BPM Guide (Part 6): KPIs and Metrics for Effective Process Management
By Joanne Wortman Posted August 16, 2016
This is a guest series by Joanne Wortman, an independent business/technology consultant and freelance writer in the NY Metro area. She has almost two decades of experience providing business process optimization, organizational change management, M&A integration, and program management across many business sectors, with a concentration in manufacturing.
The full content of our BPM Guide is now available here.
Once you've gone through process optimization fundamentals, as per our previous article, it's time to consider the KPIs and metrics you'll need to track to ensure the project meets performance goals.
In earlier posts, we highlighted the importance of KPIs and metrics to effective process management. Although the great Peter Drucker quote “If you can't measure it, you can't manage it" has become a topic of debate among process gurus, KPIs and metrics are still the most important tools in driving tangible process improvement.
Let's start with some definitions because the two terms are sometimes confused.
- A KPI or key performance indicator is a measurable factor that provides insight into how well an organization is achieving its business goals
- A metric is the target value for a KPI. Process initiatives often define metrics by stating the current value and a target value along with a target date for achieving them
The following table gives some examples and shows how the two are related:
A process improvement initiative could use these KPIs and metrics to state its goals in the following way:
- Reduce Days Sales Outstanding from 63 to 40 by the end of Q3.
- Increase inventory turns from 5 to 8 by the end of 2017.
- Increase first call resolution of inbound customer questions from 80% to 90 percent by January 1.
Better still, state the goal as a phased metric. For example:
- Reduce Days Sales Outstanding from its current value of 65 to 60 by the end of Q1, 50 by the end of Q2 and 45 by the end of Q3.
How to Begin
There are several well-known approaches for initiating the effort to define effective KPIs and metrics, including the balanced scorecard and Kaplan and Norton's strategy maps. Balanced scorecard helps to obtain a complete set of business goals across the four important perspectives on a business: Financial, Customer, Internal Business Process, and Learning & Growth. The strategy map approach provides a framework for threading the highest-level business objectives down through each layer of an organization so that every level can play an appropriate role in driving the overall objectives.
The most important thing to avoid is an unscripted approach that catalogs a wish list of KPIs from departmental managers, since this approach may result in too long a list of KPIs to manage, KPIs that provide insufficient business value, KPIs that are not aligned with high-level business goals, and KPIs that are actually at crossed purposes.
In developing your final set of KPIs for a process initiative, keep the following scoping suggestions in mind:
As you finalize your KPIs, make sure your process improvement scope covers all of the processes that can influence each specific KPI.
Include both leading and lagging indicators in your KPIs.
- Leading indicator points toward future actions, for example, the number of open customer service inquiries is a leading indicator.
- A lagging indicator assesses past performance. For example, past month's first call resolution percentage is an indicator of past performance.
- Include KPIs that cover the quality of the process outcome and the timeliness or efficiency of process operations
Be S.M.A.R.T When you Choose Metrics
When using any methodology for defining metrics, it's best to keep the SMART model in mind:
- S - metrics should be specific and tied to business goals.
- M - metrics should be meaningful and measurable. The underlying data elements must be captured accurately and completely and the calculation must be correct. If you can't measure it or report on it from your current enterprise systems, consider the tradeoff in business value vs. manual effort or report development before including it in your list of metrics.
- A - the target values for your metric must be realistically achievable. Do the right people have the ability and authority to drive the metric toward the target value?
- R - metrics should be realistic, relevant and results-oriented. Are there identified actions that can drive the metric toward its target value?
- T - metrics need to be timely, especially if they are leading indicator metrics. Can reports be generated, or dashboards be updated in time to allow appropriate interventions to drive the metric toward its goal?
Tracking and Communicating Performance against Metrics
We have come a long way since the days of tracking business performance by reviewing a stack of paper reports for critical metrics. It used to be the responsibility of the process owner to wade through a stack of paper and find his or her meaningful metrics and use them as a support for the day's operating decisions. Modern software offers a variety of features that make it easier to intervene quickly and drive KPIs toward target metrics much more aggressively:
- User-configurable reporting periods
- User-configurable alerts when metrics reach certain set points
- Multiple options for real-time visual displays with drill-down analysis capability through levels of regional, customer, product or other hierarchies.
- Export functionality for further manipulation in Excel
- Robust role-based security. For example, the system should allow a clerical worker to see only personal performance metrics while allowing the manager to view an individual as well as departmental performance.
This functionality often exists within modern enterprise software applications. If it doesn’t, it should be part of the core feature set of your process management solution. Either way, strive for maximum flexibility and power for the end-users without the need to rely excessively on IT staff to fine-tune reports and dashboards to the process owners' needs.
Effective metrics tracking and communication is critical to business operations. It also provides vital feedback to the process improvement teams, allowing them to get a better sense of what types of process interventions work best. This will help them improve their process improvement skills with each new initiative.