Measuring What Matters

Issue 18, September 2, 2021

With the drama and disruption of the pandemic, you might think it’s time to re-evaluate your Key Performance Indicators (KPIs). Just look at the megatrends. Externally, customers have been affected by financial and supply chain disruption, along with revelations of new digital ways of managing day-to-day life. Many of the adaptations and changed behaviors are likely here to stay. Internally, organizations have pivoted but many remain dedicated to returning to a normal that no longer exists or is even possible, and abandoning most, if not all, of new adaptations. Remote work and the resulting disconnected physical workplace (which may be here to stay) has challenged management with how to maintain and measure employee engagement and loyalty. This is exacerbated by employee turnover as many younger workers have reexamined the quality of their lives and the meaning of work at a time when the birth rate is decreasing, which will affect available talent in the future.

But that would be missing the point.

What we have found that transcends the pandemic are two common threads among organizations of all sizes serving any industry or purpose. Whatever KPIs organizations are using, they are rarely shared; and even more disturbing, there is no understanding across departments, divisions, sections, or the like as to what these metrics mean to the future health and growth of the organization.

At 2040, we work with our clients to help them navigate the evolving demands of stakeholders, shifts in the cultural conversation, needs for new business models and rethinking how to measure high performance by measuring what really matters. And these are evergreen issues and challenges across organizational management, unrelated to our ongoing public health crisis and our upended societal dynamics. The current and near-term environment offers an unprecedented opportunity to apply critical thinking as all organizations seek to navigate the new normal.

The Practice of Key Performance Indicators

The traditional approach to KPIs in for-profit organizations is to report on a monthly and quarterly financial basis, closing the books to measure short-term P/L against expected and forecasted revenue. It’s often focused on expected or forecasted income, and if the organization is expending the expected amount of money and time to achieve the revenue outcome. Often the indicators measure the past (week, month, and quarter to current week, month, or quarter) but may not consider or be related to goals set for the future or be in the context of mega or subtle changes in the market.

A non-profit, in contrast, is run with a membership/club model measuring an annual P/L that reflects past year to current year and uses the past to assume the future. Weirdly and rarely, regardless of organization type do we find that an organization understands and measures the cost of customer acquisition or the cost of customer retention and uses a variety of individual or groups of data points to inform the measure. And if acquisition and retention are understood and measured, it is within the department, division, or section of an organization, not at an organizational level.

In both models, an assessment of current performance majorly focuses on the comparison of past performance. Common measurements across all organizations may include staff performance, retention, training, projects completed, and milestones achieved. What many are tempted to do is use KPIs that are based on finances alone or reflective of what other similar organizations measure. The results are that the reason for the measurement, the explanation for why it matters, what data and from what system it comes, and what it means or may indicate are often unknown or staff is simply unable to explain the relevance.

Asking the Right Questions

To develop meaningful KPIs that really matter, you need to identify meaningful questions. This process will reveal meaningful answers that define the “why” and the value of the “why” to the organization’s goals, strategies, purpose, value and of course, financial, and overall performance.

Therefore, the most important question and one that is almost always the hardest is: Why? Why is this measure important? Why do we believe this measure is important? “Why” should result in a series of other questions, in the context of who the organization is, what it offers, what purpose and market it serves, and who the current or desired customers are. Key “Why” questions include:

• What is the purpose of this measure?

• What is this measure going to inform?

• What does this measure relate to and how is it connected to other measures?

• Does the data exist and can the data be connected to produce the output for the measure?

• Is this measure in conflict with other measures in place?

• Do the insights and intelligence aid in assessing organizational performance?

• Is this measure still relevant?

In thinking through what a KPI can measure, the following questions may aid in your exploration:

• What programs make the most profit?

• Which customers are the most loyal?

• How much do we spend on new customer acquisition?

• What is our year-over-year growth in member and customer engagement?

• How long do our customers wait on hold?

• How many employees transition out of the organization every year?

• How much does it cost to recruit and onboard a new employee? And so on.

The answers to these questions should spark some critical thinking processes to understand how a variety of answers informed by data contribute to an overall measurement leading to an indicator of organizational performance.

The Value of Organizational Indicators to Assess Organizational Performance

The true value of performance measures becomes clear when a connected matrix of KPIs is created across the departments, divisions, sections and/or business lines. So, take a step back and look at measures from the most essential focal point: Why are we asking this? And what are we trying to determine? All too often measurements are implemented based on some theory or best practice, unrelated to the business at hand. They are implemented for the sake of implementing and having something to measure, without questioning the value, insight, or intelligence created.

We advise our clients about the danger of past practices and behaviors becoming current norms. This often leads to outdated processes or procedures that have always been in place and continue to be followed regardless of their applicability to the present time. When no one questions whether it is effective or producing the desired outcomes, the results can be irrelevant. KPIs suffer the same fate: “We do because we always have and therefore do not question.”

KPIs + Workplace Culture

Asking the right questions is key to determining the “why” of measurement, and individuals involved in the formation of KPIs play an important role. A team along with an organization’s culture can have both positive and negative influences on KPIs.

Rose Hollister, managing director at Hollister Associates defines culture as “a shared set of values (what we care about), beliefs (what we believe to be true), and norms of behavior (how we do things). Cultures exist to align effort, engender shared sensemaking, increase predictability, and encode organizational lessons about what does and doesn’t work.” The beliefs, norms and values Hollister brings forward can upend individual, team and organizational critical thinking if they are not aligned in a functional culture.

