What is a KPI?

A Key Performance Indicator (KPI) is a performance measure usually associated with organisational performance rather than individual performance. KPIs are frequently used to determine progress towards strategic goals and objectives. They can also be used to monitor the ‘repeated’ success of an operational goal. 

Key Performance Indicator (KPI) Definition

A KPI is a quantifiable measure that an organisation uses to gauge the performance of an objective over a specified time.

Let’s break this down.

• A quantifiable measure is a value that can be counted.
• An organisation might be a company, charity, government or school but not a person
• To gauge performance means to compare a value to something that is good or bad.
• An objective is something that an organisation wants to achieve
• A specified time is the amount of time required to achieve an objective

Quantifiable Measures

A quantifiable measure is something that can be counted, for example, Revenue or Customer Satisfaction. Furthermore, Your should be using Key Performance Indicators to measure improvement. By measuring improvement, we can see whether or not you are getting closer to our desired end-point, goal or strategy. A KPI may be an index of several measures.

KPIs should not be used to measure the progress of a project. The only thing you can say about a project is, it has started, is running, or has finished. A project may or may not contribute to an objective, and the real measure is the improvement the project makes, not the project itself. You can use a different method to measure projects at an operational level.

EXAMPLE: Return on Investment (ROI), which is a percentage, is made up of two measures, Investment Cost and Net Profit (from the investment over a given time).

Organisational Performance

We’ve said that KPIs are used to measure performance at an organisational, or business, level. They won’t usually be applied to measure the performance of an individual. Sometimes, an indirect relationship might exist between a KPI and a business measure – such as a sales bonus. In this example, the achievement of the sales-related measure would trigger the related bonus for the sales team. However, the bonus element is a business measure – not a personal measure.

EXAMPLE: You could use Return on Investment (ROI), to look at how well a new product or service has performed in the market

Gauging Performance

It helps to picture a speedometer when we think about gauging performance. The top end of a speedometer tends to be red and will indicate an unacceptable outcome. We could also picture a petrol gauge. If we are in the ‘green’ area, then we have enough fuel and don’t need to worry. Moving into the amber zone suggests we need to fill up. Hitting the red means we’re in trouble! We need to have similarly defined thresholds to flag up what is considered good or bad. One way that many organisations gauge the performance of their Key Performance Indicators is to use the RAG – or Red, Amber, Green – measurement system. RAG is highly intuitive, easy to apply and well-known.

EXAMPLE: Continuing with the ROI example from above. If the cost was £100,000 in year one and the returned profit in year two £52,000 then the ROI would be 52% at the end of year two. Is this good or bad? If the objective was to attain a 50% ROI in year two, then this is good. If the aim was to achieve a 70% ROI in year two, then this is bad.

Objectives

You need to judge performance against an objective. Before setting gauge thresholds, you need to determine why you are setting them in the first place. In other words, what is your objective? What is it that the organisation wants to achieve?

The golden rule: You must base key measures against organisational objectives.

Example: The objective for Return on Investment is quite easy to describe: “To achieve 220% ROI after two years from product function X.” With this objective, you can put the correct KPIs in place. It may be that that ROI would be measured quarterly with incremental thresholds leading to the final 220% target, as shown in the diagram above.

Specified Time

All key performance indicators need targets and are therefore time-bound. The time scale can be staged based on the desired outcome of the objective.

EXAMPLE: Again, look at the ROI example above. Year one is the investment year and has no ROI expectation. You could profile year two and three as follows:

• Q1 – 10%
• Q2 – 20%
• Q3 – 30%
• Q4 – 50%
• Q5 – 75%
• Q6 – 100%
• Q7 – 150%
• Q8 – 220%

You can better control progress towards the objective by staging the KPI thresholds over time. The overall target is 220% in year three. However, a sensible plan will always phase the KPI targets rather than merely waiting two years and checking if the objective has succeeded!

What Next?

Not sure where to start? Don’t start with key performance indicators! Good KPIs come as a result of understanding where to take an organisation or business. It is imperative to understand where you want to go before deciding how you will get there. Agree on clear objectives first, and then meaningful key performance indicators can be generated.

