the power of metrics

kent
bauer

Key Performance Indicators:

The Multiple Dimensions
T he aiignmciil of KPis with organization vision/mission/
strategies/objectives is the key to realizing bottom-line
mpact- The challenge is to develop KPls tliat provide d
different, tliere is a common tliread of causality that pro-
vides a universal linkage between the four perspectives. For
example, if a company invests in Iffinniitj and ifwwih to
holistic and balanced view of the business. Faced with improve employee skills and elevate morale, then those
potentially hundreds (if not thousands) of candidate met- results will be translated into improved iutmial business
rics, how does one selet:t those that are most meaningful? processes by leveraging best practices and change manage-
One potential approach is to think of individual KPls not ment programs such as Six Sigma and TQM, These acfiv-
just as a singular metric, but as a balanced metric that ilies will then result in superior quality products and
incorporates several alternative dimensions. These dimen- services for the aistomer, which in turn will drive increased
sions include business perspectives (customei; financial, sales and an improved financial bottom line.
process and development), measurement families (cost,
productivity, quality) and measurement categories (direct, The KPI Family Dimension
additive, composite). By overlaying these various ciimen- Another important consideration in the development of
sions, one can create a framework for building KPIs dial KPls is the selection of the appropriate measurement fam-
succinctly captures the most critical business drivers. ily to capture operational performance over time and then
relate these KPls to internal business and external industr)'
The KPI Perspective Dimension benchmarks, Altliough the followmg list reflects common
Since the early 1990s when Robert Kaplan and David measurement families, different industries will have tlieir
Norton introduced the balanced scorecard methodology own specific business drivel's and relatal measures,
for performance management, the conceptual framework Produittvtiy: Measures employee output (units/
has been entliusiastically embraced by corporate America, transactions/dollars), the uptime ievels and now employ-
As a performance management tool, the balanced score- ees use tlieir time (sdles-to-assets ratio, dollar revenue
card is designed to assist management in aligning, com- from new customers, sales pipeline),
municating and tracking progress against ongoing business Qualily: Measures the ability to meet and/or exceed
strategies, objectives and targets. The balanced scorecard is the requirements and expectations of the customer (cus-
unique in that it combines traditional financial measures tomer complaints, percent returns, DPM(1 - defects per
with non-financial measures to measure the health of the million opportunities),
company from four equally important perspectives: PwfikMily: Measures the overall effectiveness of tlie
Financial: Measures the economic impact of actions management organization in generating profits (profit
on growth, profitability and ri,sk from shareholder's contribution by segment/aistomer, margin spreads).
perspective (net income, ROI, ROA, cash flow). Timeliness: Measures the point in time (day/week/
Customer: Measures tlie ability of an organization to month) when management and employee t.isks are com-
provide quality goods and services that meet customer pleted (on-time delivery, percent of late orders).
expectations (customer retention, profitability, satisfac- Process Ejfidaicy: Measures how effectively the manage-
tion and loyalty), ment organization incorporates qualit)' control. Six Sigma
and best practices to streamline operational processes (yield
bUenuil Business Processes: Measures tlie internal business
processes that create customer and shareholder satisfaction percentage, process upfime, c;apacity utilizafion)-
(project management, total quality management. Six Sigma), Cycle Tune: Measures the duration of time
LmmingandGwwlh: Measures the or;ganizational envi- (hours/days/months) rec^ired by employees to complete
ronment that fosters change, innovation, information shar- tasks (processing time, time to service customer).
ing and growth (staff morale, training, knowledge sharing). Resource lliiliziiiton: Measures how effedively the man-
Although the focus of ca.d\ perspective is distinctly agement organizafion leverages existing business resources

