Measuring What Matters

What
Measuring what matters is an important aspect of any business function (or when optimising performance in one’s life). The most challenging thing in all this is to truly understand what must be and can be measured objectively in a repeatable manner. As Albert Einstein quoted, ’not everything that counts can be counted, and not everything that can be counted counts’.

For example, when choosing what to measure, it is quite common to fall into one or more of the following three pitfalls:

1. Measuring everything: This is one of the most common errors we make when seeking to implement KPIs and performance metrics. We tend to think more is more and then decide to measure everything that walks and moves. We seek out every single metric, data point or information hot spot.

2. Collecting the same KPIs and performance metrics as everyone else: This happens when we try to work out what KPIs to measure by looking at what everyone else is measuring. For example, if a particular KPI or metric gains popularity, we tend to think that it is vital for us to measure the same.

3. Not choosing the right and/or relevant KPIs and performance metrics, including the use of vanity metrics (vanity metrics include data points such as social media followers, page views, subscribers and other flashy analytics that are satisfying on paper, but don’t move the needle. Vanity metrics offer positive reporting, but no context for future key decisions).

We need to start using a new set of KPIs and performance metrics that propel us towards actionable outcomes. These are called actionable metrics. The simple idea behind this concept is to pick and choose metrics that we can make actual decisions on, rather than make us feel good/positive.

Why
Our actionable metrics should provide insight, guidance, and help us make better decisions. An actionable KPI or performance metric will encompass the following key characteristics:

1. Easily understood: A good actionable metric should be relatively simple to understand. If you have to go on an education campaign to make the metric understandable, it is too complicated and won’t be accepted. What we don’t understand, we generally won’t trust (especially when it comes to performance metrics). This ultimately leads to that metric being not actionable as no one’s following it.

2. Must be aligned to business objectives: The metric must tie back to business objectives we establish for the department, division or organisation. The right metric will tell us if you are successful in achieving our top-level goals or how we are progressing towards them.

3. Predictive of future outcomes: The best metrics do not tell us just how well we have done. They also tell us how well we might do – in the next month, quarter or year.

4. Specific to factors controlled by the group that is being measured: This is challenging to do. However, identifying those specifics pertaining to a particular team will tell us much more about their performance. For example, if we use the revenue metric as a way to measure the performance of our Sales division, we may want to keep the following in mind. The fact is that revenue is not totally specific and isolated to the performance of the sales division. Sales teams are often impacted by conditions outside of their control, such as the quality of products/services, micro and macro economic conditions, perception of the organisation etc. If the product or service being offered is poor in quality, even the best sales team might not be able to succeed. On the contrary, a great product or service being sold might rack up huge revenue even with a mediocre sales team.

5. Comparable to competitors’ metrics: It’s helpful to track your progress against competitors. This will help us ascertain how well we are building or maintaining an operational advantage. This is not the same as collecting the ‘same KPIs and metrics as everyone else’, which is a pitfall to avoid. This requires deep understanding of our own business and of the sector we operate in, so we know what should be compared.

It is important to know that not many metrics will fit all five characteristics listed above, though we should strive to meet as many as possible. Ultimately, the only way to understand if we are achieving the right level of performance is by consistently measuring our progress on goals/objectives using relevant metrics.

How
When embarking on a journey to explore what KPIs and performance metrics one should implement, it is vitally important to have a fundamental understanding of the what and why of performance metrics before jumping into the how part. The basic tenets of what and why of metrics are outlined above.

When developing KPIs and performance metrics, one of the best ways to understand what’s important and worthwhile measuring is to start with a high-level question. Depending on the organisation setup, this can be started from the top executive layer and trickle down. The high-level question is, ‘What are the top 5 to 10 key questions you need/want to answer on a regular and consistent basis in order to know your division is on track to meeting its objectives?’

Once the answers to this question are collated, we will be able to extract specific themes and key questions that are important to the organisation’s top decision makers. This process can then be trickled down in the same format to the next layer and the one after etc. The outcome of this process is going to be a set of performance metrics that’s driven based on what we actually want answers to. This will be more effective and more widely accepted than starting with a set of performance metrics and trying to get everyone to buy into it.

Once the above process is completed and answers to the primary question are collated, we can start deriving and formulating relevant KPIs and metrics. In doing so, we will need to understand the three levels of measurements framework when it comes to business intelligence reporting. They are: KPIs, Metrics and Measures. Sometimes, these are used interchangeably, though they represent quite different aspects of the process.

• A KPI (Key Performance Indicator) is a measurable value that demonstrates how effectively a company is achieving key business objectives. Some examples of KPIs: Net promoter score (NPS), Cash Conversion Cycle, Customer Profitability Score, Customer Conversion Rate etc. These are tied to an organisation’s or a business division’s strategic objectives – such as increasing market share, increase customer satisfaction, decrease OpEx etc. A KPI can be made of one or more metric.

• A Metric is a quantifiable measure that is used to track and assess the status of a specific process. For example, from a marketing context, if we consider the Customer Churn Rate metric, this metric will be made of the following measures: total number of customers and number of customers that discontinue their service for the reporting period.

• A Measure, in BI context, is the numbers or values that can be aggregated. For example, sales, leads, distances, durations, temperatures and weight etc. Often, measures are used alongside dimensions (the categorical buckets that can be used to segment, filter or group), which provide context to the aggregated measure.

For a deeper dive on this subject of performance metrics, I would recommend Bernard Marr’s Key Performance Indicators book.
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Credit: Bernard Marr | Joel Trammell | Klipfolio.com