Key Performance Indicators (KPIs)
Once created, input to a Scorecard comes in the form of Performance Measures, often referred to as Key Performance Indicators (KPIs). A KPI provides information an organisation requires to determine whether it is performing well or not. Unfortunately, in some organisations, KPIs have often become indistinguishable from operational measures. Organisations frequently take the view that everything should be measured and reported on. A KPI is a Key performance indicator. It is one of a small number of measures that are designed to reduce the complex nature of organisational performance and turn it into something that can be understood easily and acted upon quickly. Much in the same way as a doctor or nurse will monitor pulse rate and temperature to determine the overall health of an individual, managers can monitor KPIs to determine the health of an organisation.
Where to start is entirely dependent on the strategy an organisation is deploying at the time. There must be a direct relationship between what an organisation is trying to achieve (the strategic objectives) and what is being measured to determine progress towards the objective. Clearly, there will be a lot of operational measures and some of these may contribute data to the Key Performance Indicators, but operational measures should be considered as ‘housekeeping’ and ‘good practice’ and should not be confused with KPIs.
The approach gives us the framework to take a ‘balanced’ view across an organisation and define strategic objectives in the four perspective areas together with the associated KPIs. We must be careful not to define too many strategic objectives.
It is better to focus on a small number of things where a structure can be put in place to influence behaviours and outcomes rather than to spread the workload so thinly that nothing gets achieved at all. Business strategy consultants Franklin Covey put it very well:
If your strategy has 3 objectives you will succeed in all 3, if it has 4-10 objectives you will succeed in 1-2, if it contains more than 10 objectives you will succeed in none.
A simple case of the law of diminishing returns.
Finally, KPIs must contain both leading and lagging measures. Most strategic plans concentrate on lagging measures. Why? Because they are easy to measure and they are accurate. If I want to lose weight, I get on the scales. This gives me proof positive if I have succeeded or not. It does not give me any help to succeed. If I measure how many times I go for a run and how much I have eaten (and plan for this) then I have put in place two leading measures that will help me succeed. Leading measures are harder to identify but they are the only measures that can be influenced and therefore make a difference. We must not underestimate the importance of leading measures when creating a Scorecard, defining our strategic objectives and choosing our Key Performance Indicators.