In this economic, fiscal crisis it is critical that organizations understand what drives their success and how to measure it. Performance metrics tell us how good we are at doing what we do and help us reach goals on time and on budget. But in order for them to be truly effective; they must be fully understood and properly applied.
In this economic, fiscal crisis it is critical that organizations understand what drives their success and how to measure it. Performance metrics tell us how good we are at doing what we do and help us reach goals on time and on budget. But in order for them to be truly effective; they must be fully understood and properly applied.
For example, server availability is a very common measurement for IT departments. But what does 99.999% server uptime mean? If you have multiple servers running in a redundant cluster or server farm, chances are your servers will be available 100% of the time.
But what good is an email server that is up 100% of the time if the email application itself is sporadic or if a customer is not receiving all of their mail or if transactions are taking too long to process? In this example, the metric is not set up from a customer point of view, but instead from a technical point of view. And thus that metric is not fully understood and adds little value. This article discusses the different types of measurements and how to develop simple, unique metrics that drive organizational success.
A performance metric is a type of measurement used to quantify the performance of some component of an organization. There are three types of performance measures: key result indicators, performance indicators, and key performance indicators. Key result indicators (KRIs) are typically long term measures (monthly, quarterly, yearly) which represent how your organization is doing, and are the results of your organization's actions. They are often used by executive management. Performance indicators (PIs) are the most common measurements, which are measured more frequently (weekly, daily or hourly), and often tell you what needs to be done. They are often used by middle management and staff, because they give valuable information of operations and give business unit management and staff an understanding of what actions need to be taken. Key performance indicators (KPIs) are the measures that focus on the most critical performance areas within your organization. KPIs reflect strategic value drivers and dictate the success of your organization, while metrics represent anything that is measurable. A KPI is a metric, but a metric is not always a KPI. An organization will typically have many result indicators and performance indicators, but few KPIs.
A question many people have when developing metrics is simply "How do I know what to measure?" A good place to begin is by researching industry standard metrics. Industry standard metrics are valuable measurements that are common within an industry. They allow organizations to compare their performance to other organizations with similar service offerings. While industry standard metrics are a good place to begin, every organization is different. Sometimes organizations get too focused on industry standard metrics and fail to focus on the things that make their service unique to their industry.
Other ways to know what to measure are to 1) measure what your customers say is important, 2) measure areas where there are problems you'd like to solve, and 3) measure the business objectives you are aiming to achieve.
Another effective method for creating effective metrics is the SMART test (Specific, Measurable, Actionable, Relevant, and Timely). Your metrics should be specific and assign ownership, accountability and parameters for the performance of the metric. They should be easy to measure and calculate. They should guide actionable steps to be taken if they are not met. Metrics should guide performance into the direction of the organizational mission and goals. And they should be up to date and measured on time.
A way to test if your metrics are SMART is to create a SMART table. Your first column will document the function or skill area. Next, you want to a column listing which objectives each metric supports. If the metric does not support an organizational objective it will be much less valuable and may be costly in terms of labor and focusing on the wrong things. The next column should document standards and parameters for the metrics. Other columns should document whether the metrics are agreed upon by all stakeholders, how the metric will be calculated, whether the metric is validated, realistic and easy to gather, and how often the metric will be reported? If all of these questions can be answered and documented, the metric passes the SMART test.
One major challenge organizations face is identifying valuable financial metrics that are meaningful to those responsible for carrying out the work. For example, net cash flow is a critical performance measure for executives; but it probably means very little to the accounts receivable clerk who has no idea of how their contribution improves net cash flow performance.
Instead the CEO might focus on net cash flow while the CFO looks at the debt-to-equity ratio. The controller might focus on the liquidity ratio, while the accounts receivable manager looks at days sales outstanding, and the accounts receivable clerk worries about percent of collections over 30/60/90 days. By ensuring that the proper metrics are assigned to the key people measuring and driving financial performance your organization will greatly increase its chances of achieving constant growth and success.
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