Defining and Using Key Performance Drivers

Originally published June 17, 2009

During times of economic uncertainty, it is important to ensure business effectiveness and efficiency. This requires the continuous improvement of operational performance across all key business processes. Before improvements can be made, all decision makers need a comprehensive understanding of current performance as well as the leverage points that can be used to positively impact future performance.

Those leverage points can be best found by monitoring and analyzing performance metrics that are actionable and have a direct relationship to the company’s strategies and desired business results.

Performance Metric Categories

There are two fundamental types of metrics that can be used to measure performance:
  1. The most familiar performance metric is a key performance indicator (KPI) that normally aligns with a corporate strategy or initiative and measures the progress toward achieving that strategy. As it is a measure of progress, it is an outcome; and although it provides useful information, it is generally not actionable without additional, supporting information.

  2. Another type of performance metric is a key performance driver (KPD) that will generally be:
  • A leading indicator or early warning that a situation exists that if not addressed will lead to a poor result – for example, customer satisfaction as a leading indicator of customer retention;

  • A performance metric that is associated with a preceding step in a value stream – for example, if the KPI is on-time-in-full shipments, then a performance driver may be manufacturing lead time, which impacts the flexibility of responding to customer orders; or

  • A metric that contributes directly to a KPI and may be a component in the way the KPI is calculated – for example, a gross margin KPI could be calculated as sales units times list price less discounts less cost-of-good-sold, and hence each of these components contributes to and is a driver of gross margin.
By definition, KPD metrics measure aspects of the business process or value stream that directly affect results or outcomes. If KPDs are actionable and monitored in a timely manner, they can be used to make operational decisions and drive actions that can positively impact business outcomes in the current reporting period.

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Figure 1: Example of the Key Performance Driver (KPD) Relationship Between Leading Indicators and KPI Metrics

To be truly actionable a KPD metric should be:
  • Assigned to an owner;

  • Measured against a goal or best practice;

  • Monitored frequently so that issues can be identified and corrected quickly.
Ownership of a particular KPD can be cascaded down to multiple owners, each of whom has responsibility for some sub-segment or aspect of the KPD. For example, if the KPD was cost of goods sold (COGS), then this could be segmented and have an owner for each product line or for each manufacturing facility.

Knowing when to take action is important, which is why KPDs should be measured against goals or best practices. These goals could be based on industry norms, historical values or a desired future state. A KPD owner should be able to quickly identify when a KPD is outside the normal operating range, or proactively receive an emailed alert notification.

Finally, the update frequency of each KPD will vary based on the optimal latency of each metric to support sound operational decisions. Waiting too long to receive an update means there will be a delayed reaction to an issue. Monitoring a KPD too frequently can also be an issue as it may mean reacting to noise that should be within reasonable tolerance limits.

Using KPDs to Analyze and Optimize Operational Performance

Once the key performance drivers have been identified and are being monitored, we need to use them to make sound operational decisions. Looking at a single value for a KPD is generally not sufficient to make a decision. By comparing the value to a goal or best practice, we can immediately determine if we are within normal operating parameters, but it doesn’t directly lead to understanding what action will correct an issue.

To better understand what is happening, we may want to look at trends over time, or period over period comparisons, to determine if there has been a gradual decline in performance or a more abrupt change that might signify a significant event such as a failure that occurred in the environment. To take the trending further, we may want to see a forward projection based on the trend (with associated error ranges) to determine if we are seeing a single abnormality or a systemic issue that will affect future results.


Figure 2: (mouse over image to enlarge)

Figure 2: Example of Packaged Software Solution that Links Key Performance Drivers and Overall Trends (Sample Illustration Courtesy of myDials.com)

There may be multiple corrective actions that could be taken. In the real world, it is generally not a good idea to make too many changes simultaneously as that makes it very difficult to determine cause and effect. Ideally, we would apply a single change or perhaps a small number of changes and monitor the impact before taking further action. This means that we should identify the change that will have the largest positive effect before taking action. One mechanism for achieving this is to perform several “what if” scenario analyses to derive the expected results and then select the scenario with the best outcome.

Summary

Optimizing operational performance is critical to business success. In order to do so, the metrics related to operational performance need to be continuously monitored to identify performance issues or situations that will lead to performance issues. Once a situation has been identified, it must be quickly diagnosed and corrective action taken.

Using standard metrics tied to strategic outcomes is not sufficient for optimizing performance. These may be lagging indicators and may only tell us whether we met goals historically. To positively affect those outcomes, actionable key performance indicators (KPIs) and key performance drivers (KPD metrics) must be frequently monitored and analyzed to support sound operational decisions.

  • John ColbertJohn Colbert
    John, Vice President of Research and Analysis at BPM Partners, is responsible for market trend analysis, services development and technology vendor relationships at BPM Partners, the leading independent authority on business performance management (BPM) solutions. Prior to BPM Partners, John was Senior Director, Product Marketing at Hyperion Software, responsible for directing Hyperion's OLAP Business Analysis financial software products. Earlier in his career, John was an end user of performance management solutions while a product manager at Raychem Corporation, a Fortune 500 company that has since been acquired by Tyco. John has contributed to many publications including the New York Times, BPM Magazine, Information Week, Business Finance and eWeek, and he is a regular presenter at performance management related conferences and web seminars.

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