SMART

Most organisations will use the well-known SMART model when creating their Key Performance Indicators. SMART stands for:

• Specific: So that the KPI is clear and objective.
• Measurable: So that its progress can be measured and tracked to assess attainment of the goal or objective.
• Attainable: With the right level of stretch to encourage high-performance, but achievable so that the organisation’s employees remain motivated and empowered to deliver.
• Relevant: To the goals and objectives of the business strategy.
• Time-Bound: Define a start and end-point.

This model is intuitive and easy to use, and it makes sure that every resulting KPI is robust.

Writing Meaningful KPIs

Many businesses simply try to adopt industry-standard KPIs and then wonder why they don’t work. All organisations are unique in terms of their strategy, their nature, their competitive position. Adopt standard KPIs, and they will inevitably be meaningless to your business and its strategy. The real value lies in translating your strategic objectives and goals into the key performance indicators, which will truly measure their performance towards the desired end-point.

To develop them, begin with the basics of your objectives. Ask how you intend to achieve them. Ask who will be able to act on the information you are gathering. KPI development is an iterative process that requires input from managers, department leads, functional specialists, technical analysts and specialists.

For much more information on this subject, read How to Develop Meaningful KPIs.

As part of a strategic process

KPIs are almost worthless if used in isolation. They need to be related to objectives to be meaningful. But more than that, KPIs are the most significant output of a strategic planning process. When a business or organisation is planning for the future, whatever strategy it puts in place need to be verified through measurement, KPIs provide that measurement.

Engaging staff 

The key here is to have a structured communications plan in place which ensures a systematic cascade of your business strategy and its elements. You should provide core messages for each tier of your organisation for onward briefing, with resources such as structured team briefing materials, blogs, town halls. Two-way communication between staff and managers should be encouraged to ensure everyone understands KPIs, their usage, and everyone’s role in delivering them.

Monitoring

Once your KPIs are in place, it’s vital to monitor them regularly. Many businesses will do this by scheduling in a monthly review meeting with key internal stakeholders and KPI owners. A monthly dashboard and report will be produced – ideally using a system such as QuickScore to automate the process – and this will be reviewed beforehand and discussed in the meeting.

In conclusion

By approaching your KPI development robustly and thoroughly, you can assess your objectives and goals and unlock the full value of your strategic planning process. We recommend using our Strategic Planning Process model to make the process of creating KPIs easier. Businesses can also use the expertise of a strategy consultancy for guidance, as they develop their in-house capabilities with the strategic process. For further support and resources, please see the Intrafocus resources pages or contact our team for a no-obligation chat about your needs.

 

Top 10 most asked questions about KPIs

Can I use them to measure individual performance?

Generally speaking, no. KPIs measure organisational performance, rather than the individual employees within your organisation.

How do I define a them?

The right approach is to take your objectives and goals and ask leading questions, such as:

• What is the desired outcome of this objective?
• Why does it matter to our business?
• How can we measure progress towards the goal?
• What can we do to influence the outcome?
• Who will own this outcome?
• How will we know that we’ve achieved it?
• How often do we want to review progress?

By working through these critical questions, you will cover the essential considerations for each KPI. From a practical perspective, you could do this at a workshop with your team and a large number of post-its! This dynamic approach is one that we find works very well at Intrafocus guided strategy sessions.

How can I make them as valuable as possible?

We talked about using the SMART methodology earlier. But there is a further step that organisations can take to leverage the value of their KPIs. Add an action for evaluation, and re-evaluation, into the management process. Continually assess that KPIs and that their ongoing relevance to the business is confirmed. As an example, what if your sales revenue figure exceeded your target, or if you hit it early? Then was the goal initially pitched too low, or was another factor responsible?

What should they tell me?

Various business stakeholders will look at KPIs. Stakeholders include executives, managers, investors, lenders, and employees. So the takeaway is that a KPI should always be more than just an arbitrary set of numbers. They need to tell the reader something strategic about the organisation’s goals and objectives and allow them to learn something about the business model by assessing the full suite of available KPIs.

How often should I track them?

Tracking depends on the KPI and the business. Review some weekly, review others monthly or quarterly. Err on the side of frequency, so that you can make adjustments if concerns are flagged.

Can I change them?

