According to Dictionary.com, alignment means “Arrangement in a straight line, or in correct relative positions.” For KPI alignment, the second part of this definition fits. It means that all KPIs or performance measures within an organisation correctly relate to one another.

These relationships between KPIs make it possible for everyone to see how they contribute to the organisation in the best possible way to excel at what it exists to do. And there are three types of alignment that are important to understand.

The first type of alignment is to Strategic Direction…

If you’re going to align your KPIs to anything, it just has to be strategic direction, the priorities for the organisation to improve its capacity to deliver its mission and fulfil its vision.

So at the corporate or strategic level, this means that KPIs exist to monitor the essential performance results implied by the vision and mission (assuming they’re not just motherhood statements), as well as the current strategic goals or objectives (or whatever you call them).

For a national sports agency, their mission might in part be to increase participation in sport. A KPI aligned to this result might be “Total proportion of population participating in sport at least weekly”. (If you’re thinking, “that’s not measurable”, you’d be wrong. The data comes from a national recreation and sport survey, and census figures for population.)

The second type of alignment is to Business Processes…

When you talk about aligning KPIs, you can’t not talk about cascading them too. And, of course, the cascading has to maintain the alignment.

The way that corporate strategic goals and the mission and vision get achieved is through the operations of the organisation. And, which may be surprising, operations don’t happen via the organisation’s structure but rather by its end-to-end business processes. A business process, like delivering a service to a customer, can involve many of the organisation’s departments or business units.

Aligning KPIs to business processes means three things. Firstly, the business process has KPIs that monitor the most important outputs that it exists to produce. Secondly, the business process has KPIs that monitor its greatest influence in support of the results the organisation exists to achieve. Thirdly, it has KPIs that monitor the results of critically important steps in the business process, the in-process drivers of its outputs.

If Cash Flow is a strategic KPI for an organisation, then the invoicing process has a big impact. A process output of invoicing that impacts Cash Flow is timely payment of invoices, which might be measured by Debtor Days or Percentage Invoices Paid On Time. A critical step in the invoicing process that impacts on-time payment is itemising the invoice. If that’s not done accurately, the invoice likely won’t get paid. So an in-process KPI could be Percentage Invoices With Errors.

The third type of alignment is to Business Units…

Organisations that don’t yet understand what its business processes are not ready to align KPIs and performance measures to processes. So instead they’ll align their KPIs to business units, or the departments or functional areas demarcated by the organisational structure.

When KPIs are aligned to business units, it’s similar to aligning them to processes: the business unit has KPIs that monitor the most important performance results that it exists to achieve, as well as KPIs that monitor its greatest influence in support of the results the organisation exists to achieve.

If it’s the Human Resources department, their performance results might include fast recruitment of staff into vacant positions, staff have all the skills required of their roles, and – given a strategic priority to improve organisational culture – staff are fully engaged with the organisation’s purpose. If the HR department’s KPIs and performance measures are designed to monitor those performance results – and any other results that support these – then their KPIs are aligned.

But there are a few things NOT to align KPIs with…

All too often people will look for KPIs before they know what the performance results are that matter. Measures for measurement’s sake is a waste of time and effort and attention. If your rationale for deciding to measure something is that you have some available data, or an industry benchmarking report, or a list of KPIs related to your functional area that you downloaded from a KPI database, hit the brakes.

The common underlying theme for any kind of KPI alignment is that you align your KPIs with deliberately chosen performance results. Spend time working out the performance results to align KPIs with, before you worry about what the KPIs themselves will be.

The power of having KPIs, and the power of having those KPIs aligned with the organisation’s strategic direction, is that it pulls everyone and every process within the organisation together, so you spend the least amount of time and effort to achieve its goals and fulfil its purpose.

TAKE ACTION: The tool I use with my clients to make it tonnes easier to align KPIs to strategy and to business processes or business units is the PuMP Results Mapping tool. Its power is in the way it puts a waffly weasely strategy into plain English result statements, and shows the alignment of these results from top to bottom. Then, when you design measures or KPIs for these results, your measures are automatically aligned too. You can find the Results Mapping tool at http://www.staceybarr.com/products/resultsmapping.html.

