Key Performance Indicators (KPIs) are a way to give business leaders insight into the health and performance of their departments and teams. Ideally, the business has articulated a strategy and goals, and the leaders want to ensure that the components are working in harmony to pursue those goals. In the modern workplace many of the operations are complex and measurement can be difficult, subjective, or both. KPIs are designed to be objective, measurable, and repeatable. A good mix of KPIs can help executives to create business dashboards that can disclose trends, evaluate initiatives, and signal areas of concern.
Types of KPIs
KPIs come in two distinct categories:
- Leading: These KPIs look to the future, measuring activities that will deliver business value in upcoming time periods. Examples are rate of defects during quality sampling, overtime rates, and incremental project delivery costs versus estimates.
- Lagging: These KPIs look at the past, measuring how well activities were executed and how well they supported the business goals. Examples are measurements of customer satisfaction, released product defect rates, sales execution versus targets, and most other fiscal metrics.
Both types are equally important. Lagging KPIs can be more difficult to track in small time increments, as they are usually related to larger milestones (product releases, end of fiscal quarter, etc.)
Developing effective KPIs
In developing KPIs, you need to ask:
- Whether you have the necessary data, or if not, can you obtain it at a reasonable cost?
- Are you able to set reasonable goals for success, either against historical values or versus industry practice?
- Will you know how to take action, and what action to take, if the KPIs indicate a problem?
- Should you tie incentives to improvements in particular KPIs?
- Will introducing a KPI change employee behavior in a negative way, in order to make the measurement appear more attractive?
The last question is of particular concern. Using KPIs to motivate or evaluate employees will usually change their behavior, but unintended side effects are possible. Measuring Technical Support staff on the number of cases closed per day may result in less attention to the customer and a decrease in satisfaction. Measuring software testers on defects found may produce collusion with the developers to introduce more bugs, especially if the developers are measured on time to resolution. Measuring sales staff against a fixed quota may result in sandbagging.
Simply collecting KPIs is pointless unless they are reported and acted upon. Up-to-the-minute dashboards have replaced detailed paper reports in many organizations, but designing these displays to be informative can be a real challenge. Stephen Few's book Information Dashboard Design is an excellent reference for overcoming pitfalls.
Keeping up to date
Once a particular KPI goal has been achieved and performance is stable, it may be time to augment or replace it with a different measure. Organizations that are striving for continuous improvement should be prepared to introduce new KPIs as their success and maturity warrant. Software organizations may choose to use the well-developed Capability Maturity Model (CMM) as a guide, other disciplines have or are developing similar models, such as the Project Management Maturity Model (PMMM). This is only one approach, other paths to improvement are equally valid, but would emphasize different KPIs.
Using KPIs to measure individual performance
KPIs are most helpful as an aggregate measure of organizational success. Millennials in particular may resent being reduced to a set of metrics, but most people prefer not to be judged against arbitrary targets. Having a few key performance goals can be helpful, certainly. If the job of a chicken sexer requires sexing so many chicks per hour,
output of processed chicks is a reasonable thing to measure. But as jobs become more abstract and team-oriented, KPIs should be less about individual accomplishment and more about team goals.
Great places to work
A fascinating question to track is "How happy is my team?" Research(1) shows that the happiness of employees is the best indicator for future performance, and suggests that happier people are about 12% more productive, which can add up to significant gains. Employee happiness is a leading indicator, which is valuable in an Agile organization. Happiness is a goal worth striving for, although it's not sufficient on its own. Employers and managers must also continue to create worthwhile challenges to motivate employees and to guard against complacency.
I have until tomorrow to come up with 5 KPIs for my software development team that the executive leadership team can monitor weekly. We're pretty much still at stage one of the CMM. This is not going to go well. It will be telling whether or not they accept the 'happiness metric' as part of the package.
- Happiness Metric – The Wave of the Future. The company hosting this article belongs to Jeff Sutherland, co-creator of the Scrum methodology.
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