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Question: Linking non-financial KPIs to bottom-line results
Our company has too many metrics in every department, and region. Some of these are in conflict with each other, and some have questionable financial value.
This year we have launched a project (led by our CFO) to clean-up and align our non-financial measurements. Aligned to overall strategy, other metrics, and long-term financial results.
This is challenging. Many of our managers are fond of their pet reporting metrics and are quite likely to pushback, especially if changes are perceived to be subjective. In many cases, even job descriptions are defined on the basis of these entrenched metrics.
Do you have any suggestions on how we can keep our work objective, and drive results?
This is an area where workout team meetings to drive alignment are needed. Figure that different managers have different perspectives regarding their needs.
(1) Choose a subset of metrics related to a few departments.
(2) Create a strawman of overall metrics that are cross functional while leaving single functional metrics to the independent departments.
(3) Go through these decisions with the team to move things back in, shape the decision, and come to alignment.
It may take more than one meeting to get this done right.
Construct work groups in key areas with key personnel to focus on the four elements above in a design group setting. This is going to get more people moving in the right direction proactively and in a collaborative manner.
Your non-financial (and financial) KPIs need to align to your business strategy, which should be the filter through which all are reviewed. I suggest doing some work around the clear understanding of your business strategy to ensure it is accurately understood throughout the organization, and then do the work of skinnying down the metrics through an exercise of strategy alignment. If you're measuring things that aren't driving your strategy, you probably need to know that.
I agree with both responses above that getting teams to do this important work can be very effective, but they need a strong framework to use in filtering the metrics.
One method is to focus on a top level metric. Say, Return on Investment. After that is clear, the idea is to build a metric tree in such a way that all the branches connect back to it. If they don't, they shouldn't be there.
A good illustration of this approach is DuPont analysis. Return on Investment depends on asset turnover and profit margin, asset turnover depends on assets and operating margin, etc. Pretty soon, you start hitting non-financial KPIs.
You can increase asset turnover by better managing inventory (kpi could be inventory turnover). This has a direct and traceable relationship to ROI. But is also has a trade-off with fill rate and material cost. So, a key element to set up value creating KPIs is to recognize trade-offs and define congruent relationships among them. You cannot have congruent relationships unless you have clearly identified owners for each KPI, as well as relevant stakeholders. This relationships can be documented using a RACI (Responsible, Accountable, Consult, Inform) matrix.
+ Use only KPIs that can be traced to a top level KPI (such as ROI)
+ Recognize trade-offs and create congruent goals
+ Clearly identify ownership and stakeholder relationships
Developing a clear objective metric that defines winning for the company is the starting point of each of the over 300 different companies I have worked with in the past 20 years. Over time I have refined the process I use. The steps currently are these three:
1) Get input on the key issues from employees, managers, customers and financial analysis of trends and variances to budget. We have tools such as our online employee surveys to do this quickly. Confidentiality is important to insure candor.
2) Conduct a working session with 4-8 members of the management team, reviewing the input from step one, then developing a group consensus on the key issues facing the company
3) Develop a metric that deals with the key issues, not for all time, but for the next 6-12 months
Too many metrics, some metrics conflict, and some metrics of questionable value... it seems a wise choice to take a look at your company's approach to metrics. The fact that some of your managers are fond of their pet reporting metrics suggests that those metrics may be aligned with departmental or divisional performance rather than enterprise performance. Therefore, the place to begin is probably a clear description of your desired enterprise performance.
One of the key components of a high-performing culture is a clearly understood linkage between people's jobs and their contribution to the overall company mission. By identifying a high-level definition of performance for the core process of value creation, for employee results, customer results, and bottom-line results, then showing how individuals contribute, companies can engage their people in making great happen.
The situation described is typical to the "Interface Problem". As the interfaces between functions were not managed properly, flow is hindered. Typical symptoms include frequent detailed coordination, or non converging activities.