IN THIS EPISODE:

Upcoming Events: October’s Performance Measure Blueprint is *Online*
Practical Tip: What Exactly is KPI Alignment?
How-to Resources: How to Align Your KPIs to Measurable Goals
Your Questions: Nerida in Brisbane asks how to align KPIs across business units
Getting More: Cascading KPIs to Employees, KPI Relationships, Dust-Repellent Strategy

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Certainly, on account of the Balanced Scorecard, we’re now seeing the measurement of non-financial results rather than just the financial, and we’re seeing strategies laid out in logical and cause-effect linked plans designed for execution rather than shelving.

But a few challenges continue to baffle those that embrace the Balanced Scorecard way. One of the challenges is easy and quick to remedy within the current Balanced Scorecard theory. But the other two, I believe, require a more radical re-think.

In this first part of a three part series, we’ll look at one of those challenges that does indeed need a more radical re-think.

CHALLENGE 1: The Balanced Scorecard is hard to cascade meaningfully.

You might argue with me on this point, because part of the Balanced Scorecard’s claim to fame is it’s focus on strategy execution and cascading strategy to operational levels. But those famous four perspectives that were the revelation of this framework are also the limitation on meaningfully cascading strategy.

What Happens Is “Mini-me” Syndrome.

I call it the “Mini-me” syndrome (inspired by the Austin Powers movies), where what ends up being cascaded are localised scaled-down copies of the corporate scorecard. Each department or team has the same perspectives as the corporate scorecard, almost the same strategy map, but tailored to the scope of their work.

If injury reduction is in the corporate scorecard, then every department and team has injury reduction in their scorecard: even those departments where injury risk is infinitesimal. If cost reduction is in the corporate scorecard, then every department or team has cost reduction in their scorecard: even those departments (like Human Resources or Process Improvement, whose costs must increase in order for other areas’ costs to decrease.

That’s not true cause-effect thinking, and it leaves many managers and employees bemused and cynical about having to measure things that don’t really matter to them, and that don’t really focus on their specific and unique contribution to the corporate direction.

Additive Thinking Is Not Cause-Effect Thinking.

When the focus is on maintaining the four perspectives in everyone’s scorecard to link up to the corporate scorecard, the attention has moved away from where it needs to be: focusing on the performance results and process improvements that have the highest leverage to achieve the corporate strategy.

What happens instead is a collection of additive scorecards, where you can add up or combine the metrics from scorecards across the departmental tier, and end up with the values for the corporate scorecard. Likewise, you could add up the add up or combine the metrics from scorecards across teams within a department, and end up with the values for the departmental scorecard. This isn’t cause-effect thinking. It’s additive thinking.

Cascade True Cause-Effect, Not The Scorecard.

To apply true cause-effect thinking, we have to let go of structure. We have to openly explore and analyse how the performance of a part truly does impact on the performance of the whole. The four perspectives of the Balanced Scorecard don’t encourage that open exploration and analysis, and that’s why we have the Mini-me problem.

I haven’t found a sensible and easy way to help departments and teams cascade the Balanced Scorecard in a way that’s sensible for them and truly aligned to the corporate direction. Instead, we use a more open approach called Results Mapping, which encourages them to start with a conversation about the corporate direction (or scorecard) and explore the question “How and where do our results and our processes most impact on the corporate direction?”

Two More Challenges…

In parts two and three of this series, I’ll discuss two more things I don’t like about the Balanced Scorecard, and suggest some tips for compensating for these challenges also.

TAKING ACTION:

Where are you trying to cascade the Balanced Scorecard? Is it making sense to the teams it is cascading to? Is there anything in their scorecard that isn’t really that important, or anything missing that actually is important? What questions are you asking to guide the way that strategy is cascaded in your organisation or company?

By understanding how measures are related to one another, you increase their power to help you understand and diagnose performance, and thus how you can report those measures together to make performance understanding and diagnosis easier.