Yes, they can, and in a rapidly changing market, many KPIs can become obsolete over time. Change is why a regular review process is essential. It gives you a chance to fine-tune your KPIs, and to ask whether they are still valid.

How do I know if they are attainable?

It’s crucial to set a stretch target, which is realistic and achievable. Start with a baseline of performance. Your business will already have a wealth of data, so use it to get an accurate starting point. A baseline will help you to create a target with the right amount of – attainable – challenge.

Who should see them?

The answer is – most people who work in your organisation. Business leaders and managers are an obvious example. All employees should see them as well, and understand how their performance objectives link with and support relevant KPIs. Most companies will make this link stronger by tying any performance bonuses to KPIs. Show your KPIs to external stakeholders too. For example, if you have a KPI that relates to sustainability, then its progress might be shared with investors, partners, suppliers. Even customers can benefit if you show your commitment to its attainment.

How should I track them?

Most businesses will use an automated system such as Spider Impact to make the process quick and easy. It is time-consuming and inefficient to gather data using spreadsheets, and this approach results in errors and waste. Integrate Systems such as Spider Impact with your existing applications. Spider Impact can create rich, powerful dashboards which present progress data and analysis for review and decision-making.

Is it challenging to develop them?

The honest answer is that it can be – but it does get easier with time and practice. Like anything else, a sound business methodology requires time to embed, and trial and error to get right. The team at Intrafocus work with organisations of all sizes to help them develop their business strategies and to create robust, impactful KPIs which make a difference. We usually start with a business strategy workshop and can deliver this remotely as required. Please contact our team to find out more.

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Glossary of Strategic Terms

 

It is vitally important to have a common language when working in the area of strategy management. Alternate strategic methodologies seems to have a different set of terms to describe essentially the same thing. Where it would be convenient to have an international standard language, the probability of this happening in the near to mid-term future is remote. The most important thing, therefore, is to ensure that at least within the bounds of a company (and possibly extending to the partner and supplier network) your terminology is consistent.

It does not really matter if the term we use for a metric is a Key Performance Indicator or a Performance Measure or a measure or for that matter a metric. The important thing is to agree on one term, document the definition and use it consistently across your organisation.

The following glossary of strategic terms is in common usage today. Each term has a brief definition. This list is not definitive but it does present a starting point and a resource that will get you on the road to creating your own glossary. Let’s hope in the future we will all agree on a standard set of terms.

Alert – Notifications by email or to a home page, updating users to changes to items that they have subscribed. Examples might include notifications about performance changes or commentary.

Balanced Scorecard – An integrated framework for describing strategy through the use of linked performance measures in four, balanced perspectives ‐ Financial, Customer, Internal Process, and Employee Learning and Growth. The Balanced Scorecard acts as a measurement system, strategic management system, and communication tool.

Benchmarking – The comparison of similar processes across organizations and industries to measure progress, identify best practices, and set improvement targets. Results may serve as potential targets for key performance indicators.

Budget – A description of the funding of existing and/or proposed actions.

Business Plan -These comprise the Corporate, Directorate, Service and Team plans, which specify the key priorities and activities to be undertaken.

Business Performance Management – A type of performance management that includes finance, covering compliance issues, competition, risk and profitability and human resources performance management encompassing employee performance appraisals and incentive compensation and other types of performance management include operational performance management and IT performance management.

Cascading – The process of developing aligned goals throughout an organization, connecting strategy to operations to tactics, allowing each employee to demonstrate a contribution to overall organizational objectives. Methods of cascading include identical (objectives and measures are identical), contributory (translated, but congruent, objectives and measures), unique (unique objectives and measures; do not link directly to parent) and shared (jointly-shared unique objective or measure).

Cause and Effect – The way perspectives, objectives, and/or measures interact in a series of cause-and-effect relationships demonstrate the impact of achieving an outcome. For example, organizations may hypothesize that the right employee training (Employee, Learning and Growth Perspective) will lead to increased innovation (Internal Process Perspective), which will in turn lead to greater customer satisfaction (Customer Perspective) and drive increased revenue (Financial Perspective).

