A Single KPI That Measures Overall Business Performance

September 17, 2019 by Stacey Barr

Is it possible to design a single measure of business or organisational success? And if it were possible, how would we use that single KPI?

One finger held up. Credit: kieferpix

What a tempting idea to entertain: just one single KPI to tell us if our business or organisation is successful or not! How easy and powerful it sounds. But how realistic, and how useful, could a single success KPI really be? There are a few assumptions to test before we go looking for the ultimate indicator of business success:

  1. Can we really trust just one measure?
  2. Is any business or organisation really that simple?
  3. Could a composite index or score do the job?

Could we really trust just one measure?

Is there an ultimate single measure of anything? If we wanted to sum up our overall health by a single measure, none of the typical ones seem comprehensive enough. Life expectancy is considered by some to be the ultimate measure of health, but it’s really a projection of death rate in a population, and therefore an estimate. And actual lifetime is just a bit too late to be useful.

For business, the Net Promoter Score has been suggested as an ultimate measure of business success. It’s certainly a powerful measure and important for many businesses to track. But is it true that if your business or organisation has more promoters and fewer detractors then it’s as successful as it can be? No, because you can truly impress your customers at the same time as running a very inefficient or costly business model.

Here’s a good thinking exercise: if you think you’ve found the single measure of business success, ask yourself if it can show great improvement while something else that matters can simultaneously deteriorate.

So no, it’s almost impossible to trust a single measure as the ultimate indicator of success.

Is any business or organisation really that simple?

Sport is pretty simple. You can measure success with single KPIs like these:

  • 100m sprint is measured by the time it takes to run it
  • soccer is measured by the number of times the ball goes into the goal area
  • tennis is measured by the number of times your opponent can’t return the ball into your part of the court

This works because most sport is all about a single type of result. And possibly we thought business was much like sport. For many decades success had been defined using ‘the bottom line’ as the ultimate measure of success. This means profit for the private sector, or meeting budget for the public sector, or funds raised for not-for-profits.

But is your business so simple that it should only produce a single result for success? Unlikely. Every business or organisation creates ripples in the world around them. Those ripples bounce back when they hit something, like agriculture’s ripples on global warming, or chicken production’s ripples on waterways and air pollution, or local government waste management’s ripples on local traffic and illegal dumping. And often what bounces back will negatively affect business success.

This is why for a few decades now we’ve heard more about the triple bottom line and quadruple bottom line. Rather than just profit, success is defined to include people, planet, and even purpose. Even thinking just about the people dimension, there are often different and often conflicting results that different stakeholders want from each type of business or organisation. Success isn’t one dimensional.

So no, the majority of businesses or organisations are not that simple that a single KPI of success is clear or obvious.

Could a composite index or score do the job?

Realising that no one single measure tells us everything about business success, the temptation is to create a proxy single KPI. That means using what’s known as a composite index or score. It’s constructed from weighted or standardised combinations of many underlying measures.

Composite indexes are fake measures. There are three specific reasons why composite indexes and scores should be avoided, all relating to the fact that they are like very dull blades: they don’t cut it in decision making. They don’t enable us to ask a specific enough question to arrive at a deliberate enough action to improve performance. We have to unravel the composite index to find out what exactly made it turn from green to red. And what if we got our logic wrong in how we combined the measures underlying the composite index?

So no, a composite index doesn’t provide a useful proxy to measure ultimate success.

A single measure of business success is simple gone too far.

If we rely on a single measure of business success, we’re exposed to some very significant risks:

  • It’s the wrong measure, and it takes us in the wrong direction.
  • It’s an incomplete measure, and makes us ignore other critical dimensions of success.
  • It’s a dull measure, and needs a dive into underlying measures before any decision can be made.

To make good decisions, decisions that will create the future we want, we need a sweet spot of a few measures that can sharply point us toward useful action. This is why we set a clear strategic direction, and why we make it ruthlessly prioritised.

If it’s good enough for Albert Einstein, then it should be good enough for the rest of us: make things as simple as possible, but no simpler. Searching for a single KPI of business success is simple gone too far.

Make things as simple as possible, but no simpler (Einstein’s wisdom). Searching for a single KPI of business success is simple gone too far.
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DISCUSSION:

Can you think of a single result that defines ultimate success but has no conflict relationships to other results that matter for maintaining that success?

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  1. Lawrence Golicz says:

    You are so right. Bottom liners destroy a business in short order by risking the loss of uniformity and cooperation among the components of profit making. Bottom liners ignore functions that show no departmental profit, but then the business will fail without it and a loss of maintenance of product integrity

    • Stacey Barr says:

      Exactly – ‘bottom liners’ (love that) don’t seem to understand the systemic nature of how business work, more like organisms than machines. Maximising the parts usually minimises the whole.

  2. Jim Watts says:

    Hw about a measure of how many things can derail your business, with the goal of minimizing the value?

    • Stacey Barr says:

      Don’t you think that puts too much attention on what can go wrong, taking attention away from where the opportunities are? Like going down a rabbit-hole in search of every risk to mitigate or fault to fix, and losing the chance to grow toward bigger and better horizons?

  3. Tom G says:

    Thank you again for a clear and compelling argument for good management. The dimensions of the 4 Ps you mentioned is a good model. I have adopted Goldratt’s which I think to be very clear. You must simultaneously provide today and in the future a good return to investors, satisfaction to customers, and a secure and satisfying workplace for employees. If you fail at any one of these, you will ultimately fail at all three. All of moral and ethical considerations such as good ecology, fair dealing and purpose are covered with these three. (If you make profits by scorched earth or illegal means, you will upset customers and investors.) The owner must determine which is the goal and the other two become necessary conditions to make it happen. In the event of non-profits, the money generated by the system is used to generate more social goal units what ever they may be for the organization. It is a good way to keep simple balance. If you drive one of the trio by pulling the others out of kilter, you will lose the balance of the simultaneous equation and slip backwards. Another stick on the fire. Tg

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