RELATIONSHIP TYPE 1: Cause-Effect

As the most commonly talked about relationship between measures or KPIs, the cause-effect relationship isn’t too hard to understand. It simply means that when one measure improves or deteriorates in performance, it causes another measure to improve or deteriorate in performance as a consequence.

For example, reducing rework can cause costs to reduce; improving recruitment of talent can cause workforce capability to improve; if employee engagement slides then it can cause customer satisfaction to slide too.

RELATIONSHIP TYPE 2: Companion

Measures have a companion relationship when they each tell a part of a complete story of performance. If you relied on just one of the measures, you wouldn’t have a full enough picture to take the best action.

For example, number of new prosects and prospect conversion rate are companions to track a marketing process; customer lifetime value and number of active customers are companions to understand drivers of profit.

RELATIONSHIP TYPE 3: Conflict

Because you can’t have your cake and eat it too, you often can’t maximise the performance of any one measure. Other measures of performance can pay the price, and that’s where you get conflict relationships between measures.

For example, improving workplace safety can conflict with on-time delivery to customers; reducing call handling time (in a call centre) can conflict with first call resolution; improving product quality can conflict with cost reduction.

TAKING ACTION:
Look at one of your organisation’s performance reports, and the suite of measures or KPIs it includes. How are these measures related to one another? Does this appreciation of the relationships suggest any opportunities to improve the way your report the measures, so they are more useful?

And that’s what lead indicators do. They are a special breed of performance measure or KPI because they have predictive power.

They always have a relationship to a lag indicator, which is your typical performance measure or KPI that tells you what has happened already. Lag indicators track performance outcomes or end results that your business or organisational goals are based on.

When a lead indicator starts to improve, your lag indicator will likely improve too. And if your lead indicator starts to show poor performance, you can expect your lag indicator will follow suit.

Now this relationship is not quite the same as any other cause-effect relationship. There’s usually a time lag, so when your lead indicator behaves differently, the lag indicator won’t start changing until some time in the future. And that’s where the power of the lead indicator lies!

You can use your lead indicators to give you advance warning of likely future performance, so you can do something about it before your lag indicators – your performance outcomes or end results – are affected.

So an increase in building permits now could be a lead indicator of a boost in the economy in the future. Or an increase in the number of other websites linking to your website now could be a lead indicator of increased traffic to your site in the future. Or higher than average rainfall could be a lead indicator of bigger sugar harvests and thus demand on sugar mill processing rate in the future.

The stronger the correlation – or quantitative relationship – between a lead indicator and lag indicator, the better the predictive power of the lead indicator. So a great way to find good lead indicators for the lag measures of your performance outcomes is to first consider some potential lead indicators, and then to gather some historic data to measure the correlation.

Finding really fabulous lead indicators takes time and practice, so the sooner you get started, the sooner you’ll have more control over performance!

Here are 5 practical steps to help your team to measure in way that will encourage collaboration to improve corporate performance, and help put an end to measures that trigger fights about who’s right and who’s wrong, rather than dialogue about how to achieve shared goals.

STEP #1: Forget about measuring individual people’s performance. You read it right. And yes, I know it’s common practice in many organisations to do this. They believe that organisational performance is the sum of individual people’s performance. But take a closer look at those organisations and you’ll see that people will be doing all they can to get good personal performance reviews at the expense of what’s best for their team or the organisation.

STEP #2: Make regular time each week for the team to talk about shared goals. These might be part of your existing team meetings, or you could create a quick and easy stand-up meeting to check on progress of a goal, or discuss the meaning of a new goal, or explore ideas to achieve a goal more collaboratively.

STEP #3: Never blame people for performance shortfalls – always look to the process for clues about how to improve performance. Blame threatens the dignity of the people it is thrown at, and that takes personal power away from those people. If we seriously want people engaged in improving performance, they need to feel more empowered, not more disempowered. The majority of people want to do a good job, so make it easy for them!

