Traditional performance measurements focus on financial results and outcome. They reflect on results at the end of a time period. They are called “lagging indicators.” For example, common financial metrics include revenue growth, net income and margin. Customer satisfaction metrics include the number of complaints and satisfaction rating. These measurements are outcome-oriented.
When results are below expectations, you perform an autopsy to figure out what went wrong. If the results are customer impacting, the unhappy customers might have moved their business to your competition already.
Wouldn’t you like to have an early warning system that alerts you about an impending problem? This provides the opportunity to take proactive measures to steer you back in the right direction, turning around a potentially negative situation.
The right performance metrics give you insight on progress of critical activities that drive results. These metrics are called “process metrics”, or “leading indicators.” They also provide useful information on sources of problems.
Follow these steps to determine what leading indicators to use:
- Identify the end goal;
- Determine the key activities you perform to deliver the end goal;
- Understand the processes involved for the activities;
- Develop metrics that correlate to the effectiveness of these processes.
For example, you want to migrate your customers to electronic payment because it saves customers time. They could make their payment any time and any where. It also reduces the payment processing costs for the company. Let’s walk through the four steps:
- End goal – migrate customers to electronic payment
- Key activities – communicate the option and provide support to customers
- Processes – communication process and customer support process
- Metrics –
- Communication process – measure the effectiveness of the communication approaches. Metrics include site traffic for electronic payment information, direct signup, number of emails received, number of calls to customer support desk, conversion ratio;
- Customer support process – measure the conversion rate on customer inquiries.
You could monitor these metrics daily or weekly and determine what works well. Subsequently, you focus on the approach that is most effective.
The traditional measure for the above example would be the number of customers signed up for electronic payment. This metric gives no indication whether you have the right strategy to convert the customers. You would still use it as an outcome measure. However, the additional leading indicators provide insight on what your success or failure is attributable to. With this information, you can tailor your activities to improve the results.
The right metrics help you focus your energy on what makes a difference in achieving the business goals, invoke the desirable response from your customers and appropriate behaviour of your employees. Inappropriate metrics lead you to incorrect conclusions and mislead you down a path that could result in:
- Wasted valuable resources and time;
- Steer you away from your strategy and goals; and
- Delays in rectifying poor results.
It takes effort to identify what the proper leading indicators should be. They require a sound understanding of your business. The key is to focus on what matters to achieving the end results. Measure the pertinent activities that are critical to success. The true benefit is that you have the information to pinpoint problems and make timely adjustments.
By using performance metrics as a strategic tool, you gain new perspectives on operational excellence and raise the bar for performance.