How to Create a KPI Terminology

May 14, 2013 by Stacey Barr

My client D.K. asks: “What terminology can we use to understand the different types of performance measures and KPIs?”

We need a consistent terminology for our Performance Frameworks to be strong enough to support a large number of measures. But it can easily get messy.

We refer to performance measures using all kinds of names: KPI, PI, lead indicator, lag indicator, metric, index, key figure, to name a few.

And we classify performance measures using all kinds of buckets: financial versus non-financial, qualitative versus quantitative, strategic versus operational, to name a few.

As I said, messy. What we really want is a simple and consistent method of naming and classifying our measures. That way, it’s easier to understand how any specific measure fits into the overall Performance Framework. And it helps us get balance and alignment in the overall Performance Framework.

Please don’t assume that I have the complete answer here. But what I will share with you now, I hope will give you some sample dimensions for how to create a performance measurement terminology that supports your organisation’s Performance Framework:

Financial versus non-financial

Financial measures are any measures based on quantifying dollars. The most typical examples are Profit, Revenue, Costs, Return on Investment, Equity Ratio and Cash Flow.

Non-financial measures are based on anything other than dollars: attitudes, time, weight, widgets, events, and so on. Customer Satisfaction Rating, Delivery Cycle Time, Landfill Mass, Camaro Production Rate, Workplace Accidents are examples.

I’m not sure if financial versus non-financial is a useful distinction to make. Dollars are just one possible unit of measurement.

TIP: In your Performance Framework, make it clear what the measurement units of each measure are.

Quantitative versus qualitative

Quantitative measures are based on numbers, where those numbers are gauging the size or amount of the result you’re measuring. These numbers can be discrete counts or continuous values that include decimals.

Truly qualitative performance measures don’t exist. Qualitative data is based on non-numeric data, and that’s usually in the form of words. Gender, geographical region and mode of transport are examples of qualitative data. They help us analyse patterns and causes in our measures, but they aren’t themselves performance measures.

TIP: Distinguish your measures as either continuous or discrete, rather than qualitative or quantitative.

Key versus … um… not key?

KPIs, key performance indicators, key figures… What exactly does ‘key’ mean? And if it’s not ‘key’ then what is it? Likely ‘key’ means important. So your key measures or KPIs are those measures that are most important to monitor and improve right now, given your strategic priorities.

But ‘key’ might also be a label that distinguishes your business-as-usual measures from those measures that are tightly linked to your strategic goals. You want to improve your key measures, but just monitor and maintain your business-as-usual measures.

TIP: Define what you mean by ‘key’ if you’re using it to name any of the types of measures in your Performance Framework.

Lead versus lag

Lead indicators are performance measures that monitor results which have some predictive power over lag indicators. A change in the number of near miss accidents in the workplace might be a lead indicator for the lag indicator of lost-time injury rate.

To be a real lead indicator, a measure must give you clues about what a lag indicator is going to do BEFORE it does it. The idea is to use lead indicators to prevent problems, not diagnose them.

You need to do some decent cause analysis to find the best lead indicators. Some might be obvious, like the example I gave above, but others are more subtle, and only revealed when you dig into the patterns and correlations in your data.

TIP: Add relationships between measures to your Performance Framework, to document the important lead-lag and cause-effect relationships.

Measure versus indicator versus metric

This is a distinction that is contentious. More often than not, the terms measure and indicator and metric are used interchangeably. And that’s how I use them (because I’d rather focus on good design and use of measures, and not a universally accepted terminology). But here is some food for thought if you want to be a bit fancier than that:

A measure is a direct gauge of the result you’re monitoring, just like Average Delivery Cycle Time is actually based on data directly about actual cycle time.

An indicator is an indirect gauge of the result you’re monitoring, just like Average Likelihood to Recommend is based on intentions of customers to recommend your service, not their actual behaviour of recommending.

A metric is defined by my friend Marty Klubeck, in his book “Metrics: How to Improve Key Business Results“, as “a picture made up of information, measures, and data… Metrics can also include other metrics… a metric tells a complete story, fully answering a root question.”

TIP: If you’re going to use different words to name types of performance measures, write a glossary to define the difference.

Strategic versus operational

An important part of any Performance Framework is some kind of heirarchy among performance measures. Not a heirarchy of importance, but rather a heirarchy that helps anyone throughout the organisation understand how the measures they affect ultimately affect the success of the organisation.

