Your KPIs should be an indicator of who you are as an operational excellence function and team. These important metrics provide guidance to employees, managers, customers, suppliers, and even shareholders about your most important goals and results. After all, by definition, a KPI is a key performance indicator.
Since KPIs change over time as you create new plans and set new goals, your KPIs also signal who you want to be in the future. If you think you should go into 2017 with the same old metrics, stop and think again.
It’s time to reflect on where you’ve been and where you’re going, factoring in business and market conditions, and looking for ways to capitalize on both continuous improvement and disruptive changes. Your KPIs must align with, support, and drive your OpEx and overall organizational vision.
Just as you set other SMART goals throughout the organization, you need to create KPIs that are challenging but achievable as you plan for the future.
What gets measured, gets done.
It’s important to remember that what gets measured gets done. If you can’t find an effective way to measure something, you don’t have a way of verifying that improvements are occurring. Perhaps even more importantly, without effective metrics in place, people across the organization don’t have the feedback to know if they are on the right track or need to make corrections.
In a high-performance organization, people will work very hard to achieve specific goals that are set before them. They will be motivated by progress they see as these metrics improve. KPIs may be formally tied to compensation, be rewarded with social recognition, or simply be in place for teams to strive for as personal bests.
If you pick a metric that sounds reasonable but is not exactly what you truly need to achieve, people will still try to deliver to meet that metric. Remember: What gets measured gets done. This slight misalignment can sometimes lead to very dysfunctional behavior.
Picking the right metric is important to ensure the results you want.
Should KPIs be based on activities or outcomes?
This question does not yield an “it depends” or either/or answer; good KPIs are a balance of both activities and outcomes. As an example, an activity-based metric might be the number of projects completed, while the associated outcome-based metric might be the cost savings from those projects. The two go hand in hand.
Activity metrics' benefits:
- They identify and drive the specific actions that must occur in order to make the desired results happen.
- They provide early opportunities to reinforce employees for progress toward the vision even though results may lag.
- They give management and workers early indicators of how well—or how poorly—the plan is being executed so that course corrections can be made long before results are in.
Outcome metrics' benefits:
- Outcomes are often more easily tied to quantified organizational results, making them easier for managers and employees to understand their alignment with the overall organization.
- Outcomes can frequently be dollarized, as revenue, cost, assets, etc. Money talks.
Metric alligators waiting to bite...
When setting KPIs for operational excellence, it’s easy to fall into traps of creating inappropriate metrics that will bite you later. Consider these scenarios:
1. Whack-a-mole metrics
Despite best intentions, a quality goal to deliver a “right the first time” product drives so much additional planning, testing, and work-in-process waste that overall delivery and cost performance declines. Conversely, increasing the focus on delivery or cost leads to declining quality.
2. Misaligned metrics
The operational areas of the business set last-minute goals as they negotiate next year’s deliverables, but OpEx is setting its goals using its OpEx vision aligned with now outdated operational plans.
3. Soft targets
Since OpEx is often seen as the people side of the business, OpEx goals frequently involve areas of employee satisfaction, culture, and other “hard-to-measure” areas. To be effective, goals in these areas can’t be just “feel-good” sentiments, but must be able to be quantified and monitored on an ongoing basis.
4. Imbalance on activities and outcomes
Too much focus on behaviors can drive employees to look for frequent "attaboys" without thinking about results. Too much focus on results can lead people to take shortcuts or adopt an “ends justify means” approach to goal achievement.
5. Built-in punishment
Imagine a system set up with a metric of “average days for project completion.” That may work for projects that are similar in complexity and flowing smoothly. But completion of an important but difficult project that has appropriately taken much longer will make this metric show a decline in performance upon completion rather than the uptick the work deserves.
6. Mountains of metrics
Creative OpEx practitioners know that they can find a way to measure anything…and they do. However, KPIs must be the key That means only one to three KPIs for each strategic objective.
7. A mountainous metric
In striving to get the perfect KPI for a strategic objective, a complex and artificial weighted aggregate of lower level objectives may be rolled up, resulting in something that no one owns or can even understand.
Convenient truths about OpEx metrics
The general function of an OpEx organization is to create a sustainable competitive advantage through superior operations management. If the right vision is set and has aligned strategies, appropriate KPIs will be critical in driving those strategies.
Establish and test your KPIs with input not only from the OpEx team, but also from business functional stakeholders. Use a vertical slice to ensure that the metrics at the highest, aggregated levels both align with actions across the organization and can be easily understood.
Communications about OpEx performance are going to center on your KPIs, so be sure they are clear, concise, and effective.
The metric-setting process deserves concentrated focus and adequate time, but it doesn’t have to be difficult. Use the process expertise that resides in your OpEx organization to drive a stellar KPI-setting process. A standard work approach to setting metrics can deliver a simple and effective process.
Your OpEx strategy must clarify exactly what needs to happen in order for the OpEx function to progress against its vision and make your business successful. In parallel, your OpEx KPIs must support that strategy. In today’s digital world of rapidly changing opportunities with disruption in both technologies and operational models, your business is likely to be highly transformational. To be effective, your KPIs must be living, breathing, and evolving in lockstep…or a step ahead.