Critical Success factor (CSF) – A CSF is a business event, dependency, product, or other factor that, if not attained, would seriously impair the likelihood of achieving a business objective. This term is always included in a glossary of strategic terms 

Customer-Facing Operations – Encompasses those facets of the organization that interface directly with customers; typically an organization’s sales, service and marketing functions. Also referred to as Demand Chain.

Customer Perspective – Measures are developed based on an organization’s value proposition in serving their target customers. In many organizations, especially public sector and non-profit, the Customer perspective is often elevated above or placed alongside the Financial perspective.

Dashboard – A dashboard is a reporting tool that consolidates, aggregates and arranges measurements, metrics (measurements compared to a goal) and sometimes scorecards on a single screen so information can be monitored at a glance. Dashboards differ from scorecards in being tailored to monitor a specific role or generate metrics reflecting a particular point of view; typically they do not conform to a specific management methodology.

Drill Down – A method of exploring detailed data that was used in creating a summary level of data. Drill Down levels depend on the granularity of the data in the data warehouse.

Economic Value Added (EVA) – A financial performance measure aiming to determine whether a company or activity has truly created shareholder value; in other words, EVA aims to distinguish real profit from paper profit. EVA is determined by calculating a business’s after-tax cash flow minus the cost of the capital it deployed to generate that cash flow.

Financial Perspective – The perspective that looks at bottom line results. In public sector and non-profit organizations, the Financial Perspective is often viewed within the context of the constraints under which the organization must operate.

Forecast – Forecast usually refers to a projected value for a metric. Organizations will often create a forecast that is different than their target for a given metric. There are multiple types of forecasting methods for creating forecasts based on past data and usage of them varies widely across organizations.

Goal – An observable and measurable end result having one or more objectives to be achieved within a more or less fixed time-frame

Goal Diagram – Generically used to describe the one-page visualization that shows the different goals of the organization and how they are related. Examples of goal diagrams include strategy plans, strategy maps and process diagrams.

Human Capital – A metaphor for the transition in organizational value creation from physical assets to the capabilities of employees. Knowledge, skills, and relationships, for example. Closely related to terms such as intellectual capital and intangible assets. Some experts suggest that as much as 75% of an organization’s value is attributable to human capital.

Initiatives – Initiatives organize people and resources and dictate which activities are required to accomplish a specific goal by a particular date; initiatives provide the how while goals provide the what. As differentiated from projects, initiatives directly support an organization’s strategic goals; projects may or may not have strategic impact.

Inputs – Commonly used within the Logic Model to describe the resources an organization invests in a program, such as time, people (staff, volunteers), money, materials, equipment, partnerships, research base, and technology, among other things.

Internal Process Perspective – Internal Process Perspective: The perspective used to monitor the effectiveness of key processes at which the organization must excel in order to achieve its objectives and mission.

IT Performance Management – A type of performance management that assists organizations with the increasing demands of maximizing value creation from technology investments; reducing risk from IT; decreasing architectural complexity; and optimizing overall technology expenditures. Other types of performance management include operational performance management and business performance management.

Key Outcome Indicator (KOI) – Often used in the public sector to describe key performance indicators, those metrics most critical to gauging progress toward objectives. KOIs are metrics that are: tied to an objective; have at least one defined time-sensitive target value; and have explicit thresholds which grade the gap between the actual value and the target.

Key Performance Indicator (KPI) – Distinguished from other metrics, key performance indicators (KPIs) are those metrics most critical to gauging progress toward objectives. KPIs are metrics that are: tied to an objective; have at least one defined time-sensitive target value; and have explicit thresholds which grade the gap between the actual value and the target.

Lagging Indicator – Backward-looking performance indicators that represent the results of previous actions. Characterizing historical performance, lagging indicators frequently focus on results at the end of a time period; e.g., third-quarter sales. A balanced scorecard should contain a mix of lagging and leading indicators.

Leading Indicator – Forward-looking in nature, leading indicators are the drivers of future performance. Improved performance in a leading indicator is assumed to drive better performance in a lagging indicator. For example, spending more time with valued customers (a leading indicator) is hypothesized to drive improvements in customer satisfaction (a lagging indicator).

