Measuring what matters: Implementing effective business metrics

In contrast, we have Goodhart’s Law: ‘An obsession with the numbers can sink your strategy. When a measure becomes a target, it ceases to be a good measure’. This article will give me an opportunity to demystify what to measure, how and why, so that the measures drive effectiveness in the workplace. To do this, we’ll cover a four step system for implementing effective business metrics:

• The Process Model – Understanding the key measures of Safety, Quality, Delivery, Cost, and Morale/People (SQDCP) that result from converting inputs to outputs.
• The Hierarchy of Measures – Aligning metrics from the strategic level down to process level, including Key Strategic Indicators, Key Management Indicators, Key Performance Indicators, and Key Activity Indicators.
• The Interval of Control – Determining the appropriate timeframe to review and act on metrics at each level, from hourly/daily at the process level up to monthly at the strategic level.
• Visual Management – Bringing the metrics to life through visual displays and daily team huddles to review performance and take corrective actions.

By following this four step system of the Process Model, Hierarchy of Measures, Interval of Control, and Visual Management, businesses can implement a comprehensive and effective approach to measuring what truly matters for driving performance.

The Process Model

A good place to start is the Process Model. In this, inputs of Man, Material and Machine are converted into output through a suitable Method, and the effect can be measured in terms of Safety, Quality, Delivery, Cost and Morale/People (SQDCP).

The key point is that these measures are mutually exclusive and balanced to a degree. Of course, they can affect each other. For example, quality problems can cause the following problems:

• Increase cost
• Delay delivery
• Increase safety risks if people are rushing

However, when looking to make improvements, they can be analysed separately. Other additional measures at the business level are Growth and Customer Experience.

The Hierarchy of Measures

The second consideration is the level of the measurement, whether process, department or business level.

Starting at the top, the Key Strategic Indicators (KSIs) will often be what moves the business ahead of the competition. Examples might be the speed of introducing a new product to market, or to have leading-edge product performance.

Next down is the Key Management Indicators (KMIs), which are the typical measures that would be reported to the board. Examples would include financial performance, growth, and customer service; this would also reflect SQDCP.

Next, we have Key Performance Indicators (KPIs), which are at the process level. If a facility has numerous production areas and departments, each will have their suite KPIs aligned to SQDCP. Examples would be accidents and near misses, quality right first time, delivery performance, productivity, and Overall Equipment Effectiveness (OEE).

As measures get closer to the process, they demonstrate the link between cause and effect more closely. This helps with problem solving because issues can more readily be pinpointed to something specific, which in turn helps root cause analysis and developing a robust fix.

Next, we have Key Activity Indicators (KAIs). KAIs are particularly powerful for performance and culture because they directly influence behaviours. They often relate to the inputs that influence outputs we desire.

An example here would be by completing risk assessments and safety checks (the KAIs), there should be a positive impact on accident rates (the KPI). This type of relationship is also referred to as Leading and Lagging indicators, and you continue to see the lead -lag relationship throughout the hierarchy; the higher up, the more it lags.

Finally, at the bottom of the hierarchy we have the ‘Sea of Indicators’. These may be legacy metrics that are no longer used, but nobody ever said to stop collecting them! Reviewing and removing these can often give people back time in their already busy days.

All these names and levels may add to confusion. In fact, most people default to KPIs, which is fine if these principles are understood. Something to be aware of is the further up the hierarchy, the slower the ‘needle’ moves.

The Interval of Control

The third consideration is the interval of control. In simpler terms, how frequently should the measure be reviewed and acted upon? This has a link with the hierarchy, as the lower down the level of measure, the shorter the interval of control should be.

If we apply this to a production facility, hourly or daily reviews would take place to confirm plans are met. If not, analysis would follow in order to identify the point of cause, then root cause and countermeasures can be agreed.

If we only reviewed these weekly, much of the memory and evidence would be lost and problem solving breaks down to guesswork. KMIs, however, would typically be reviewed monthly, reflecting the business or accounting reporting cycle. If we choose the wrong interval of control, we either no longer remember what led to a problem, or we are constantly bothering people while they are trying to get their work done.

Visual Management

Visual Management brings the measures to life. Ideally, it will be part of a Daily Management System on the shop floor, or an Obeya (Japanese for big room) for progress on strategic plans in support areas.

The best results come from relevant cross-functional teams of supervisors, managers, or directors holding a stand-up meeting to review performance against plan and reach a consensus of what, if any, corrective action is needed. Where recovery action is necessary, actions should be agreed with clear ownership and timelines.

Are you implementing these crucial steps?

When visiting successful businesses, there will be clear evidence of this four-step system of measurement and action. Once in place, this can empower people to play a greater part in the future success of the business. This can be a point of reflection – to what extent are these steps in place? If they are, then the system will be relevant, understood, owned, and applied.