MEASURE STRATEGY USING KPI
By Chris Fox.
Strategy measures and kpi help organizations implement strategies.
Studies suggest that as few as 1 in 10 strategies are ever successfully executed. In my experience, strategies with clearly defined and measurable objectives and kpi (Key Performance Indicators) are more likely to get delivered than those without.
Why strategy measures and kpi matter.
Humans have an affinity for keeping score. We fill our leisure time with games and activities, competing against each other or against ourselves. We set up leagues and tournaments. We set and break records. And all of this requires measurement and score keeping. Measurement and score keeping are fundamentally motivational.
A clear kpi helps people to pull together as a team working towards a common goal.
Measurement insists on clarity. Rugby only works because everyone knows exactly how many points you get for a try versus a conversion, and because everyone agrees exactly when a try is and isn't a try (even if it can sometimes be difficult to see it). This clarity enables people to align and pull together as a team towards a common goal.
High level strategies which remain too vague are open to different interpretations. Even a simple goal like increasing market share can be open to different interpretations. For example, is market share measured in terms of numbers of customers, numbers of transactions, or monetary value of transactions? This matters when you find that a third of your team are taking steps to attract new customers, a third are taking steps to get additional business from existing customers, and a third are taking steps to up-sell each customer to a larger contract: three very different strategies to achieve the same high-level goal. Most importantly, instead of pulling together to achieve your strategy, your team is pulling in three different directions, fragmenting or even undermining the effort and its impact.
A vague kpi results in different teams pulling in different directions - based on how they each interpret your kpi.
Establishing measurements as part of your strategy is important, but by no means easy. Here are my eight top recommendations for strategy measurements, or Key Performance Indicators (KPIs).
1. Be prepared to build measurement systems and processes for your kpi.
It's important to base your KPIs on what you are really trying to achieve, and not just on the data that you happen to have readily available, or on what is easy to measure. This sounds almost too obvious to bother mentioning, but when you're up against a deadline and short of resources, it's a very tempting mistake to make.
Measurements are most accurate when based on data produced by the system or process being measured.
Measurements based on someone going back and measuring or counting something after the fact are prone to errors and delays. They are also more prone to be abandoned when things get busy.
When a new strategy indicates new measurements, you may find that you need new systems and processes in order to collect the data.
Implementing those new systems and changes should feature high up on you strategic plans. Convincing people to invest time and money in introducing or changing measurement systems and processes can be a challenge as some might argue that new systems and processes don't actually take you any closer to achieving your goals. However, this upfront investment will pay off in spades later on when it drives sustainable delivery.
2. Maximize information content
The value of measurements lies in their ability to communicate information about what is desired, and how successfully you are achieving that. The information content that different measures can carry is, therefore, important.
In general terms quantitative measures (numbers of things or events) convey more information than qualitative measures (categories or states of things or events). The fewer categories in a qualitative measure the lower the information content: unidirectional binary measures (for example, not done or done) convey the least amount of information at all.
Qualitative measures can be made more quantitative in a number of ways:
- Points can be assigned to qualitative categories and then added together.
- Qualitative measurements can be applied to smaller units of work and these then summed.
For example, if projects are scored as being red, amber or green and there are 20 projects on the go, then assigning 1 point for red, 2 points for amber and 3 points for green yields a quantitative score between 20 and 60. This, in turn, can be converted into a percentage figure which applies regardless of how many projects there are on the go.
3. Increase objectivity in your kpi
Measurements which are subjective create less clarity because opinions introduce an element of randomness at best, or bias at worst.
Measurements based on counting physical things, events or money are the most objective. KPIs which can be independently audited against well developed external standards are also more objective.
In some cases, subjective measures do more harm than good as people spend more time debating subjective evaluations than they do delivering the strategy itself!
Some subjectivity can be eliminated by clearly specifying the criteria to be taken into account, and/or by averaging subjective scores from many people, as they do, for example, in scoring an Olympic diving competition, or in a customer survey.
Subjective measurements present particular challenges where incentives are involved. If you're rewarding your team to deliver your strategy using your measures - and you should be - then they're hugely incentivized to overstate the results wherever they can.
Time spent increasing clarity and objectivity in your kpi up front will more than pay for itself further down the line.
