Chapter 8 Measures, Metrics, KPIs, and Fundamentals of …campusconnect.infosys.com/homedownloads/BI_old/KPI... · · 2015-06-10measurement also has a key role in sampling, accuracy,

“Fundamentals of Business Analytics”

RN Prasad and Seema Acharya

Copyright 2011 Wiley India Pvt. Ltd. All rights reserved.

Chapter 8

Measures, Metrics, KPIs, and

Performance Management

Learning Objectives and Learning Outcomes

Learning Objectives Learning Outcomes

Measures, Metrics, KPIs and Performance

Management

1. To introduce terminology associated with

measurement

2. Need for a system of measurement

3. Characteristics of measures

4. Process used for defining good measures

5. Relationship of these measures to individuals/

teams/departments and the entire company

(a) Ability to explain the role of

Metrics in the

Business/Functions

performance management

and decision making

(b) Ability to identify Metrics

and Indicators in a given

business scenario

(c) Ability to model a business

scenario, identify the

metrics, indicators and

make recommendations to

achieve the business goal




Session Plan

Lecture time : 90 minutes approx.

Q/A : 15 minutes




Agenda

• Measurement system terminology

• Salient attributes of a good metric

• SMART test for ensuring metric relevance to business

• Supply chain associated with the metric

• Fact-based decision making and KPIs

• Few sample KPIs used by Human Resource (HR) division

• Mapping metrics to business phases




Measurement System Terminology

Data – It is a collection of facts which have similar attributes or characteristics.

“Phone number” is a named collection of, say, mobile phone numbers of your friends.

Measure – Data with associated unit of measure (UOM) is typically termed as measure.

“Lab hours per month” has a numeric data associated with “time duration”.

Metric – It is a system of measures based on standard UOM with a business context. The term

business metric also refers to the same.

“Product defect rate” by city is an example of measuring “what percentage of goods

was returned by customers in different cities”.

.

Indicator – It is a business metric used to track business results or success/performance.

“Call drop frequency” for mobile phone users is an indicator of user dissatisfaction.

Index – It consists of a composite set of indicators used to address the overall health of business

operations.

“Customer satisfaction index” measured on a scale of 1 to 5.




Measurement System Terminology

A metric data when properly defined includes four components:

• Subject – This measure is about a customer, a product, a supplier, an

employee, etc.

• Quantum – It is the value of the measure, such as cost, frequency,

duration, amount, etc.

• Stratum – It is the grouping consideration expressed like By Location, By

Quarter, By Customer, etc.

• Application – Value compared with similar measurements like previous

month, forecast, target, etc.




Few Salient Attributes of a Good Metric

Metric Attribute Remarks Example

Name Metric should be assigned a simple, easy-

to-remember name. Do not include codes,

long words, and unit of measure.

1. eLearning Training Days

2. Average Lines of Code

Abbreviation Short form used inside the organization. eTD/ ALOC in above cases.

Description Provide explanation to help users

understand more contexts and comprehend

the metric unambiguously.

eLearning Days – Total number of full-time

days equivalent spent in training using

online course delivery system. Users may

log-in any number of times and duration of

each session is captured in minutes.

Unit of Measure

(For data capture)

The commonly measured base unit needs to

be included.

In the eLearning example, the unit is

“Minutes”.

Scale Commonly reported granularity of unit of

measure. We need to capture the conversion

formula. Simple multiples like 1000 (K) or

M (Million) are commonly used.

In the eLearning example as the data

storage granularity is “Days”, the scale is

“minutes/(60 * 8)” assuming 8 hours is a

standard training day.

Metric Owner Position/department responsible and

accountable for the metric

The training support manager in the training

department could be an owner.




SMART Test for Ensuring Metric Relevance to Business

Test Test Focus

Specific Metric is clearly defined, articulated, and understood by all

stakeholders, and is triggering action.

Measurable Someone in the organization must have the ability/instrumentation to

accurately, easily and regularly measure the actual value at reasonable

cost and technology. Think if a clinical thermometer would cost USD

1000!!

Attainable There will be no metric without target. This target may be stretched but

must be attainable with the current level of people efforts and

processes. Speed by cycle can’t be enhanced to 300 kmph no matter

whatever be the technology used!

Result-

oriented

The metric must motivate team members performing the work. In

businesses results are crucial.

Time-bound All actual values of metrics should be traceable to the date/time when

the actual value measurement was taken. The instrument used for

measurement also has a key role in sampling, accuracy, speed and

correctness that can be verified in other ways.




Supply Chain Associated with Metrics

Component of Measurement Supply Chain Contribution

Entities to be measured Includes employee, vendor, product, customer,

asset, expense category, sales promotion, service

feedback…

Instrumentation Measurement data, data capture and storage in

raw form

Raw material Reference data, definitions, benchmarks, limits …

Sub-assemblies Measures with unit, format, storage structure,

archives…

Product Business metrics approved, communicated and

measured, verified and analyzed with rigor

Metrics Delivery Reports, dashboards, scoreboards, alerts, Flash

updates




Supply Chain Associated with Metrics

Component of Measurement Supply Chain Contribution

Business Activity Areas

(Decisions/Actions)

Plan review, tracking project progress,

sales campaign analysis, profit

forecast

Business Application Budget control, quality improvement,

innovation projects

Business Value Business results meeting and

exceeding plan




Fact Based Decision Making and KPIs

KPIs are objective, measurable attributes of business performance, which

assist in informed decision-making.

KPIs should be:

– Relevance and functionality – The KPIs chosen should be directly related to

business results that the company is trying to produce in the specific business

function. Like, your body temperature measurement can only indicate whether

you have fever or not, but can say nothing about your blood pressure!

– Understandable – Chosen KPIs must be defined unambiguously. A KPI needs to

be understood in one and only one way by all stakeholders. It must be

documented, and its definition must be easily accessible to all users.

– Reliability and Credibility – The value of KPIs needs to be authentic and

should be validated as “trusted” or “dependable”. Someone is going to base an

important decision on the chosen metric. Adequate checks are needed to declare

data as trustworthy. This also means that the data must represent the “single

version of truth”.

– Abuse-proof – An abuse-proof measure is unlikely to be used against intended

purpose or individual(s) involved in the measurement process.




Few Sample KPIs Used by the Human Resources Division

• Average time to recruit.

• Average open time of job positions.

• No. of responses to open job positions.

• No. of interviews to fill up open job positions.

• No. of offers that were made.

• No. of responses to the offers made.

• % of vacancies that were filled within x time.

• % of new employees that remained after x time.

• % of new employee satisfaction rate.




Answer a Quick Question

How would you aggregate KPIs for selecting sports teams for tournaments

at college, state, regional, national and international levels?




Answer a Quick Question

You are the owner of a retail chain. You wish to enhance the productivity

of your store’s employees. What metrics will you define to achieve this

objective?




Mapping Metrics to Business Phases




Ask a few participants of the learning program to summarize the lecture.

Summary please…




Documents

Chapter 8 Measures, Metrics, KPIs, and Fundamentals of …campusconnect.infosys.com/homedownloads/BI_old/KPI... · · 2015-06-10measurement also has a key role in sampling, accuracy,