The primary linking mechanism is such a heirachy is cause-effect. A good way to build this is to start with the performance measures that monitor the ultimate success results of the organisation: the vision, mission and current strategic goals.

Then, examine how each of the core business processes impact these measures. The process results that have the impact will then be measured.

Next, examine how each activity or sub-process within the core processes impacts on the process results. The results of these activities or sub-processes will then be measured.

The resulting set of measures will form a heirarchy. The number of layers in this heirarchy is somewhat dependent on the complexity of your organisation, but 3 to 5 layers is usually plenty.

TIP: Design the heirarchy of your Performance Framework, and make sure each measure is located at the appropriate level.

JOIN THE DISCUSSION:

What other ways do you classify and name your performance measures? Let’s collaborate to identify as many options as we can, so we have more choice when we design our KPI terminology. Share your suggestions on the blog.

Facebooktwittergoogle_pluslinkedinmailby feather

Speak Your Mind

Your email address will not be published. Required fields are marked *

  1. Hamid says:

    As I’m working in Health care institute, we use the term of Clinical versus Non-Clinical (Operational) indicators; also we use Strategic versus Managerial indicators, in the same time we open rooms for any departmental performance indicators to monitor their performance (sometimes particular issue).

    • Stacey Barr says:

      I imagine, Hamid, that this is the case for many organisations like yours: to have their own industry-specific terminology, over and above the more general KPI terminology. I’m curious if there is a very clear and unambiguous split between the clinical versus non-clinical indicators and whether they are treated separately or used in integration.

  2. Barry says:

    “Words exist because of their meaning. Once you have the meaning you forget about the word. So where can I find a person who has forgotten the words, so that I can have a word with him?”

    • Stacey Barr says:

      Barry, that’s so appropriate! Are these your words, or do you have a reference? I’d like to use this phrase in my consulting work (as I’m sure many others would too).

  3. Barry says:

    Tracey, the phrase is not my own (though I wish it were!). I borrowed it from Zhuangzi, a Chinese philosopher. Below is the full phrase.

    “The fish trap exists because of the fish. Once you’ve gotten the fish you can forget the trap. The rabbit snare exists because of the rabbit. Once you’ve gotten the rabbit, you can forget the snare. Words exist because of meaning. Once you’ve gotten the meaning, you can forget the words. Where can I find a man who has forgotten words so I can have a word with him?”.

  4. Arthur says:

    As long as the people who have to work with it agree about it, any terminology is OK. Though for my own practice, I stick to one, to avoid confusion: Key Performance Indicators are indicators for someone’s (or some unit’s) performance. In order to reach a certain performance, that person or unit (manager) can leverage specific factors, called Critical Success factors, which should be measured as Critical Success Indicators (CSI’s). Which is which depends on the level in the control model: Ehat is considered a Critical Success Indicator at Board level should be regarded as a KPI for the next level of management below. This aligns with the cascading principle across hierarchical levels as you describe in your post. This principle not only allows for a sanity-check of the control model (CSI’s must always have someone responsible for reaching the optimum level.) For each level of control and for each domain of management (division or department) a Business Control Matrix can be drawn, linking the KPIs (leftmost collumn) to the CSI’s (top row) that influence them. The dots in the cells indicate a causal relationship. The matrices can be linked top-down, by transposing the CSI’s to the KPI’s in the next model downward. There’s a lot more to share, but this is already taking too much space, I’m afraid. Good luck !

  5. Sue says:

    Until recently, a structure for our external measures have been legislated. When building these I prefer to use operationalization terms: construct, variable, operational definition. When published, the construct is labelled Outcome or Impact, the variable is labelled Indicator, and the operational definition is labelled Measure. I find that using operationalization herds a bit of discipline into the design.

    • Stacey Barr says:

      Sue – that’s great. It’s just important to be consistent with the terminology, and make sure everyone shares the same understanding/definition of the words used by the terminology.

Reprinting Articles


You are welcome to use articles from the Measure Up blog, with these requirements

Connect with Stacey


Haven’t found what you’re looking for? Want more information? Fill out the form below and I’ll get in touch with you as soon as possible.





*We respect your email privacy.
PO Box 422
Samford, Qld, 4520
Australia
Stacey Barr Pty Ltd
ACN: 129953635
Director: Stacey Barr
Simple Share Buttons