As I discussed earlier, Analytics is highly quantitative in nature. Here we will discuss about the importance of Key Performance Indicators and how does KPIs help in measuring the organization’s performance and in analytics.
Key Performance Indicators are a business metric used to evaluate factors that are important to the success of an organization. KPIs can differ as per the business functions. It can also vary between companies and industries, depending on the priorities and the performance criteria.
If any organization wants to talk about performance measurement framework, we cannot ignore the work done by Dr Robert Kaplan and David Norton who developed a performance measurement framework that added a strategic value to the organization.
“What gets measured gets managed”
Measuring the business critical key performance indicators helps organization to know where they stand in terms of market share, profitability etc. This could also lead the organization to identify where the problem lies and solve it accordingly by optimizing the key performance indicators.
Very often managers concentrate on measuring results, outputs and outcomes. Because they are easy to measure and they are accurate. If a manager wants to know how many customers have visited the shop or how many sales have been made today, he will simply count them. However, if a manager wants to increase the sales or reduce the number of customers calling the customer care. In this context, the manager has to measure the right metric to optimise the business outcomes. The combination of Lag or Lead Indicators helps to optimise the business outcomes.
Lead & Lag Indicators:
Let’s first discuss on Lag Indicator, lag indicators are nothing but a measurement of any metric. It can be a simple Conversion Rate for a website. Sales per Customer Visit to a retail shop. These lag indicators helps the manager to know about the WHAT of performance metric. In Order to optimise any performance metric the manager has to look at the performance metric of HOW. The transition from WHAT to HOW performance metric can help manager to identify the Lead Indicators. However, the lead indicators are always more difficult to identify than lag indicators. The below use cases can helps us to understand the difference between Lag and Lead Indicators.
Lag Indicator – Conversion Rate
Lead Indicator – Improve Customer targeting i.e. any metric that help you to measure
Lag Indicator – Customer Satisfaction
Lead Indicator – Satisfied and Motivated Employees
Lag Indicator – Revenue Growth
Lead Indicator – Add a new product to the portfolio or enter new market.
It is always a good practise to understand the importance of both lag and lead indicators in the context of performance measurement. A lag indicator without a lead indicator will give no indication as to HOW a result will be achieved and vice versa.