7 Key Steps to Develop Effective Performance Metrics
Performance metrics are valuable for monitoring, analysis, and collaboration. In turn, businesses can monitor operations, optimize processes, and finetune and execute strategy.
Astute businesses also see performance indicators as roadmaps for their employees. Effective performance measures guide focus and ensure employees are not working at cross purposes.
Many businesses, however, struggle to choose effective performance measures despite the numerous benefits.
Some challenges include wrong design, lack of top-level commitment, no linkage between metrics and processes or goals, only measuring what’s easy, no accountability or authority, and a poor performance management culture.
In this article, we enumerate the steps you can adopt to develop effective metrics and avoid the challenges above.
We also discuss the importance of performance measures and the core principles for originating them.
Step 1: Create a key performance indicators (KPI) team
In his book, “Performance Dashboards: Measuring, Monitoring, and Managing Your Business, Second Edition,” Wayne Eckerson explains that companies need to create a KPI team to choose effective performance metrics.
The team should consist of members with performance management process experience. Other skills needed in the group include:
Data pipeline and analysis, especially with context on the company’s existing data architecture
Organizational unit’s processes knowledge
The tasks of this team are in six folds:
All performance measures must serve a purpose. The KPI team must identify the consequences of adopting a particular metric.
For example, what would happen if you tied a performance bonus to the number of accounts opened or tied a doctor’s performance to the number of patients they saw?
The doctors may start offering subpar care to patients to see more patients in a day.
That’s where gathering requirements come in. The process helps forestall adopting metrics with dire consequences. Gathering requirements involve:
Asking what the short and long-term strategic objectives are. This stage includes interviewing all key stakeholders to understand the “why.” What is each metric supposed to achieve? To plan, learn, predict, forecast?
Learning which department, processes, or groups are affected by this metric?
Knowing the best way to measure this metric
Identifying the appropriate time frame
Prioritizing performance measures
The “gathering requirement” stage will likely throw up many meaningful measures.
However, the team will need to choose measures most likely to move the needle towards meeting your strategic objectives.
Validating performance measures
The KPI team also tracks these measures to ensure they’re achieving the “why” identified in Step 1.
It may not necessarily be the performance measure but how it is evaluated. So, the team needs to review how it’s measured and correct it accordingly.
If the metric is totally off base, it is more prudent to pivot to a new metric completely.
Standardizing metrics across the organization
Standardizing metrics ensures all departments track and report information uniformly. It means that there’s a clear definition for each adopted measure by your organization.
Otherwise, many departments or employees may provide their definition of a metric and fly with it. It also helps when the KPI team creates a reference document for each adopted measure.
Setting realistic targets
The KPI team must set targets based on the business context. For example, say the industry benchmark for a metric is 50%.
It is not advisable to set the same benchmark if the department is starting from 0%.
The KPI team must consider previous performance, budget, department dependencies, and other factors.
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Getting buy-in from individuals
The KPI team must also ensure individuals whose performance will be evaluated buy into the measures. The individuals must know what they’ll be judged on, why, and other details like timeframe.
Step 2: Start with your mission, goals, and objectives
Nicholas Fisher, in the article "Performance Measurement: Issues, Approaches, and Opportunities," published in the Harvard Data Science Review, opined that:
"It is clearly of interest to individuals, enterprises, and governments to have sensible (quantitative) targets and sound ways of assessing progress toward these targets."
Performance measures must always stem from your company's goals, targets, and objectives. That way, you can develop metrics that fit all your business dimensions, including finances, people, customers, internal processes, compliance, and innovation or growth.
Aligning performance measures to objectives will ensure everyone uses the same data points and metrics and is focused on the same strategy.
You can thus more easily assess if you're on track to achieving your goals.
These quantitative measures should then be translated into business unit goals and cascaded into individual actions.
Step 3: Choose your measures carefully
After the end of the review period, a marketing director did an attribution analysis and found that the company made $10 million from 100 conversions. The marketing department spent $5 million during the review period.
From the marketing director’s perspective, the 100 conversions happened based on marketing activities carried out by their team. As such, the cost per conversion is $50,000 ($5 million/100).
But the real question is: Would some of this conversion have happened irrespective of what the marketing department did?
Most likely, yes! From word of mouth to non-marketing factors, certain drivers other than marketing can lead to a conversion.
This means the cost per conversion rate calculated above is misleading if marketing doesn’t account for all the conversions.
Avoiding faulty conclusions
Rather than use attribution, it’s more valuable and accurate to use incrementality.
Avinash Kaushik defines incrementality as “the conversions that would not have occurred without various marketing tactics.” It’s a better approach to measuring marketing impact than attribution.
On further prompting from the financial director, the marketing director returned to the drawing board. After painstaking effort, the marketing director found that marketing only contributed to 27 of the 100 conversions. Ouch!
This new revelation means that the cost per conversion jumped to $185,185 ($ 5 million/27). That is more than the $50,000 per conversion rate from the initial approach.
While the final measure does not put the marketing team in a shining light, it’s more useful than a misleading metric.
The marketing team can review patterns and what worked to bring 27 conversions. By repeating what works, the team can eventually increase incremental conversions.
Additionally, using the incrementality approach clearly showed there was a large chunk of wasted marketing budget that could be better channeled.
Case study culled from The Marketing Analytics Intersect by Avinash Kaushik.
The lessons from the above case study to adopt include:
Developing metrics that paint the full picture
You can only improve performance by adopting the best practices when using certain measures. The cost per conversion in the case study above is the same but with different outcomes. The incremental approach was more valuable.
