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KPIs

Your KPIs Probably Aren’t! But What Are They?

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This is the 2nd part of my post following Defining KPIs in Enterprise Services Planning.

Running our classroom exercises with private clients this past 18 months has shown me that most businesses have KPIs which really aren’t Fitness Criteria Metrics. In other words, their KPIs are not indicators of performance and certainly not key indicators or indicators of key performance. What I see as KPIs are really what should be classified as general health indicators and in some cases metrics driving specific improvements.

So what are general health indicators? Read more…

General Health Indicators

If we were to talk about individuals as people general health indicators are their pulse, their weight, their blood pressure, their cholesterol levels. If the individual was an athlete, they wouldn’t be setting goals based on achieving a certain blood pressure or a certain pulse rate but they would have expected ranges for these and they would monitor them. They might also monitor, for example, recovery time – the time it takes an accelerated heart rate to recover to a more normal level after stress.

Whether customers walk through your door is a health indicator. It is like having a pulse. Whether they buy something is also a health indicator and whether you had a positive margin in that sale and free cash flow are also health indicators.

In comparison, whether your customer is satisfied and whether they are likely to place repeat business and recommend you to a friend or colleague is a performance indicator. There are plenty of profitable businesses with lackluster stock price performance while others with growth but negative free cash enjoy elevated P/E ratios. They can always raise capital because their performance in the market is improving.

In Agile software development, velocity is a health indicator – you’d rather have some than not – but it is unlikely to be a performance indicator. The reason for this is that the volume or rate of production is not a fitness criteria for your customers and it is rarely a valued criteria even for internal stakeholders. Customers value things like delivery time, quality, useful functionality. You may believe velocity is a proxy for delivery time but it may not be. You may have a lot of velocity but a chronic, systemic problem with growing work-in-progress and ever longer delivery times. You are like a patient with a pulse but your blood pressure is trending the wrong way, your cholesterol is rising and your ability to get day-to-day tasks completed is being impacted. It could be your liver isn’t performing as it should be? If you set a target for your blood pressure you might be able to hit it by taking drugs – this is known as a symptomic fix which allieviates the symptom but fails to get to the root cause, as a result the problems persist and you end up back where you were again, a few months later. The same is true for companies. Many health indicators can be “vanity metrics” like boasting about your “at rest” heart rate – it isn’t always a fitness indicator!

Sure enough if you don’t have sufficient working capital, if you don’t have margin and profits and free cash, your corporate health is in danger, but as Richard Branson said, “People think companies exist to make profits. Wrong! They make profits in order to exist!” When you change to a mindset like Branson’s you start to see general health indicators for what they are, and you stop calling them “Key Performance Indicators.”

Metrics Which Drive Improvements?

While less common, it isn’t unusual to find a manager with a KPI on their scorecard which should rightly be classified as an Improvement Guiding Metric.

For example, we have poor customer satisfaction and a low Net Promoter Score because our delivery times are too long. In other words, the customer views lead time as a key selection criteria. Lead time is a fitness criteria metric and consequently lead time should be one of our KPIs.

In order to improve lead time, we decide that we want to automate testing because after analysis we discovered a significant portion of lead time is delay waiting for manual testing.

So we create an improvement goal to automate the testing of 85% of our application. We want 85% automated test coverage. So we start measuring and reporting the percentage of code covered by automated tests. We may even have placed this metric on the SMART goals for a manager. Despite all of this, it doesn’t make it a “Key Performance Indicator”. Instead it is a derivative of a KPI. The true KPI is lead time. We believe that by improving automated testing we will improve lead time. We may have causation to determine this or it may simply be a postulation and an experiment. The true KPI remains the customers’ fitness criteria – the lead time. So automated code coverage percentage is an Improvement Guide Metric.

Classifying Your Metrics

In our Enterprise Services Planning workshops, we have a series of exercises on metrics and the specific exercise on classifying existing KPIs is particularly enlightening for clients. They discover that most, if not all of their existing KPIs, are in fact health indicators and some improvement guides. Often the clients are not measuring anything which affects customer satisfaction. It is no wonder then that they aren’t happy with the NPS results.

What About Metrics That Aren’t in Any Of The Categories?

During the exercise, clients often find existing metrics they are measuring and reporting which can’t be classified as Fitness Criteria Metrics, Improvement Guides or General Health Indicators. The reality is these are metrics they probably don’t need and should drop. Often these are legacy metrics – metrics that were guiding earlier improvements, or perhaps fitness criteria that no longer apply because the company doesn’t serve that market segment any longer, or the customers in that segment have changed their opinion about what is acceptable and what represents “fit for purpose.” In some cases, the metrics are simply things the business could see and was capable of measuring. They serve no useful purpose.

To discover if a metric has a useful purpose ask yourself, “What decisions does this metric affect?” “What would we do differently if this metric rose or fell or hit some threshold value?” If you can’t identify an action or outcome you expect as a consequence of reporting a metric then you don’t need it.

When clients complete our Enterprise Services Planning workshop they often find they need far fewer metrics than they were already capturing and reporting but equally they need new instrumentation in order to capture the fitness criteria they’ve discovered from thinking about market segments in a new way and seeing their product or service through the customers’ eyes.

