick update on productivity: from the third quarter of 2021 to the third quarter of 2022, US nonfarm business labor productivity decreased 1.3 percent, reflecting a 2.1-percent increase in output and a 3.4-percent increase in hours worked. This follows?over-the-year?decreases in labor productivity of 0.4 percent in the first quarter of 2022 and 2.1 percent in the second quarter of 2022. Why are statistics like these important? ?When a workforce is more productive it produces more goods and services at a lower cost per unit. This means there is a greater supply of these things, which puts downward pressure on prices and is therefore associated with lower inflation. ??

Economists Mark Whitehouse and Tim Aeppel aptly describe the economic value of productivity growth in a recent Wall Street Journal Article:

“Productivity matters for everyone because it provides the essential ingredient that makes nations rich!?When companies produce more for each hour their employees work, they can pay higher wages or reap bigger profits without having to raise prices. Annual productivity growth of 2% would more than double inflation-adjusted wages over 40 years, all else being equal. Add another percentage point in productivity growth, and wages would more than triple!”

Achieving high productivity helps companies stay in business and grow.?It’s a distinctive competence that insulates companies from destructive actions like across-the-board budget cuts and reductions in head count.?In fact, a nationwide improvement in corporate productivity can reverse the negative consequences forecasted on the US economic horizon.

What is Productivity?

Productivity is simply defined as output per unit of input.??As illustrated in the figure below, productivity is the difference between the value produced by an organization and the cost of the basic resources brought to bear in a productive process.

A company can increase productivity by:

• Serving more customers or selling more products while keeping the cost of its inputs fixed, or by;
• Keeping the number of customers served or products sold constant while decreasing its cost of operating.

?KPIs Create Focus

Why do we measure??We all know that what gets measured gets attention, what gets attention gets improved.?If you want to create a culture of focus and accountability, start by deploying a new system of KPI’s.??But be careful!?Once dashboards and scorecards are deployed into a company’s culture, leaders should be prepared to respond to a series of new requests from their employees.?Why??People come to work every day with a we can do better attitude. ??With that comes a flood of improvement ideas!??If a leadership team is determined to implement a system of KPI’s, but is not prepared to change, it should be prepared to lose credibility and the trust of its workforce.?????

KPI Best Practices

When designing a system of performance metrics, an organization should follow 5 proven practices:

1. Define metrics so they are understood by all within the organization.????
2. Engineer metrics such that they are based on cause-and-effect relationships.??
3. Data derived from measurement systems should contribute to operational and strategic decision-making.
4. Compare KPI’s with industry competitors and benchmarks.?
5. Make certain metrics ultimately impact a financial component of the business - numbers govern.?

What to Measure

As good system of KPI’s will measure levels, trends, and comparisons for at least the following:?

• Customer-Focus:?Customer Satisfaction, Customer Retention, Customer Complaints, Willingness to Recommend.
• Product and Market Performance:? Number of Units Sold, Percentage of Revenue by Product Type, Product Quality (Returns, Customer Credits)?
• Operational Excellence:?Productivity, Efficiency, Quality
• Supply Chain Effectiveness: ?Supplier Audits, On-Time Delivery, Acceptance Results?

Thank you for taking the time to read this article.?If you are interested in learning more about KPIs and Metrics, please look forward to our next article, “Operationalizing Strategy with Objectives and Key Results.”

Gerald Taylor is a Managing Director for TPMG Global?, a recognized leader in business transformation consulting.?He can be reached at:?taylor@helpingmakeithappen.com

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