Learning and Growth Perspective – May also be termed “Skills and Capability.” Measures in this perspective are often considered enablers of measures appearing in other perspectives; therefore, this perspective is often placed at the bottom or foundation of a strategy plan. Employee skills and training, availability of information, and organizational culture are often measured in this perspective.  More latterly, this perspective has included ‘Capacity’ to indicate that it is concerned with more than the human aspect and all includes other physical resources.

Logic Model – Having gained prominence in the ’90s largely in response to the Government Performance and Results Act (GPRA), the Logic Model is now a widely accepted management tool in the public and non-profit sectors as well as the international arena. The model is a roadmap or picture of a program that shows the logical relationships among resources or inputs (what an organization invests); activities or outputs (what an organization gets done); and outcome-impacts (what results or benefits happen as a consequence).

Malcolm Baldridge – Established by the U.S. Congress in 1987, the Malcolm Baldridge performance framework is a rating tool that assesses management systems and helps identify major areas for improvement in seven categories of performance criteria: Leadership; Strategic Planning; Customer and Market Focus; Measurement, Analysis, Knowledge Management; Human Resource Focus; Process Management; and Business Results.

Measure (also called metric) – Term to describe a standard used to communicate progress on a particular aspect of a program. Measures typically are quantitative in nature, conveyed in numbers, dollars, percentages, etc. (e.g., $ of revenue, headcount number, % increase, survey rating average, etc.) though they may be describing either quantitative (e.g., sales made) or qualitative (e.g., employee motivation) information.

Metric (also called measure) – A framework to establish and collect measurements of success/failure on a regulated, timed basis that can be audited and verified. The term used in commercial organizations to describe a standard used to communicate progress on a particular aspect of the business. Measures typically are quantitative in nature, conveyed in numbers, dollars, percentages, etc. (e.g., $ of revenue, headcount number, % increase, survey rating average, etc.) though they may be describing either quantitative (e.g., sales made) or qualitative (e.g., employee motivation) information.

Milestone – The set of specific deadlines or hurdles that signal progress in completing an Initiative. Milestones include progress/completion dates or % completion rates, key presentations/meetings, and key decision points.

Mission – Concise statement that describes, in motivating and memorable terms, the current top-level strategic goal of the organization. A mission provides both an internal rallying cry and external validity. Usually financial-, process-, or customer service-oriented, with a mid-term (three to five years) horizon, an effective mission is inspiring as well as easily understood and communicated.

Mission Statement – A mission statement defines the core purpose of the organization ‐ why it exists. The mission examines the “raison d’etre” for the organization beyond simply increasing shareholder wealth, and reflects employees’ motivations for engaging in the company’s work. Effective missions are inspiring, long‐term in nature, and easily understood and communicated.

Objective or Outcome Scorecard – A specific application of a scorecard/objective scorecards monitor progress toward a given set of objectives or outcomes using a threshold-based rating scale. Typically, objective status is determined by normalizing one or many key performance indicators and comparing it to a given rating scale.

Objective – A concise statement describing specific, critical, actionable and measurable things an organization must do in order to effectively execute its strategy and achieve its mission and vision. Objectives often begin with action verbs such as increase, reduce, improve, achieve, etc. Whereas the vision and mission statements provide an organizing and mobilizing “rallying cry,” objectives translate the vision and mission into measurable and actionable operational terms.

Operational Alignment – The means to and/or state of alignment of an organization’s day-to-day activities with its strategic goals or objectives, operational alignment helps ensure that an organization’s daily activities are advancing its longer-term goals and mission.

Operational Performance Management – A type of performance management that addresses the growing pressure to increase revenue while managing costs, while meeting ever-evolving and expanding customer demands. Other types of performance management include business performance management and IT performance management.

Operational Reviews – Usually used to describe the regularly scheduled internal status meetings of an organization. Going by different names based on the organization, manufacturing companies typically call them Operational Excellence (OPX) meetings, other organizations sometimes just refer to them as Performance reviews.

Outcome – Commonly used within the Logic Model, outcomes (also called outcome-impacts) describe the benefits that result as a consequence of an organization’s investments and activities. A central concept within logic models, outcomes occur along a path from shorter-term achievements to medium-term and longer-term achievements. They may be positive, negative, neutral, intended, or unintended. Examples of outcomes include changes in knowledge, skill development, behaviour, capacities, decision-making, and policy development.

