Measuring performance

Abstract

Most organizations today have a set of key performance indicators (KPIs) that are used for decision-making. Because a balanced scorecard approach has been widely adopted, typically KPIs have moved beyond the basic financial metrics. However, developing the right set of KPIs is an important step in promoting continuous improvement and overall business success. Organization that implement six sigma or lean six sigma have a built-in set of KPIs, such as defects, ppm defective, process yields, process cycle times, and a variety of inventory statistics, such as WIP inventory. But I don't think this goes far enough in most situations. KPIs should be traceable to customer satisfaction, both for external customers and internal ones. Organizations should formalize customer requirements and then evaluate how they are doing with respect to this list when they conduct strategic planning sessions. This is a good way to develop the right KPIs. However, overemphasis on short-term financial results can skew this process. Too much focus on quarterly growth in sales or revenue and deflect attention from the issues that contribute to long-term business growth and success. Organizations often gravitate towards collecting data that is easy to obtain, but may not be necessarily useful. An example is information about customer satisfaction data. Surveys can be useful, but may not tell the complete story. One organization that I am familiar with has a customer service line. They reported very few serious complaints from that source. Analysis revealed that the average waiting time for customers that used this line was in excess of 30 minutes. Furthermore, the ability of the system to place calls on hold was limited, so a significant number of calls were “blocked”; that is, they were not answered at all. So the volume of customer issues that this service was designed to serve was dramatically underestimated. Some KPIs are lagging indicators of business performance. Examples include sales volumes and maintenance expenses. These are usually easy to generate, but may not provide much indication of future success. Reliable forecasts of future demand (demand isn't necessarily the same as sales) is usually a better business indicator. Leading indicators are harder to devise, almost always depend on the specific nature of the individual organization, and may be difficult to generate. For example, cycle time for new product introduction is often a critical measure of future business success in many industries. If this KPI is unsatisfactory or is getting longer for unexplained reasons it may indicate an area for lean six sigma intervention. Performance measurement is an important management tool for evaluating and improving organizational success. Leading KPIs can be an effective “canary in the coal mine” warning of impending trouble. The investment required to develop and maintain the correct set of KPIs will pay many dividends.