62 October 2004 DM Review www,(lmreview,com

.such as assd.s, bricks tuid mortar, invest- erally never just a raw data point, but some weigiited averages of several similor meas-
ments (sdles per total assets, sales per cjian- massagt-d data derivative - ratio, index or ures that result in an overall composite indi-
:iel, win rate). weighted average. The first step in creating a cator of pedormance (eg., aistomer satisfac-
('().•>•( :>avimjs: MrasLircs how sLiicessfuliy derived measure is to standanJize llie meas- tion composite i.s mixture of results from
the mdnajJemciil organization achieves ures so that comparisons across different sur\'eys, focus groups and product returns).
economies of scale and scope of work with divisions/iunctions/departments are consis- Stalislii's: Multiple measures such as
its people, staff" and practices to control tent and not just an exercise in comparing mean, variance, standaixl deviation and
opei'ational and overliead costs (cost per apples and orangt-s. Normalization, the most variance thai capture the spread and distri-
unit, inventory turns, cost of goods). common technique, places all the measures bution of fhe performanc^c measures (e,g.,
Gwwlh: Measures the ability of the on a similar footing by equalizing tliem sales distribution by demographics, geogra-
management organization to maintain across a common organizational base (eg., phy channel).
competitive economic position in the per employee, per square loot, etc,}. Critical Keep in mind Ijiat Ihe evolution of
growth of the economy and industry to successful implementation of such meas- c-ffective ratios, indexc\s and composites is as
(market share, customer acquisition/ ures is an enterprise-wide commitment to much art as scienc^e. In most situations, the
retention, account penetration). this standardization process. Siloed business dired data elements that ncecJ to be incor-
and fundion-Sfiecific metrics need to be porated in a specific KPI are quite apparent
Innovution: Measures the capabilit)' ol
elimin.itrtl and replaced with new enterprise up fi'ont. Ihe real challenge is in trdnslatijig
the orgiiniziition to develop new products,
stan(Jards that ensure enterprise-wide opti- tlie data elements into meaningful derived
processes and services to penetrate new
metrics tiiat refltti true business drivers.

KPI Category The KPI Focus Dimension

KPI Perspective & Family
• Direct After incorporating the perspective, fami-
Financial I Customer • Percent
ly and category dimensions into the
• Protltability •Product Quality • Simple Ratio
• Index development of KPIs, one needs to con-
• C o s t Savings • Product Innovation
• Composite Average sider the Unal overlay - the focus. The
• Resource tJlilization •Timeliness • Statistics focus dimension refleds an eclectic mix-
• Staff Productivity • Service Quality
ture of views that further balance the
KPIFocus dc^veiopment and scledion of KPIs: Time
Learnings Growth
• Time Horizon Horizon - short-term vs. long-term, Phiimiiii
• Process Quality • Innovation • Indicator
• Technology - strategic vs. tactical, linikator - lead vs.
• Productivity •Type
• Cycle Time • Growth • View lag, Tjfif - qualitative vs. quantitative. View
• Process Efficiency • Knowledge Sharing • Level - internal vs, externcil, Levd - process vs.
• Purpose outcome. Purpose - planning vs. control,
It is important to screen the final KPIs
to ensure that they are not ail skewed
Figure 1: KPI Dimension Schema
toward short-term, quantitative, tangible
markets and customer segments (new mizat ion- and lag indicators, which are easiest to
patents, new produd rolknits, R&D spend). After normalization, development of develop. Kor example, tangible assets such as
TaJirii)|()(jv: Measures how effeciively t!ie category dimension is the next critical investments, real estate and inventories are a
liie IT organization develops, implements step. The potential options include several lot easier to "dollarize" than intangible assets
iind maintains information management variations such as dired, percentage, ratio, such as emf:)loyees' skill, talent, knowledge
infrdstrudure and applications (IT capital index, composite and statistic al categories: and teamwork. Values (or the latter are
speriding, CRM technologies im[)lemented. Dirccl: The actual raw data value as mudi more difficult to c:apture, but tJiey are
Web-enabled access). measured (e.g., sales levels). t\'pic^ally a much better indicator of the
The perspectives and measurement Pcnail: The comparison of the company's future potential.
families can now be combined to develop a changes in performance of one value rel- The bottom line is that the c reation
KI^I profile matrix (sc^' Figure i), which pro- ative to the same value at a different time, of effective KPIs requires an extensive
vides a construct for balancing tlie number geography, etc (e.g., percentage cliange in commitment in time and resources. The
and types of KPIs that are developed. The sales vs. last year). effort can be streamlined by incorporat-
profile matrix also ensLires the proper mix of Simpk Ratio: The comparison of one ing the dimensions explored here, ^
financial and non-nnant:ial measures - typ- value relative to another to provide a
ically a shoriiall tif most pedormance man- benchmark for comparison of performance Kent Bauer is the managing director. Performance
ManagemenI Practice at GRT Corporation in
agement implementations. (e,g,, average sales per day). Stamford, CT. He has more than 15 years of experi-
Imkx: A combinatioti of several sepa- ence in managing and developing CRM, database
The KPI Category Dimension rate measures added together tJiat resiilt in marketing, data mining and data warehousing solu-
tions for the financial, information services, health-
Oncf you have identified the perspective an overall indicator of perfbnnance (e.g., care and CPG industries. Bauer has an MBA in
and tile family dimensions, the next task is (company sales growth)/( industry sales Statistics and an ARC in Finance from the Stern
Graduate School of Business, New York University,
to determine what form the measure should growth) for a specific geography). Please contact Bauer at kenLbauer^rtcorp,com.
take - the category. AJI eflec tive KPI is gen- Avmujr Tlie addition of the

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