Output – Commonly applied within the Logic Model, outputs describe what an organization gets done; e.g., “what we do” or “what we offer” and may include workshops, delivery of services, conferences, community surveys or facilitation.

Performance Driver – Measures that indicate progress against a process or behaviour. These measures are helpful in predicting the future outcome of an objective.

Performance-Based Budgeting – A performance budget is an integrated annual performance plan and budget that shows the relationship between program funding levels and expected results. It indicates that a goal or a set of goals should be achieved at a given level of spending.

Performance Gap – The “difference” between actual and target, the trend of the performance or target gap shows an organization’s momentum.

Perspective – Representing the various stakeholders, internal and external, critical to achieving an organization’s mission. Together, the perspectives provide a holistic, or balanced, framework for telling the “story of the strategy” in cause-and-effect terms. While the traditional Balanced Scorecard includes the four perspectives of Financial, Customer, Internal Process, and Employee Learning and Growth, an organization may choose to modify and/or add to these to adequately translate and describe their unique strategy.

Process Diagram – Process diagrams typically are used to represent specific processes that are undertaken in an organization and the key steps involved in the process. An example might be a high-level diagram that highlights the customer experience.

Program Assessment Rating Tool – Developed by the Office of Management and Budget within the Office of the President of the United States, the Program Assessment Rating Tool (PART) was developed to assess and improve program performance so that the federal government can achieve better results. A PART review helps identify a program’s strengths and weaknesses to inform funding and management decisions aimed at making the program more effective. The PART therefore looks at all factors that affect and reflect program performance including program purpose and design; performance measurement, evaluations, and strategic planning; program management; and program results.

Qualitative – Subjective, as opposed to quantitative (measured). A common source of qualitative metrics are surveys of customers, stakeholders or employees.

Quantitative – Measured, as opposed to qualitative (subjective). Quantitative measures often come from transactional systems.

Readiness Scorecard – A specific application of a scorecard, a readiness scorecard can be used to evaluate an organization’s state of readiness/acceptance of a given strategy.

Reports – Typically show the details of performance for a metric or multiple metrics. Reports are often used to drill down to the root cause of performance issues.

Scorecard – A scorecard is a visual display of the most important information needed to achieve one or more objectives, consolidated and arranged on a single screen so the information can be monitored at a glance. Unlike dashboards that display actual values of metrics, scorecards typically display the gap between actual and target values for a smaller number of key performance indicators.

Six Sigma – A quality management and process improvement methodology particularly well suited to process intensive industries like manufacturing. Six Sigma measures a given process by its average performance and the standard deviation (or variation) of this performance, aiming to reduce the occurrence of defects in a given process to a level of “Six Sigma” outside the norm; no more than 3.4 times per million.

Strategic Management System – Describes the use of the Balanced Scorecard in aligning an organization’s short‐term actions with strategy. Often accomplished by cascading the Balanced Scorecard to all levels of the organization, aligning budgets and business plans to strategy, and using the Scorecard as a feedback and learning mechanism.

Strategy – Strategy is the way an organization seeks to achieve its vision and mission. It is a forward-looking statement about an organization’s planned use of resources and deployment capabilities. Strategy becomes real when it is associated with: 1) a concrete set of goals and objectives; and 2) a method involving people, resources and processes.

Strategy Map – A specific version of a strategy plan that adheres to the Balanced Scorecard methodology. Strategy maps depict objectives in multiple perspectives with corresponding cause and effect linkages.

Strategy Plan – A visual representation of an organization’s strategy and the objectives that must be met to effectively reach its mission. A strategy plan can be used to communicate, motivate and align the organization to ensure successful execution.

Target – A target is the defining standard of success, to be achieved over a specified time period, for the key performance indicators associated with a particular strategic objective. Providing context to make results meaningful, targets represent the organization’s “stretch goals.”

Task – Represents details activities or tasks to be carried out to achieve each initiative. It captures information like resources, time , constraints, risk, budgets, milestone, duration to complete the tasks.

