How to Identify Your Metrics (Key Performance Indicators)

How to Identify Your Metrics (Key Performance Indicators)

Most businesses leaders I speak with do a pretty good job of measuring results, but they often struggle to come up with strong Metrics, aka Key Performance Indicators (KPI).

Note: I use the terms Metrics and KPIs interchangeably, but prefer to use Metrics these days in an effort to reduce the use of 3 letter acronyms.

They track things like sales revenue and orders, but these measures are the “result” or “outcome” of good performance.

Of course results and outcomes are important. We need to measure them, after all, they are what we are striving for at the end of the day. But if all your measures have a currency sign ($ € £ etc) in front of them, I recommend you dig deeper to uncover the key drivers of those results. There are some exceptions (e.g. ratios like “average $ sale per transaction”), but the most powerful Metrics are often non-financial measures.

Why?

Results are important, but you can’t manage results. What you can manage are the activity and effectiveness measures that drive those results. That’s where the most powerful Metrics are usually found.

What is a Metric (KPI)?

Unfortunately, there’s a lot of unhelpful information on the subject of Metrics (KPI) which can be confusing for business leaders.

Lead vs Lag?

Some business authors refer to Metrics (KPI) as “lead” indicators, and results/outcomes as “lag” indicators, but this is an oversimplification and not always helpful. Sometimes a metric can be both a lead and lag measure.

Linked to Strategy Execution?

Other authors say that your Metrics need to be linked to strategy execution, but I do not agree with this concept.

I tell my clients that to be an effective strategic leader you need to operate with what I call “dual vision”. I tell them that you need to have:

“One eye looking through the microscope – looking at your current business model – improving what is”

“One eye looking through the telescope – looking out to the future on the horizon – creating what will be”

Each quarter you might choose Strategic Projects or “Big Rocks” that need to be implemented by a due date. Often, these projects are “improving what is”, ie improving your current business model. But in some cases, your strategic planning may identify the need to pursue new opportunities or transition to a new business model in order to ensure your future success and survival. These projects are “creating what will be”. 

Regardless, there may be a considerable lag between the completion of a strategic project and it having a measurable impact on your metric performance. Or it may have no impact at all. In summary, Metrics (KPI) are not necessarily linked to strategy execution.

Of course, we need to track strategic progress with numbers. But we track the successful execution of your BHAG, your long-term strategy and your current strategic projects with outcome measures that I call numerical targets. We track progress toward these numerical targets on a monthly, quarterly, and annual basis. Numerical targets form the basis of our budgets, financial forecasts, and staffing forecasts.

Numerical Targets are important, but these numbers are typically not the Metrics that drive the performance of every person in their functional role on a daily basis.

OKRs?

OKRs (Objectives and Key Results) are another 3 letter acronym that confuses people. In simple terms, OKRs are projects with measurable outcomes attached. OKRs are not KPIs.

So what is a Metric then?

Metrics (KPI) are for tracking “Business As Usual”.

Metrics measure the critical success factors that drive your current business model (current operating model).

Your business model comprises the things you do every day to create leads, make sales, provide your products and services, keep your customers happy, grow cash and make profits. Let’s call this stuff “Business As Usual”.

In my experience working with small-medium businesses, the execution of your strategic projects will take up about 10% of your people’s time each quarter (and that’s in an ideal world where you carve out meaningful time for strategy execution), whereas “Business As Usual” will take 90%+ of your people’s time. Some companies don’t even have a strategic plan, but they have a business model that is currently working for them, and Business As Usual takes up 100% of their time.

Industries change. The lack of a well-crafted strategy for your future success will eventually bite you in the backside, but regardless of whether you have a strategic plan in place right now, you need to identify and track the Key Metrics that drive the success of your current business model.

How to identify your Key Metrics.

We began this article by talking about results and outcomes. To keep things simple for now, figuring out your Key Metrics starts by looking at your current business model and asking yourself the following 4 questions;

1. What are the key functional areas of our business model? (eg marketing, sales, operations, customer support, finance)

2. What result or outcome are we looking to achieve in each functional area?

You may need to ask yourself “Why?” several times to really get to the nub of the most important outcomes for each function.

Then, to identify your Key Metrics, I recommend spending the bulk of your time exploring and debating the following questions:

3. What “activities” or “actions” drive this outcome?

4. What “effectiveness” measures let us know how well these activities are being performed?

You can’t “manage” results. What you can manage are the activity and effectiveness measures that drive results. Activity and effectiveness measures are things you have the ability to manage and improve. These 2 areas are where your most powerful Metrics are likely to be found.

Each functional area of your business will have a small handful of Metrics that drive the results you seek. By handful, I recommend that clients whittle down their measures to 4 to 6 Metrics per functional area at most, and likewise for each individual role.

Critical Success Factors (Tropical Island Metrics).

Once you have identified the key Metrics for each business function, you are ready to identify the small subset of Metrics that you deem to be the “critical success factors” – the key drivers of your overall business model. I call these your “tropical island metrics”.

Imagine you are the CEO, and you are on holiday on a remote tropical island with no cellphone coverage. The only communication you can receive from your business is a once per week email that contains a small handful of numbers (4 to 6) that are color-coded red, yellow, green using the traffic light concept to inform you how well your overall organization is performing: 

– If the Metrics are “green” you can relax and go back to reading your book 

– If the Metrics are “yellow” you need to use the resort landline to ring the office to see what is going on

– If the Metrics are “red” you need to cut your holiday short and return home

What 4 to 6 Metrics would you identify as the “critical success factors” for your overall organization?

These tropical island metrics are your leadership team metrics, the critical success factors for your company that you display on your one-page strategic plan. You keep these scores visible on a software dashboard and discuss them every week in your leadership team meeting to drive accountability for performance.

Contact me if you need help to identify your Key Metrics.

Also, see these articles:

The benefits of having the right metrics

KPIs vs OKRs – what is the difference?

Metrics for roles that are hard to quantify

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Until next time…
Stephen

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