STEP #4: Reward people for using measures to improve performance, for looking for causes of performance shortfalls, finding potential solutions to improve performance, for learning from their performance-improving experiments. And one of the best rewards is public recognition and celebration of what they’ve achieved. Encourage a culture of tracking, testing and tuning together.

STEP #5: Invite and encourage people to work together to design new and more meaningful measures for the goals they share. Creating new measures through discussion helps people converge on the same understanding of the goals they share, and helps them understand each others’ points of view about those goals. With a democratic process to decide what to measure, the resulting buy-in will help the measures be used for collaboration, not competition.

TAKING ACTION:
Think of a team in your organisation where more performance improvement collaboration is needed. Which of the above 5 steps do you think will help them the most? Is there an opportunity for you to talk to them about this step, or to suggest how they can make some constructive progress toward better performance?

We have activities, outputs and outcomes. Creatures that seem so much more frightening than they truly are, and mostly because we don’t really understand whether and how we are supposed to measure them.

The truth is, we should measure all three.

But don’t go skipping down the yellow brick road too quickly, measuring every activity, output and outcome you make friends with along the way.

Let’s look first at the relationship between the three, because it’s in that relationship that you’ll find the answer to how to measure them meaningfully.

Outcomes Are Your Ultimate Performance.

Outcomes are important to measure because it’s important that we deliberately define and focus on fulfilling our purpose. Every team should have a purpose, otherwise their talents and energy and the resources they consume are wasted.

The trick with measuring outcomes though, is you have to start with your customer or stakeholder – those people that use your service or product. Only they can define the outcomes that really matter enough to measure.

Outputs Are The Drivers Of Outcome Performance.

Outputs are also important to measure, because they are the drivers of the outcomes. The better your outputs align with your stakeholder outcomes, the better those outcomes will be achieved. It has to be a conscious connection.

Measuring outputs is often easier than outcomes, because unlike outcomes, you can directly see what you are delivering to your customers or stakeholders. And if you can see it, you can measure it. But a word of caution: still take the time to define what those outputs are before you choose measures.

Activities Are The Drivers Of Output Performance.

Activities are also worth measuring, because how well you perform those activities drives the quality of outputs you produce and how well those outputs can create the outcomes your customers and stakeholders want and need.

But the important things to measure about activities are not just how much of them you are doing, but how well you are doing them. And not all activities are worth measuring: only those that have the biggest impact on your outputs and outcomes.

Sketch A Cause-Effect Chain

It’s much easier to visualise and communicate the relationship between activites, outputs and outcomes when you can draw the cause-effect relationships between them. With my clients, I use a tool called a Results Map, but you can use a simple flowchart to get started. And before you can click your heels together three times, you’ll be on your way to a more meaningful balance of performance measures!

YOUR CHALLENGE:
Take a look at a sample of measures your organisation has now, and work out which are tracking activities, which are tracking outputs and which are tracking outcomes. See if there is a sensible cause-effect relationship between them.

To avoid disappointing any of the estimated 380 odd million Christian children in the world on Christmas Eve, Santa Claus needs to be capable of some pretty spectacular performances:

• Santa’s memory is so good, he can recall 380 million childrens’ Christmas wish lists.
• Santa visits about 970 households per second.
• To achieve this, his sleigh has to travel at over 1000 kilometres per second (3000 times the speed of sound).
• The sleigh’s payload (that is, the sack of toys) is estimated at being about 500,000 tonnes.
• Santa’s reindeer are each 40,000 times stronger and faster than the average ordinary reindeer.
• Santa’s reindeer, due to air resistance created by the astronomical speeds they travel, each absorb up to 14,300,000,000,000,000,000 joules of energy every second.
• Each time the sleigh takes off, Santa is subjected to 17,500 g of force (apparently the average human will black out at about 4 or 5 g).

