Balanced Metrics – Be sure to answer these five questions when establishing your metrics

EmFluent helps companies execute better using Line-of-Sight to measure and manage five critical capabilities necessary for successful execution (or KSEs): strategic understanding, leadership, balanced metrics, activities & structure, and human capital; it also assesses market discipline – the ability to execute in a way that remains true to the strategic intent. These factors are aggregated to form an overall Organizational Health index measured on a scale from 0 to 100.

Line-of-Sight recently surveyed more than 150 CEOs to evaluate their execution performance. When CEOs self-assessed the execution capabilities of their organization, balanced metrics received the second lowest score, with 69 points out of 100  (the lowest score was on human capital, with 67 points).

This highlights the importance and difficulty to put in place a good set of metrics to manage any business. You can only manage what you can measure, and what you measure drives people’s behavior.  In turn, employee behavior is what determines what gets done and in what priority across the organization.

Therefore, selecting metrics is of paramount importance. Here are the five questions that you need to ask and answer when implementing a new set of metrics or evaluating an existing set:

1. Do we have a mix of leading and lagging indicators?

A leading indicator is a predictive measurement. For example, the percentage of people wearing hard hats on a building site is a leading safety indicator. A lagging indicator is an output measurement. For example, the number of accidents on a building site is a lagging safety indicator. 

Leading indicators are generally more difficult to determine than lagging indicators. They require understanding the chain of causation between the metric and the event or value you measure. Leading indicators can also leverage past data to make forecasts. An example of leading indicators used in retail is the 12/12 and 3/12 rate-of-change KPIs that are used to evaluate sales trends. A balanced dashboard typically includes both leading and lagging indicators. For example, employee satisfaction, especially in service industries, is a leading indicator of customer satisfaction. Customer satisfaction in turn can be measured with lagging indicators such as NPS scores.

2. What will we do with the information?

Because an activity is easy to measure does not make it worth measuring. Is what you are measuring representative of what you really want to know? What decision will you make based on the measurement? How different will that decision be if the metric value is low vs. high? If the information is not absolutely critical, leave it aside. Less is more.

3. Is the measurement process itself impacting the data?

When the items to be measured are influenced by the process of measurement, measurement becomes less reliable. This is because people react to the measurement in ways that can distort the results. This is often the case of employee engagement surveys. On the other hand, if the metric relates to a manufacturing process or an objective outcome, it is likely to be reliable.

4. What are the costs of getting the data?

Information is not free, and its costs may not be readily apparent to those who want more of it. Collecting, processing, and analyzing data takes time, and a large part of this expense lies in the opportunity costs of the time put into developing the metrics, then managing the data collection process and its analysis.

5. Do we have the expertise to analyze the data?

Metrics are more likely to be meaningful when they are developed and analyzed with the right level of understanding of what the metric measures and what it means. This means asking those with the knowledge that comes from direct experience to provide suggestions about how to develop appropriate performance metrics, and to interpret them. If a metric requires excessive interpretation, if its meaning is ambiguous, or if proper analysis requires the participation of unique individuals whose availability is not guaranteed, this may not be the right metric.

Balanced metrics are an essential component of execution excellence, for organizations of any size. CEOs of smaller organizations may think that the size of their company allows them to manage the business without a comprehensive dashboard. But in reality, CEOs of companies of less than 150 employees rate their performance of metrics the lowest (65 points vs. 69 on average). Interestingly, CEOs of larger organizations (more than 500 employees) do barely better at 72 points.

Midsize companies between 150 and 500 employees appear to have the most effective metrics with 80 points – highlighting the balancing act that is the development of a solid, reliable set of metrics to manage their operations.