I’m helping a client set goals for their IT organisation. During one of our workshops on KPIs and metrics he commented that throughout his career, he never realised the difference between the two. This got me thinking, that prior to working at Amazon Web Services, neither did I!
Taking a deeper look at the differences between KPIs and metrics it seems that while there are crossovers, many people confuse the two (particularly their implementation). During my time at Amazon, I was fortunate enough to learn more about these mechanisms. I’ll weigh in and share my thoughts on the subject.
You get what you measure
Amazon is well known for being a data driven organisation, and measures everything. Every single thing! Just reflect on your online shopping experience for example. It’s likely that you make a purchasing decision based on the product reviews, and the effectiveness of the seller. This helps you establish trust before clicking the purchase button. Once you’ve made the purchase, you will receive a number of notifications, confirming the order, and the expected delivery date. On the day the product is due to arrive, Alexa notifies you as well. Yep, they intentionally measure every process along the way. This inspection of processes allows Amazon to continuously optimise and improve their business, and of course, delight their customers.
What’s the difference between KPIs and metrics?
In short, KPIs track whether you hit business objectives/targets, and metrics track business processes.
Dictionary definition: a KPI (key performance indicator) is a quantifiable measure used to evaluate the success of an organisation, employee, etc. in meeting objectives for performance.
In my opinion, most businesses should aim to have between five and seven KPIs. For example they can be growth related such as the number of new online subscribers in a tech start-up. Or they they can be financial such as the net profit of an established project construction company. A customer retention score of an incumbent telecom provider is an example of a service related KPI.
A KPI is strategic and should align with a business’s desired outputs. A KPIs design has a number of components including a title; current value; a desired value; a metric (or indicator) and of course a timeframe. Most importantly, a KPI needs to inspire action. This means that it needs to be controllable.
The revenue KPI
Let’s take a simple example of a KPI “to grow revenue by 30% year on year”.
Broken down it looks like this:
- Title – to grow revenue by 30% year on year
- Current value – previous year total revenue
- Target value – 30% more than previous year
- Timeframe – 12 months (year on year)
- Metric – actual revenue
- Is it controllable? – yes…with the right product mix, cost structure and marketing.
Note that this revenue growth KPI will not work on its own, and that’s why businesses have multiple KPIs. If the focus is purely on revenue, you may start ignoring your costs. Spending too much of your budget on marketing might result in more revenue but can also increase the cost per acquired customer. I like to think of this as a GPS which requires two to three different satellites to accurately pinpoint your location and allow you to navigate to your destination.
Let’s take a closer look at metrics.
Dictionary definition: Metrics are a system or standard of measurement, and in the business context, a set of figures or statistics that measure results.
Use metrics to measure the results on your business processes. For example, take a look at your operational playbooks and inspect each process from customer acquisition through to onboarding and retaining those customers. Ask yourself the following:
- How are you measuring these processes?
- Are these processes working, or do they need to be replaced?
- Where is the waste (or inefficiency)?
- Can you simplify the number of touch points a customer needs to successfully utilise your product or service?
All of these data points provide the metrics to better inform your business.
In the previous example we referred to the revenue metric in the KPI. To measure this, simply add up all the invoices sent. However, to ensure the revenue target is met in the right way, add more metrics. Set up metrics such as a a variance report to see if the invoicing has dipped (or unexpectedly grown) over a given period, compared to the expected invoicing. Or another metric to measure incoming leads over a period. If projected leads are off balance, this may also impact the revenue.
To give another example, let’s look at the Volvo car company. Their vision: “that no one should be seriously injured in a new Volvo”. The car manufacturer deliberately sets strategic KPIs around passenger safety To achieve this they innovate around safety and have developed technology such as Intellisafe. IntelliSafe includes many metrics like monitoring the distance between the car and another vehicle. IntelliSafe also identifies dangers such pedestrians in the road by using radars. It uses lane keeping aids such as cameras to ensure that drivers don’t veer off the road.
These metrics constantly monitor the car’s processes while in motion, and warning lights flash up on the dashboard notifying the driver if anything is wrong, or if a further action needs to be taken by the driver.
No doubt, the next time you bring your Volvo for a service, these measurements will get uploaded to help meet the company’s safety KPIs and their vision.
I like the idea of ‘safety metrics‘. When designing a KPI consider adding supporting safety metrics. These metrics will keep the KPIs balanced. For more on sales process measurement click here.
Many organisations have data that they are not utilising. As the saying goes, you get what you measure, and if you can instrument your business with appropriate KPIs and metrics, it will become easier to navigate. You will increase accountability and empower your people. Employees will have KPIs that align strategically with the business’s outcomes, but more importantly, they will have the right metrics in place to monitor and control those outcomes.
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