This is an engineer’s perspective on Santa Claus, (you can read more at
http://www.baltimoremd.com/humor/santaengineer.html) and it has been suggested that these calculations might be proof that Santa Claus doesn’t really exist. But that’s not the point of this month’s Handy Hint. These trivial statistics illustrate a few interesting points about performance measures…

Measuring Capability

Measuring what your organisation or process or team is capable of (modelled from past performance) can help you anticipate how likely you are to meet changing stakeholder needs. As the Christian population in the world grows, how much faster will Santa have to travel, and how much more will the sleigh have to carry, and how much more energy will the reindeer have to absorb? How many more toys will the elves have to make?
What kinds of toys will most influence the children of tomorrow to be nice and not naughty?

Measuring Outputs

Santa’s outputs are the results of his activities, what he produces. And what he produces is gifts delivered to Christian children that have been nice and not naughty. Measures of his outputs might include: the % of nice children that did receive a gift, the % of children that received the gift they requested, the % of children that received a gift they loved, the safe return of Santa and the reindeer to the North Pole sometime on Christmas morning.

Outputs are produced over and over again by our business processes, but for the purpose of making some bigger, ultimate set of outcomes happen.

Measuring Outcomes

Measuring activities and outputs might be interesting and easy, but we need to measure the ultimate set of outcomes of our activities and products if we care at all about what we are doing. Santa doesn’t do the Christmas Eve thing because it’s a challenge. He actually really wants to encourage children to be nice and not naughty (source:
http://www.northpole.com/Clubhouse/Q&A/Santa.html) and he rewards those children being nice with gifts on Christmas Eve.

Santa’s ultimate outcome measure might be the percentage of children that always behave nicely. He might analyse trends in this information – he has years and years of history, as he’s been at it for around 1600 years (source: http://www.oldandsold.com/articles01/article762.shtml).
Santa might also benchmark this measure against the motivators for non-Christian children to be nice and not naughty, to see how well his gift strategy is working.

Linking Outcome Measures to Capability Measures

There is a logical connection among these three types of measures. The capability measures predict the quality of the outputs, and the quality of the outputs predict the quality of the outcomes. If Santa’s elves make the right kinds of toys, then more children will get the gift they want and thus, more children will be influenced by Santa’s message to be nice and not naughty.

YOUR CHALLENGE:
Have a very safe, incredibly happy and gorgeously relaxing Christmas Holiday Season! And hopefully that *won’t* be a challenge!

Consider safety. If reducing lost time injuries is a corporate goal, imagine what it would be like if everyone had to measure lost time injuries. What sense would that make? Does everyone in the organisation have the same impact on or exposure to lost time injuries? Is it the best use of everyone’s time to work to improve safety? Of course not.

Rather than over-simplifying the KPI cascading process, follow these four keys to make sure that what gets measured at the individual level is meaningful to the individual at the same time as having a strong “line of sight” to corporate goals:

Key #1: Don’t cascade by duplicating the measure, cascade by building the cause-effect chain.

If a corporate goal is loyal customers, then ask “what makes customers loyal?” to determine the first level of cascading. You might end up with things like attracting more ideal customers, keeping promises to customers, and solving customers real problems. Cascade to the next level (say, teams), ask “what makes it possible to attract more ideal customers?”. Keep this line of questioning until you reach individuals and their contribution to the cause-effect chain.

Key #2: Only cascade to where it counts, to where there is highest leverage to achieve the corporate goal.

Only a few parts of the organisation will truly have a worthwhile impact on a corporate goal. Operations generally has the biggest impact on safety and timely delivery, for example. Marketing generally has the biggest impact on which customers you attract. Keep asking “where is the greatest leverage?”

Key #3: Document the cascading cause-effect links, to build a map or story of the organisation’s strategy.

It will make it easier to test the logic of cause-effect, and to communicate throughout the organisation what matters and why. Maps bring everything together, so you can see the whole, not just the parts. And you can start seeing something more than the cascading – you can see the collaboration!

Key #4: Involve people in the process of determining their “line of sight” to corporate goals.

We find the most meaning in things we take part in discovering and creating. People throughout your organisation will not only have the best idea of how they contribute to company goals, but they will also have many times better buy-in if they take part in the cascading process.