Tracking effective performance measures takes effort. Don't choose the easy metrics but those that can improve specific business processes. Don't prioritize Net Promoter Score over a more robust market research process into what makes your customers tick.
Every performance measure you adopt has consequences and will lead to behavioral changes.
Measure impact and value, not activity.
Step 4: Develop a measurement plan
Think of a measurement plan as your strategy for ensuring the accurate and timely tracking of your chosen metrics. It’s a roadmap to determine the kind of data you need and the sources of those data points.
It can also involve detailing the kind of dashboards required and how employees need to produce certain reports.
Let’s say one of the data points you need requires customer feedback. Your measurement plan must answer questions like:
What’s the best approach? Do you need to create a survey? What’s the ideal sample size? What’s the best delivery method? Do we need to pay for software? If so, which is the best fit for our needs?
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Step 5: Create a quality and accurate data pipeline
Any insight or performance measure is only as good as the quality of the data that produced them. You can have the right metric, but poor data can truncate your progress and provide misleading results.
You cannot develop effective performance measures without quality and accurate data.
You must review your data architecture and systems, including third-party providers, for accuracy, recency, ownership, and reliability.
You must also collect business performance data that your team can use to derive the measures. Consequently, you may need to find new data sources.
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Step 6: Assign ownership and authority
The next step is to delegate the responsibility of delivering the target to a primary entity. They would be held accountable for both success and failure.
They are the go-to person when you need information on the progress (or lack of it) of the measurable components of a set goal.
It’s one thing to be responsible for something, but another reality entirely when you’re empowered to do that thing. Suffice it to say that many organizations get it wrong in not delegating authority appropriately.
If the entity in charge of a performance measure needs certain resources, would they be able to get it without delay?
Delegating both responsibility and authority is especially essential when the actualization of reaching performance measure targets depends on multiple individuals and business units.
Step 7: Review and refresh
This step helps you track progress to ensure all measures are still relevant to your business goals and objectives. Note that this is not the step to evaluate if you’re meeting your targets. Your focus is on their relevance and implementation.
You may pivot your business offerings and thus render certain metrics useless or less important than before.
In other instances, you may need to add some measures because of compliance and external factors.
Ultimately, the goal is to review and evaluate the efficacy of each measure and if you should continue with them.
Principles for developing effective metrics
Two key principles for developing effective metrics are:
Stakeholder analysis is a simple concept of identifying all entities with a vested interest in a project and what “quality” means to them.
While there are other key stakeholders like shareholders, the board of directors, and employees, your number one stakeholder should always be the customer.
The Tribus Paradigm
The Tribus Paradigm captures four critical elements:
Your customers must always be the starting point of picking performance measures.
The concept of "quality" must be understood from the customer's perspective, and subsequent measurement of outcomes for the customer must be based on this definition.
That good quality is predicated on process improvement. For example, you can only reduce your cost per conversion by improving the process of identifying your target audience and designing quality marketing campaigns.
Identifying leading indicators and predictors of the outcome you identified above.
Why are performance metrics important?
Performance measures serve three core purposes, according to Nicholas Fisher:
A concise overview of the health of the enterprise
Performance measures taken together should provide a snapshot of your organization’s health. There are little to no surprises that can derail your operations.
From the board room to individuals, everyone in the organization must be able to answer these three questions confidently:
“Where are we now?” - Present performance
“Where are we heading?” - Business targets and objectives
“Where do we need to focus our attention?” - Strategic analysis
Effective performance measures help you gain context at the full system level, not just locally. Metrics linked to the entire system can provide a bigger-picture view and lead to optimal decisions.
Decision makers can then leverage this health-check information to make timely and data-driven effective decisions like allocation of resources and hiring and firing choices.
A quantitative basis for selecting continuous improvement priorities
In the mid-1980s, AT&T ran a monthly customer satisfaction survey, similar to Net Promoter Score, that always returned at least 95% satisfaction.
Surprisingly, though, the company lost 6% market share during the same period despite the high satisfaction reported by its customers. The value of the lost market share was $3.6 billion.
The question is: Why did AT&T lose market share if their customers were satisfied with their products?
The answer to that question is that it turned out that the satisfaction score did not take a system’s view and did not provide areas for continuous improvement priorities.
Customers may have been satisfied with the product, but the survey failed to capture areas where the team could do better or get what customers wanted.
Perhaps support service was poor, or customers wanted more on their package. And as soon as another company filled this void, the customers jumped ship.
Effective performance measures dig deeper and help unearth growth opportunities, as shown in our attribution and incremental case study above.
Alignment of the efforts of the people with the mission of the enterprise
We've extensively emphasized the importance of aligning performance measures to your business goals and objectives. That's because 100% alignment ensures everyone is focused on the same strategy.
Alignment also fosters collaboration between managers and staff and better coordination among departments.
Other than serving as a tool for strategic alignment, performance measures are also a tool for communicating strategy.
When you adopt clear, simple, and specific measures, your employees know what direction the company is going.
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Takeaway: The power of business survival lies in the quality of performance measures
Performance measures are critical to a business's survival odds. Many companies went bankrupt due to poor monitoring and not knowing what was going on.
By adopting the seven steps above, you can avoid major consequences like bankruptcy and minor ones like poor customer satisfaction.
Overall, developing systems and bigger-picture metrics will provide you with insights into your business health status, identify improvement areas, and align the efforts of your staff with your organization's objectives.
Do you want to seamlessly track, cascade, and monitor performance measures in your company? Start an interactive demo and see how Kippy can help.