4. Combine and derive measures
Strategy is a complex subject and so we shouldn't expect measurement of it to be simple. Not every measure needs to have a one to one relationship with something we see in the real world. Composite measures, derived from weighted contributions of several factors can help to simplify the subtleties of a complex strategy. Both the constituents and the weightings of such composite measures can be nuanced over time in order to influence the delivery of your strategy.
For example, rugby, like most games, is decided based on a simple point score. However, that point score is a composite of different points awarded for different activities (scoring a try, conversion, or penalty, etc.). The weighting of these different contributions has changed over time: in 1983, the number of points awarded for a try in rugby league was increased from 3 points to 4 in order to encourage the more attacking play which appealed to spectators.
In a more commercial context, there are many opportunities for composite measures. For example, different numbers of points could be awarded for progressing contracts through different stages in a defined tender process; different weighting could be assigned to the short, medium and long-term percentile performance of investment funds, etc.
5. Beware of unintended consequences
Unintended consequences arise particularly when organizations settle for what is easy to measure, rather than what really describes their strategy.
Poor measurements are, of course, the best way to motivate people towards poor outcomes. For example, when the UK NHS started setting targets for how long it took a doctor to see a patient entering the emergency room, some hospitals quickly worked out that keeping patients waiting outside in the ambulances helped to improve their scores.
A cynical mind can help to foresee these unintended consequences and design measurements which focus fully on the true objectives.
With increasing specialization and the fragmentation of processes between departments and even outsource partners, it is important to measure strategic KPIs on an end-to-end basis. Remember that if the current divisions of labor are preventing you from delivering your strategy, you should change the divisions of labor, not settle for less contentious KPIs.
6. Have enough, but not too many kpi
My general perception is that a solid business strategy requires between 12 and 25 measures to properly define it.
Too few measures, and the nuances of a strategy will be lost, leaving too much room for interpretation and misinterpretation, and not providing enough direction for teams to pull together around. Too many measures, and the strategy can appear confusing and unfocused, leaving teams feeling like they're playing a lottery with the outcomes.
You need to be able to track and show your progress on a single page to make communication easier.
12 to 25 measures also fit conveniently on a single page. This is important because if you can't track and show progress towards your strategy on a single page, it becomes more difficult to communicate progress of the strategy as a whole. Soon your strategy starts to appear as disparate initiatives, and cohesion and teamwork starts to erode.
7. Get the balance right
Most organizations have biases of one sort or another. For example, a common bias in listed companies is towards short-term historical financial measures.
Constructing the dashboard of KPIs for your strategy presents an ideal opportunity to counterbalance those biases.
Short-term historical financial measures should be counterbalanced with more customer-centric metrics, process-based metrics and measures of the organization's ability to grow in the future (such as R&D pipeline or investment in staff development and training aligned with your strategic objectives).
The relationships between these different perspectives should be made clear in the strategy itself. For example, how will improvements in the chosen process-based metrics achieve better customer outcomes, and how will improvements in those customer-centric metrics deliver better long-term financial results? This will help those delivering the strategy to understand how all the different elements of the strategy a mutually supportive of achieving the overall vision.
8. Measure often and quickly
The more often you are able to take readings on your KPIs the more useful they will be in guiding behavior and helping to deliver your strategy. Can you imagine driving a car where the speedometer only gives a reading once every 100km, or where the reading only showed how fast you'd been going an hour ago?
Some metrics are less easy than others to collect on a regular basis. But there are invariably ways around this.
For example, you can't conduct a full staff satisfaction survey every month - it would be too expensive, and the annoyance to those have to fill it in would skew the results. However, assuming you had enough staff, you could survey a twelfth of your staff every month. That way, you get a monthly reading, but each member of staff is still only surveyed once a year. Provided your sampling is random enough and there would be little or no loss in statistical accuracy. An added advantage is that the impact on staff satisfaction of one off events is reduced. Where headcount is statistically inadequate, analysis could be based on the rolling cumulative results over the last quarter, half year, or even full year.
When measuring more often, you're also likely to get better at doing it, put the right systems and process in place, and therefore be able to produce and communicate the answer more quickly.
Measurement is a complex subject. However, the prize for getting it right is increased clarity in your strategy, and a team that is more motivated and aligned to deliver it.
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