Posted by Peder Enhorning
May 1, 2015
When companies decide to track performance, they invariably begin by measuring results. That’s the wrong approach. Results only tell you what happened, not why. You can choose to measure either the results of your work or the actions that cause the results. KPIs (Key Performance Indicators) should be reserved for tracking things that directly relate to specific actions or activities, not the final result. Revenue, profit and number of customers should not be used as KPIs. They are the result of many activities, so don’t identify particular actions to take.
A Performance Indicator is a metric that informs how your business is doing. It tells you what to do and what action to take. Many people confuse measures and metrics, so let’s define them:
Measure – a number derived from taking a measurement, the observed value of a number at a point in time. Measures are raw numbers and data points found in data or reports such as corporate databases, call centers and other data silos. On their own, measures deliver little value.
Metric – a calculated number derived from measures. Ideally, it should be expressed as a ratio, average, percentage or rate.
Since there are hundreds or even thousands of Performance Indicators/metrics produced in our daily corporate lives, KPIs should ONLY be the ones that are necessary for business performance measurement. They should provide vital feedback and actionable insight that directly drive business goals. KPIs, as the name implies, are KEY! They track essential items that are considered critical to the success of the business.
See White Paper: KPIs and the Logic of Decision Making to learn more about how to establish KPIs that will help you make better decisions.
Don’t label various numbers as KPIs if they are only metrics. According to a recent study by ScienceDaily, fully 90 percent of all the data in the world was generated in the previous two years. We are so inundated with data, there are simply too many data points to try and track everything. You have to hone in on what’s really going to help your business succeed.
Whereas Performance Indicators track your specific actions or activities, Results Indicators measure the results from your many business actions as an aggregate. Result Indicators only tell you what happened, not why.
Just as with Performance Indicators, there can be many Result Indicators, but only KEY Results Indicators tell how you have done in a part of your business that is critical to meeting corporate goals.
KPIs measure the precise actions we take to obtain specific results.
KRIs report on the results of many activities, so are backward looking and inform what has happened. KRIs measure the effect of business activities but ignore the cause.
KPIs don’t measure goals; KRIs do. It’s certainly important to track goals, but you don’t know what caused the goal to be reached or not if you don’t track the actions or activities that align with those goals. For that you need to establish KPIs.
To illustrate this, we can see that there is a relationship between the various actions and activities we perform every day. Some are more critical than others and key actions aggregate up to create key results.
Don’t overuse KPIs or they will get ignored. KPIs should track unique actions or activities while KRIs track the aggregate results of many actions.
If you need help or want a better way to identify and measure the “right” KPIs and track them against actual performance, you may want to try KPI Karta, a new cloud based service. You can download a free trial here