The most important things cannot be measured

So indicators developed from measures can be more helpful, but what about the things that can't be measured so easily if at all; things like how someone feels about something. Back to my car and whilst I have a dashboard of measures and indicators, my decisions about driving are also, and more so, informed from other factors such as road conditions, weather, how the traffic is moving, perceived space from the car in front, risks, the 'feel' of the car on the road and so on. These are more than responses to measures or indicators but a complex series of judgements I make without fully understanding or being conscious of how. As Edward Deming said the most important things cannot be measured. Similarly you can't measure a relationship but you can say how it feels. This is a crucial point if we are to measure supplier performance. It is easy to focus on measuring aspects such as on time, in full or conformance to specification. Such measures may be important or necessary, but if we are seeking more value from a supplier relationship, higher up the VIPER hierarchy then we need to develop a relationship and that means we need to understand how it is working, despite not being able to directly measure it.

Whilst we cannot measure a relationship or how something feels or is working directly we can however solicit feedback about such things and, if we ask the right questions, convert feelings into some sort of measure. This, of course, is the basis for how customer surveys work.

Key performance indicators (KPIs)

A performance indicator is just that, an indicator that shows the performance of something. A KPI is an indicator that has been identified as more important or relevant than all the other indicators. KPIs exist throughout businesses and might typically be presented on some sort of scorecard. They are used as indicators of performance in many areas including performance of the organization, a specific project or individual suppliers.

A KPI scorecard typically contains both direct measures and indicators, but all called KPIs. This is normal; the point is what information is being presented and acted upon is that which is needed to guide the business. In my car, current speed is a pretty important (measure) as is 'miles until empty' (indicator). Both are key to help me drive. A measure of engine temperature is useful but an indicator that tells me to stop due to over temperature in the engine to prevent damage is essential.

Determining what is key is an important concept within performance measurement - have too many measures and the system will consume great resource but will not add value and any scorecard will become meaningless and confusing (Gordon, 2008). Too few and decision making could be impaired or outcomes could be compromised. Measurements should be relatively few in number, focused on the activities that will yield the greatest results (Cunningham and Fiume, 2003). The point of key performance indicators is therefore to identify the handful of indicators that will guide actions effectively and efficiently. Cunningham and Fiume (2003) suggest outputs should offer the most relevant information to the reader and be the ones that any employee can relate to.

KPIs should be developed as if scarcity was a key consideration; as if every KPI used comes with a high cost. This doesn't mean that only a few things should be measured, but rather is concerned with what gets presented, shared and drives action. Behind this there could be a vast array of further measures and indicators to drill down if further information is needed. Back to my car example and imagine that you could buy a new type of car that was half the price of other cars, but you had to make some compromises and one of these meant that you could only have one indicator (or measure) on the dashboard. What would you choose? Speed, gas level, miles until empty or just a big light that came on to tell you that you needed do to something, perhaps driving slower, gas was low, there was a problem with the engine. It wouldn't be the most useful of indicators, but if you could have only one then perhaps it would be a good compromise. Asking 'if we could only measure or indicate one thing... what would it be?' is a great place to start in determining KPIs as it forces us to debate what is really important. Therefore the process of developing KPIs is most effective if there is discussion and debate from those involved to challenge what is essential and resist the temptation to measure too many things.

KPIs are defined as:

The essential measures or indicators necessary ongoing to guide a business, function or individual towards a stated goal, or to provide an alert of a state that might prevent, or hinder reaching, the goal.

Service level agreements (SLAs)

It is worth touching on SLAs as these are often referred to alongside KPIs as another measurement approach. This is in fact not entirely correct, as an SLA is actually part of a contract, specifically for a service or the service aspects associated with a product. SLAs are negotiated between two or more parties, where the targets and the requirements for how services must be delivered, responsibilities, remedies and performance are defined in plain English with the intent of establishing a common understanding about expectations. Depending upon how they are written SLAs can be legally binding, with remedies or agreed courses of action for failure to meet defined targets.

A SLA is therefore not a measurement system but a means by which performance targets can be defined and formally agreed. Examples might include '80 per cent of calls to be answered within 15 seconds', 'System uptime of 99 per cent to be maintained' or '95 per cent of all emergency call outs to be attended within two hours'.

If we have identified what needs to be measured with KPIs that help to achieve our outcomes, SLAs become the guiding expression of the targets that sit behind this.

 
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