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Friday, February 10, 2006

METRIC MATTERS: Designing key performance indicators

Here are three top tips on designing relevant key performance indicators:
Understand your audienceGaining an understanding of the needs of a range of stakeholders, both internal and external is critical to the design of good KPIs. Ask yourself what’s critical to your key stakeholders and use this information as a starting point for designing your KPIs. Once you know what you need to do to get it right, you can start to worry about how you measure it. Once you know what’s critical to the various stakeholders, then you can start to ask what’s preventing you from delivering on these critical things, which provides a good basis for the KPIs you’re developing. Measure the few critical things, not everything.

It will often be the case that at the end of this exercise, a KPI will cut across two or more departments. This presents an opportunity for some "creative tension," where two departments rely on each other to meet a KPI. This means that department managers have to co-operate with each other to achieve a common goal, which is something that doesn’t always come naturally.

Because managers sometimes develop their KPIs in isolation, the measures they chose related only to their own needs and not to the needs of the business as a whole, or its clients. For example, in meeting supply chain’s requirements, a manufacturing department is left short of critical components, which delays their despatch, in turn impacting on the ability of project management to complete their projects on time.

Does this sound familiar Outcomes vs. activities
Do you measure activities or outcomes? There’s an important difference between the two. Outcomes describe what will be different as a result of an activity; they do not describe the activity itself. For example, on a recent assignment I discussed an audit manager’s 2006 plan. He proudly stated that they would do 50 audits, which is laudable, but hardly describes what the outcome is to the business (reduced costs, increased margin, regulatory compliance etc).
Focus on outcomes. Don’t base your performance management system completely on what you do (activities), focus on why you do it (outcomes).

Lack of focusKPIs need to be focused. Having a dozen measurements on equipment inspections does not make for a good performance management system. Well-designed KPIs are focused and few in number. They are detailed enough to be able to spot trouble ahead (you can then do more investigation) but no so detailed that you spend more time collecting stats than doing work. Remember the ‘K’ in KPI stands for Key. Make sure that your KPIs measure the key things that tell you if your organization is performing.

By John Davidson, Facilitators UK

KM Review.


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