Theme – Descriptive statement representing a major component of a strategy, as articulated at the highest level in the Vision. Most strategies can be represented in three to five themes. Themes are most often drawn from an organization’s internal processes or the customer value proposition, but may also be drawn from key financial goals. The key is that themes represent vertically linked groupings of objectives across several scorecard perspectives (at a minimum, Customer and Internal). Themes are often stated as catchy phrases that are easy for the organization to remember and internalize. For example: Operational Excellence or Customer Intimacy or Strategic Partnering.

Threshold – A means of describing and/or depicting the performance gap in easily understandable terms. Examples of threshold methods include “letter-grade” (A/B/C/D/F) and “traffic-light” (green/yellow/red). Values – Representing an organization’s deeply-held and enduring beliefs, an organization’s values openly declare how it expects everyone to behave and are often embedded in its vision.

Value Chain – The process steps by which a company moves from the identification of its customer needs to customer fulfilment.

Value Proposition – Describes how an organization intends to differentiate itself in the marketplace and what particular value it will deliver to customers. Many organizations choose one of three “value disciplines” operational excellence, product leadership, or customer intimacy.

Vision – A concise statement defining an organization’s long-term direction, the vision is a summary statement of what the organization ultimately intends to become five, 10 or even 15 years into the future. It is the organization’s long-term “dream,” what it constantly strives to achieve. A powerful vision provides everyone in the organization with a shared mental framework that helps give shape to its abstract future.

Lead and Lag Indicators. What are Leading and Lagging Indicators?

 Leading and lagging indicators are two types of measurements used when assessing performance in a business or organisation. A leading indicator is a predictive measurement, for example; the percentage of people wearing hard hats on a building site is a leading safety indicator. A lagging indicator is an output measurement, for example; the number of accidents on a building site is a lagging safety indicator. The difference between the two is a leading indicator can influence change and a lagging indicator can only record what has happened. 

All too often we concentrate on measuring results, outputs and outcomes. Why? Because they are easy to measure and they are accurate. If we want to know how many sales have been made this month, we simply count them. If we want to know how many accidents have occurred on the factory floor, we consult the accident log. These are lag indicators. They are an after-the-event measurement, essential for charting progress but useless when attempting to influence the future.

To influence the future, a different type of measurement is required, one that is predictive rather than a result. For example, if we want to increase sales, a predictive measure could be to make more sales calls or run more marketing campaigns. If we wanted to decrease accidents on the factory floor we could make safety training mandatory for all employees or force them to wear hard-hats at all times. Measuring these activities provides us with a set of lead indicators. They are in-process measures and are predictive.

Lead indicators are always more difficult to determine than lag indicators. They are predictive and therefore do not provide a guarantee of success. This not only makes it difficult to decide which lead indicators to use, it also tends to cause heated debate as to the validity of the measure at all. To fuel the debate further, lead indicators frequently require an investment to implement an initiative prior to a result being seen by a lag indicator.

What has become clear over years of research is that a combination of lead and lag indicators result in enhanced business performance overall. To provide a couple of specific examples; “satisfied and motivated employees” is a (well-proven) lead Indicator of “customer satisfaction”. “High-performing processes” (e.g. to 6 Sigma levels) is a good lead indicator for “cost efficiency”. When developing a business performance management strategy, it is always good practice to use a combination of lead and lag indicators. The reason for this is obvious; a lag indicator without a lead indicator will give no indication as to how a result will be achieved and provide no early warnings about tracking towards a strategic goal.

Equally important however, a lead indicator without a lag indicator may make you feel good about keeping busy with a lot of activities but it will not provide confirmation that a business result has been achieved. In much the same way a Balanced Scorecard requires a ‘balance’ of measures across organisational disciplines, so a ‘balance’ of lead and lag indicators are required to ensure the right activities are in place to ensure the right outcomes.

There is a cause and effect chain between lead and lag indicators, both are important when selecting measures to track toward your business goals. Traditionally we tend to settle for lag indicators, however, do not underestimate the importance of lead indicators.

Examples of Lead and Lag Measures

The following table provides some examples of lead and lag indicators used in the production of a typical business scorecard.

“Scoreboard has greatly streamlined manual data collection, and our KPIs are much more readily accessible than before. I am amazed by the speed to implement the tool, and support from Intrafocus is excellent.”

Roland Schmid, Associate Director, Biogen Idec

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