Performance Indicators

Peter Drucker, the management guru, wrote in ‘Management: Tasks, Responsibilities, Practices’, “Work implies not only that somebody is supposed to do the job, but also accountability, a deadline and, finally, the measurement of results —that is, feedback from results on the work and on the planning process itself.”

Measuring results or outcomes is a fundamental concept in managing performance, whether it is of an individual or a team. Effective managers define performance clearly and are explicit on what great, good, average or poor performance is, with the help of metrics. These metrics are usually called Key Performance Indicators (KPIs) and they help us understand what is important to the company and how our work will be measured and rewarded. Relevant KPI metrics help us learn where we are, how much farther we have to go, and frequently, where we are headed. These are crucial to organizations seeking to constantly learn from their own operations and the feedback they receive from others.

There are essentially two categories of indicators:

• Lag Indicators. These are sets of data that are collected after the fact or “post facto”. They tell us about what has already occurred and are instrumental in letting us know how we have performed up to now and where we are today. These indicators help us understand where we excel and where we need to improve. They help us validate the strategies we have implemented. Where trends are identifiable, they can help us chart future courses of action too. Examples are Accident log, Defects log, Revenue growth in the last 4 Quarters, Customer Satisfaction Ratings, employee satisfaction, employee attrition and Quality ratings.
• Lead Indicators. These are sets of data that are collected “in process”. They are only predictive and thus do not provide a guarantee of success. These indicators suggest (in strong or weak ways) what the future holds. Since it is sometimes difficult to know which Lead Indicators to use when making decisions or how valid they are, they can cause much debate. Examples are number of press articles (about an upcoming event), number of favourable reviews (about a product to be launched), political stability (in a place we want to invest in), state of the economy (to predict purchasing power), public sentiment (to predict future laws on outsourcing, for example), size of deal pipeline (to know how much to scale up), employee satisfaction (to understand near-future employee attrition) and emerging technologies (to know imminent capabilities).

Defining the right KPIs is critical to shaping your company’s culture. Focusing on only “the numbers” has led to “winning at all costs” environments where employees look out for only themselves, cut corners and even commit crimes. This is why many organizations now measure both hard performance targets (“the what”) as well as behaviour (“the how”). So, if you want to encourage and reward risk-taking, strategic thinking, creativity or collaboration, ensure the KPIs you have defined for your team include these behaviours too.

In a future post, I shall ruminate on the challenges of defining the right KPIs and how data without adequate context can lead us to make regrettable decisions. I wish you a very good ’22.