Do you manage the 3 must have’s for a company KPI metric?

Source: by Kevin Schulman, TRG iSKY

Firms spend a lot of time tracking stuff (or metrics in business lingo).

Many of these metrics are direct indicators of a firm’s financial health (e.g. cash flow, sales.) while others are proxies for it – e.g. customer satisfaction and  productivity measures.

The best proxies are those that actually predict the direct, financial metrics to varying but acceptable degrees of precision – Must Have #1.

For argument’s sake, let’s say there are bunch that do a good enough job on this score. However, to move from just a credible thermometer to actually being useful these proxies also must link to business activity (e.g. marketing, operations), which corresponds to functional areas, programs and people with responsibility for it.  Must Have #2.

Move those levers that positively influence the proxy measures and see the corresponding financial benefit to the firm. Having a proxy measure that links to financials AND business activity – i.e. a diagnostic thermometer – is a more difficult proposition than just the thermometer (Must Have #1).

As this graph shows, key business activity was tracked across 4 months showing dips in Sept 08, again in Oct 08 and a rebound in Nov. Three different proxy measures for firm financial health were also tracked – Customer Satisfaction, Net Promoter and a measure of Customer Relationship Strength called Relationship Investment. Only one of these (RI) – broken out as Personal and Functional Relationship Strength – actually tracks well with the changes seen in the business activity metrics. NPS and Satisfaction are relatively static across the same time period.
RI trendRI trend

As this next graphic suggests, the proxy measure (blue circle) is really a mediating construct between direct financial measures and firm activity – i.e. the stuff that gets done every day by employees and machines. The proxy measure as a mediating construct is more than an interesting visual. It is necessary because the firm level stuff (7P’s) falls short on two fronts: 1) it doesn’t mathematically link very well to financial metrics. 2) Even if it did, it does not represent an orderly, parsimonious set of measures that can realistically or economically be tracked as a leading indicator or KPI of firm financial health – Must Have #3.

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To recap, the Three Must Have’s of a KPI Metric

1) Deliver credibility by linking to firm financial metrics.

There really is a big difference in how well certain metrics link to financials.

2) Deliver usefulness by also linking to firm activity (e.g. sales, marketing, operations)

Delivering on the first Must Have is pretty easy compared to finding one that delivers on #1 and #2.

3) Be Parsimonious.

If it takes 10 or 20 measures to create the KPI then forget about it.

It isn’t economically feasible to track this sort of thing with enough regularity to actually serve as a leading indicator of firm (or even customer level) financial health.

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