On a day-to-day basis, both in business and in undergraduate and (post)graduate courses, I observe a certain confusion on the part of students and professionals when it comes to using common expressions in the management of business performance — especially around the terms “metric,” “performance indicator,” “unit of measure,” “index” and “target.”
Let’s dedicate this installment of Management Tips to helping you understand the differences by suggesting a semantic agreement that facilitates understanding, thus communication.
Understanding the meaning of these parameters will make life easier for managers and their teams, especially in critical performance analysis meetings, or simply CPAMs, also called performance review meetings (PRMs), or monthly management assessments (MMAs).
Figure 1 illustrates the five parameters that I believe are fundamental in measuring business performance.
Let’s start with metrics.
Metrics are rudimentary and crude measures; they are of simple construction.
Examples of metrics are: number of visits to a company’s website, number of invoices issued, or number of employees. The metrics, because they are rudimentary, are usually composed of a single variable. They provide very rudimentary information about company performance. It’s a simple statistic; they provide basic, very simple information that contributes little to decision-making.
Performance indicators, such as Key Performance Indicators (KPIs) or Key Success Indicators (KSIs) are more sophisticated, as they seek to relate two variables. Usually one in the numerator and another in the denominator.
Performance indicators can be thought of as a mathematical relationship, numerically measuring attributes of a strategic objective, process or its results, for the purpose of comparison with previously established numerical targets.
Examples of performance indicators are: the company’s turnover divided by the number of employees over a given period of time; the relationship between the quantity that can be produced and the time required for this to occur; the relationship between the outputs generated by a production process and the resources used for this purpose; the relationship between total output (all that was produced) and compliant outputs (those without defects or nonconformities).
Performance indicators are calculable measures composed of metrics. They are, therefore, a level above the metrics, since they take a broader view of a certain observed phenomenon one wants to measure. In addition, indicators evaluate business performance and allow for trend analysis, continuous improvement, and proactive action, thus enabling transparency for the company.
In summary, we can say that an Indicator is a quantitative value that allows the company to measure what is being executed and to manage it in a way that is beneficial for the achievement of the targets of a sector, a department, management, the board or the whole company. As the name suggests, an indicator is a metric that indicates something relevant and that assists in the decision-making process.
Indicators are a basic (and essential) tool for business performance management and should be part of the daily rhythm of any organization, regardless of size or domain of activity. In addition to being instrumental in measuring results, KPIs are an excellent means of communication, because they enable an organization to communicate its targets and results to the entire team, objectively demonstrating the performance of a process over a given period of time.
But be careful! A performance indicator is not just another variable (metric). It needs to be directly oriented to company strategy and operational performance; an indicator can only be called a performance indicator when it indicates where strategic or operational results of the company can be improved.
An index is the result that is determined for a given indicator at a given moment. In other words, it is the numerical value assumed by an indicator at a particular instant. Let’s assume that an organization uses as an indicator the number of employees with a higher education divided by the total number of employees. Let’s say this indicator shows 0.6, or 60%, at a given time; this, then, will be the organization’s employee higher education index.
Units of measure are representations of the physical quantities used in several fields of study in order to quantify a substance, a sensation, time, the size of something, or the result of a performance indicator, for example.
If we want to measure the consumption of water in relation to the number of employees in a company, we can use the cubic meter (m³) as the unit of measure. If our objective is to calculate how much each employee, on average, contributes to the company’s billing, we can use a currency (US dollars or Brazilian reals, for example) as the unit of measure.
A unit of measurement is, then, a specific quantity of a given physical size and serves as a reference standard for comparisons and as a measurement base for other measures. Meters, cubic meters, kilowatts, hectoliters, kilograms, tons, hours, minutes, procedures, disallowed expenses, among others, are units of measurement that can be used in indicators.
If the result shown by the indicator is multiplied by one hundred, we transform the result into a percentage, as we did in the employee higher education indicator.
Finally, a target is the result to be achieved. It indicates how decisions and actions should be directed. Targets specify the quality or quantity of the desired results and the speed or intensity of effort that the company, through its employees, must achieve. They signal to the teams the expectations of executives and shareholders regarding the results.
A target is, therefore, the value that is expected to be achieved via the performance of the objective, process or parameter being measured. It is the challenge to be met. All performance indicators should have their targets. If what is being observed presents seasonality, the target can predict this seasonality. You do not need to set equal targets for every month.
A target is characterized (defined) by a numerical, which is the quantity, and a time, or deadline by which to achieve it.
Is it clearer now?
Remember: business results have a direct relationship with setting targets and your ability to achieve them.
I cannot end this post without first thanking my friend, Prof. Dr. Maria Amélia de Paula Dias, for her valuable contributions.