KPI, Metrics and Measures

People have a tendency to use a word in conversation that carries a different meaning then the one intended.  You probably have experienced this yourself.  The more technical a conversation, the more important it is to use the correct terms.  This discussion centers on the terms KPI, Metrics and Measure as they pertain to Balanced Scorecards.

A Balanced Scorecard (BSC) is a tool for tracking performance of strategic business goals.  The BSC contains data points normally referred to as a KPI (Key Performance Indicator).  A CEO, or any manager, is looking at the performance points which reflect the established business goals chosen as important to the company.

Figure 1

A KPI, Key Performance Indicator, is a metric of a higher class.  This is normally the performance point that CEOs, CFOs and high-level managers want to monitor.  The KPI is an indication of how well the selected strategic goal is performing.  Companies use Balanced Scorecards as a tool for managing their strategic business goals.  Any report viewed by these managers is going to include their strategic goals and the KPIs that summarize that performance.

For example (refer to Figure 1), a strategic goal would be to increase overall sales.  To know this, information of past years must be known and compared to the current year.  The KPI would contain a +/- percentage indicating performance above or below the previous year’s sales.  However the Sales KPI is a sum of the overall sales of all products regardless of category.  The manager doesn’t know which product-line is improving.

A Metric is a combination of measures intended to quantify a system of measures.  When a metric is developed, it represents measures from various sources to create an analytical value.  This value is not something you can readily benchmark as it could be a very specific calculation.  Whether you are talking sales, customer satisfaction or even cycle time, a metric is an indication of performance for a specific topic.

A Metric from the example (Figure 1) is a combination of either insurance policies or a combination of investments.  But these all roll up into the Sales KPI and only denote which category is performing better.  The business manager for insurance is looking at performance for that business unit while feeding this data outcome to the next level up which would be the KPI.

A Measure is a measureable business attribute.  As the saying goes, “you must be able to measure it before you can manage it.”  It is easy to accurately measure how many new customers you obtain each month, but how do you measure customer satisfaction?  Without a meaningful measurement system, a customer satisfaction measure is not going to accurately indicate how well your customers perceive your company.

Individual employees will enter data (measures) into the various data collectors such as spreadsheets, custom software programs and even enterprise databases.  That data then is accumulated into various metrics which a manager is going to use to make adjustments to correct any deficiencies.  Finally the metrics flow upstream to another data collector which then calculates the KPIs.  Those appear on the CEO’s report in whatever form is used.

While debate sometimes ensues because someone may say that it’s all a matter of semantics, terms exist to indicate meaning and using a term incorrectly can give people the wrong impression. The Measure is where everything starts.  Without good measures, your measurement system will fail.  Your management system will find it difficult to make the correct adjustments and the company will suffer.

http://www.custommetricssoftware.com/