Defining KPIs in Enterprise Services Planning

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All KPIs should be fitness criteria metrics. All KPIs should be recognizable by your customers and addressing aspects of how they evaluate the fitness of your product or service. If your customer doesn’t recognize or care about your KPIs then they aren’t “key”, “performance” indicators, they may indicate something else but they aren’t predictors of how well your business is performing or likely to perform in future.

This blog follows my recent posts on Market Segmentation and Fitness for Purpose Score explaining how we define Fitness Criteria Metrics. These metrics enalbe us to evaluate whether our product, service or service delivery is “fit for purpose” in the eyes of a customer from a given market segment. They are effectively the Key Performance Indicators (KPIs) for each market segment. All other metrics should either be guiding an improvement initiative or indicating the general health of your business, business or product unit or service delivery capability. If you can’t place a metric in one of these categories then you don’t need it.

Project Manager and Mom

Read more…

Fitness Criteria Metrics

We left our story of Neeta the busy project manager, mother of 4 kids, having established that she represents a member of two market segments – the “working late ordering food for the team in the office” cluster, and the “feed my children, its an emergency!” cluster. We also determined that the main metrics of concern are: delivery time; quality – both functional quality (the menu and order accuracy) and non-functional quality (hot, tasty, artisan, gourmet or maybe not); predictability (of delivery time, and perhaps of quality too); safety or regulatory concerns, perhaps including trust that organic ingredients were used or not. In our example, these 4 main metrics apply whether Neeta is ordering pizza for the team or whether she is ordering for her family. However, the satisfaction thresholds vary significantly based on the context.

When Neeta orders for the team they are happy to wait an hour to 90 minutes for delivery. If minor errors are made in order accuracy it is unlikely to matter too much. However, there is a threshold. If some of the team are vegetarian then there must be some vegetarian pizzas delivered or we’d consider the order a failure. The menu is important in the sense that the geeks want a more exotic set of choices. They are fussy about their non-functional requirements. They want the pizza hot, tasty, artisan and gourmet. They aren’t too particular about predictability of delivery time or order accuracy. A 30 to 45 window for delivery is probably acceptable and a few minor errors in the order is also acceptable. They do care about health and safety in the restaurant but they only care about the traffic safety of the delivery boy in so much as it doesn’t endanger the quality of the pizza on arrival.

When Neeta orders for her family, the threshold levels are significantly different. The kids are really hungry and impatient and now they know that pizza is coming, they are super-excited about it. Fast delivery is essential. Predictable delivery is essential: the 6 year old is now running his countdown timer on his iPad. The menu was important but only in so far as it offered simple plain cheese pizza with tomato sauce. The kids are so excited that they won’t mind if the pizza is a little cold on arrival, nor will they mind if it got shaken up a bit during transportation. Order accuracy is important to the kids. If it isn’t a plain cheese pizza they will be extremely upset and unlikely to eat it at all. Meanwhile, mommy can worry about safety and regulatory concerns but they may have a preference for a restaurant that promises to use organic ingredients. They have no concept of whether they trust this assertion. The restaurant said it was organic – mommy can worry about whether that is true or not.

So in summary…

Kids

Fast delivery

100% order accuracy

Not concerned too much on non-functional quality

Predictable delivery

Not concerned too much on safety or regulatory concerns

Geeks

Longer delivery acceptable

Some errors in order accuracy acceptable

Extremely fussy about non-functional quality

Wider tolerance for unpredictable delivery

Not too concerned about safety or regulatory issues

In 4 of these 5 categories we have significantly different fitness evaluation thresholds for these two segments.

If we are to successfully serve both segments, driving improvements so that we have high levels of customer satisfaction in both segments, we must use the higher thresholds with each metric as our benchmark. Alternatively, we need to segregate our service delivery by segment. We can do this by introducing two classes of service, one of each segment. This might work through pricing, for example, would Neeta pay a premium for the guaranteed fast delivery for the kids? Or it might work through capacity allocation and demand shaping based on it. We might, for example, refuse to take large commercial destination orders during peak times for domestic orders. In this example, we trade off educating our corporate clients to order earlier in the day, versus the risk that they will go elsewhere. We do this because we value the domestic market.

There is no formula for this. No right or wrong. We make choices for our business in terms of which segments we wish to serve and how well we wish to serve them. Choices come with consequences. We need to be prepared to live with these consequences and be willing to be accountable for them.

The metrics and threshold values we’ve developed for each of our segments should become the KPIs for our business and specifically in this case, the pizza delivery service. We should put in place the mechanisms, instrumentation and customer feedback, to measure these metrics. We can use the results at Service Delivery Reviews, Operations Reviews and Strategy Reviews to determine how well we are serving our markets, where we need to make improvements and which segments we wish to serve.

In my next post in this series I will take a look at the other types of metrics: those which guide improvements; and general health indicators. My experience working with clients in 2015 is that most existing KPIs are in fact merely general health indicators. As a consequence these businesses are optimizing for the wrong things and customer satisfaction and their ability to survive and thrive in the market is impaired. All KPIs should be based on threshold values for fitness criteria metrics derived from analysis of the market segments you choose to serve.

Read Part 2: Your KPIs Probably Aren’t! But What Are They?