Critical thinking and collaboration go hand and hand with KPIs. Employees throughout the organization should be encouraged to review the KPIs, challenge status quo, and champion ideas for improvement. Therefore, management must create a culture where employees are empowered to ask questions, not afraid to tell the truth, and supported in identifying problems or issues. Creating a culture of mutual trust is a top-down responsibility. The CEO sets the stage for a systems-wide buy-in for discussing and then establishing KPIs, which are shared to provide holistic insights and understandings. The result becomes an upstream and downstream communication and evaluation mechanism where those involved are keeping their finger on the pulse of the organization and its performance.

KPIs Disconnects

We often measure specific items without recognizing how those insights and roll up into major indicators that can truly reveal how an organization is performing. There are many common worst practices when it comes to creating and managing KPIs.

• Basic Instinct
  Humans by nature want to measure and will measure many things to gain correlation points for assessment and insight. But not all things should be measured, nor should all things be measured in isolation from other things.

• Siloed KPIs
  Far too many organizations look at metrics in silos; rarely is there a holistic look at KPIs across the organization with insights and actions triggered by shared and connected data. Silo models can hijack any organization in seeing true performance by limiting the focus to a single or set of items in isolation.

• Intelligent Data
  Data alone is not a panacea. Data must be balanced with human interpretation and thought to reveal what the measurement output means. To beat the drum one more time, critical thinking and pattern recognition should be applied to how data is being reviewed, processed, and represented.

• Amassing and Interpreting Data
  There is a tendency to over measure which results in a deluge of data being collected to manage. Data in and of itself is objective. The interpretation of data is subjective. You can derive different answers from the same sets of data; therefore, the results may not be indicative of any real value, insight or intelligence around performance.

• AI and the Machine
  Organizations are now implementing artificial intelligence tools and machine learning algorithms as part of the KPI process. Both can aid in crunching and assessing large sets of data. However, what often gets overlooked is how AI and machines have been programmed and what instructions have been given to AI on how it should interpret and define the data.

• Isolated Internal Measures
  There is always a danger driven by internal needs to measure internal performance in isolation. That leads to KPIs that are overly operationally focused and miss the bigger picture and connection to the customer, market and overall organizational performance and effectiveness.

• Bias Is Everywhere
  Bias affects measures just as it does communications. Measures used to demonstrate success are often biased to what the chief executive selects to validate his or her own performance. Equally, others in the organization who have measures in their own performance plans or whose bonuses are based on measures (aka performance) may attempt to bias (consciously or unconsciously) what comprises a KPI. The behavior can skew reality and create an inaccurate picture of the organization’s performance.

KPIs for Everyone

To ensure that KPIs make a difference; managers and employees need to understand what KPIs are and how this practice will help them with their work. KPIs should reflect the organizational priorities and their work should tie to the organizational priorities.

Basic KPI training can aid managers and employees in understanding how KPIs and other measures are used, how they are created, how they should be assessed, and how they should be communicated. This type of training can introduce critical thinking skills and pattern recognition abilities across an organization which will contribute to the upstream and downstream communication and evaluation mechanisms to successfully and effectively use KPIs and measure what matters.

Lastly, informed staff can help continuously assess organizational performance via its own KPIs as frontline workers have the most knowledge of the factors and variables that are changing and impact overall performance.

The Ultimate KPI

What’s the one KPI that transcends all others? Customer loyalty is a miracle maker for any organization. It extends the lifetime value of the customer (CLV), builds a steady stream of repeat purchases and can turn the customer into a brand evangelist who spreads the word. A positive net promoter score is the magic any organization needs for sustainability and yes, growth.

Because loyalty is so powerful yet so elusive, executives often turn to all kinds of utilitarian measures to ensure that they find it or represent what they found is the truth. Most organizations measure it differently using the Net Promoter methodology or other practices inappropriately and often with substantial bias. Not surprisingly, chosen measures typically shine the best light on the organization’s or more accurately, the chief executive’s performance. Organizations need to understand each customer and what has brought her or him to the door and return individually. And how do you do this? You ask the right questions, establish KPIs that are shared across all departments, divisions and sections in your organization and rely on individual and team-based evaluations to make sure everyone is on the same page and measuring what really matters.

Here’s a tip on getting useful insights gleaned from researching your stakeholders. Ask your questions as advice to your organization rather than opinions and expectations about the organization. Asking for advice immediately engenders trust and engagement, stimulating a feeling of belonging. In contrast, asking for opinions and expectations externalizes your stakeholders, distancing them from you and diminishing the feeling that they are part of your community and mission.

End Notes

So, what are the key takeaways? Measuring the right things requires understanding factors and variables impacting the system and marketplace using applied critical thinking to ask the right questions, ask them why, and assess what is possible. Customer (external and internal) loyalty, retention and engagement should be the focus of all KPIs. Cultural values and operational behaviors can impede identifying the right measurement for the right reasons. The importance of training staff on appropriate measurement and KPI development is crucial.

An organization needs to be constantly assessing its internal and external stimuli to ensure the organization is measuring what really matters, interpreting the measurement output in context by asking the right questions, applying critical thinking, and determining what intelligence and insight are gained into how the organization is performing.

The desire to return to normal, one that doesn’t exist, overlooks the fact that much has changed and therefore how performance is assessed likewise needs to change. The variables and factors in the environment, market, and customer base you serve, and yes even your organizational system, are always subject to change and indeed are always changing whether that be to external or internal stimuli.