There is one key process: serving clients. All KPIs need to measure those parameters that harmonically create customer satisfaction, repeat buy, etc. Thus:
- Sales and marketing look at price, color, design, features and so on, that make clients buy the offering time and again.
- Development must meet those KPIs and offer additional ones early enough to still be competitive!
- Operations must supply the offering on a timely manner, at the right cost and quality.
Key KPIs are therefore derived from client satisfaction. If a manager wants to internally develop additional KPIs it is fine as long as he meets his key KPI.
And yes, it is a cultural change and it does require buy-in from the managers involved. Buy in is accelerated as little successes are created like less coordination meetings and less understandings.
As an executive that led many corporate changes I recommend:
- beginning with small steps and creating said successes,
- have one leader who understands the full system flow and its intricacies. Normally it would be the CEO or COO.
The principle is to ensure that metrics whether tangible or non-tangible drive the process behaviors.
Aspect one is the organization MUST develop a structured and self-disciplined strategy deployment and execution process such as X Matrix or Strategy Mapping & Balanced Scorecard. These provide the structure to lead an executive team and staff through the development of strategy around the organizations purpose while limiting the focus on the Vital Few Objectives (VFO) that move the organization toward the vision. These VFO must be defined in detail so that the organization gains clarity around them, can communicatie them flawlessly to others, and rally cohesively as a community of purpose to achieve. Both of the methods mentioned permit the organization’s leadership to cascade the strategic plan, VFOs, and metrics down through the organization in a manner that promotes constructive feedback and challenges based upon the realities of the various levels of the organization. Through this process, the VFOs and metrics become operationalized and internalized to the individuals most close to the customer and process; those who own the process daily, are the process content experts, and are in tune with both the voice of customer and the process.
This deployment methodology builds the buy in, hence commitment to, hence the ownership to improve their process, hence the development of critical thinking, leadership ability, innovation from individuals…hence engagement! Engagement is the source of strategy execution. Who executes the strategy….the people within the organization.
So how we develop them, lead them, engage them, satisfy their needs and desires, etc.; they are the process experts and owners as mentioned earlier. Align them, integrate them, and serve them in their journey.
Aspect two is use of a dashboard or a balanced scorecard with only 2 -3 metrics per section. The sections focused upon financial, customer, process, and people. The cross functional (horizontally and vertically) leadership team must ensure that the metrics align to the overall VFOs and hence the overall strategy. Next, leadership must ensure that each metric is integrated with the others to create cohesive and optimized utilization of limited resources on the prioritized VFOs. Further, during this process leadership ensures that no metric is detrimental to another metric or overall objective; each metric should in some way support and enhance the other metrics, i.e. people engaged in improvement events ties to quality outcomes, improvement in safety, growth or revenue by improved equipment uptime, etc. Keep in mind that metrics drive behaviors, so this activity is vital to the organization and must be done well. One method I promote to all organizations is the use of a sustainability assessment, conduct the baseline then every six months re-evaluate. The basic assessment keys on elements such as HR, OD, change readiness, critical thinking, leadership of change, satisfaction, etc.
In summary, the metrics signal what is important to the organization and as such must align and integrate the strategy throughout the organization. Leadership must model the way by creating an environment in which their leadership example creates new experiences, new behaviors and new actions, thereby creating the desired culture. When done right, the right mix of integrated tangible and non-tangible metrics transforms the business into a high performance high commitment high reliability organization.
All businesses exist because they own and/or control an asset that can be used in a product or service that provides customers with a competitive advantage. That is, the asset somehow makes the customer's life easier or less uncertain in some way. the busy part of the business involves putting in place processes that make that asset usable to the customer, and managing the risks inherent in the business. The business survives when all this done and an excess of value of produced, otherwise known as profit, allowing the company to pay for the cost of capital, return money to investors and reinvest in its future.
All KPIs should be designed to measure the return on this asset and the competitive advantage provided to the customer.