The Fundamental Principles of Metrics

Dan Melchior
Posted: 07/09/2012

The subject of metrics and shared services is one of the most talked about subjects at many of the conferences held every year. Everyone agrees that measuring performance is certainly a good idea; however, there are many who question the effectiveness of their program and the effort needed to generate the measures. Questions as often asked like "what should I measure?"; "is there an easier way to gather the data?"; "who should receive the results?"; "should teams be incented on improvements?"; "who should we benchmark against?"; and "should we display individual results or team results?". So what’s the answer? Unfortunately there is not a clear cut answer to all of the questions; however, there are some fundamental principles that should be the foundation for all metric programs.

First and foremost it is important to remember that metrics are not complicated. Metrics are all around us in our everyday life but are so commonplace that they are not given a second thought. For most of us, our first introduction to metrics occurred when we first went to school. In the beginning we received grades such as "satisfactory", "needs improvement" or "unsatisfactory" (which hopefully for most, did not occur too often). Then we progressed to the standard A, B, C, D, F scale which corresponded to 90 – 100%, 89- 80%, 79-70%, 69-60%, 59% or below. The letter grading scale also corresponded to a grade-point average usually ranging from 4.0 to 0. This set of metrics stayed with us from kindergarten through college and even on to graduate school.

The reason this set of metrics has been with us so long is it meets all of the principals of a good metric or Key Performance Indicator (KPI) system. Grading scales are:

  • Simple and easy to understand
  • Designed with the end result in mind
  • Easy to benchmark
  • Progressively more detailed as needed
  • Communicated to the right audience

These five attributes are imperative to creating an effective shared services metric or KPI program. "Simple and easy to understand" is the foundation that all programs must be based on. If metrics are not understood, they will be difficult to analyze and even more difficult to act upon. The point of metrics is to determine progress toward a goal or to continuously improve. Reaching a goal or improving requires action and that action should be based on the data gleaned from the metrics.

Every process completed in a shared services environment can be measured in one way or another. In most cases volumes are used to determine the amount of work being completed. Examples of these types of metrics include invoices paid, employees paid, checks printed, pages scanned, accounts reconciled, money collected etc. Once the volume of activities is compiled it is easy to determine the number of transactions per employee or the overall cost of these processes. These are the simple and easy to understand metrics that every shared services program should begin using from day one because they will highlight areas that are satisfactory, need improvement or are unsatisfactory.

"If I just started measuring these activities how do I know if they are satisfactory, need improvement or are unsatisfactory?" is the question most often asked in the early stages of metrics and shared services. All shared services centers were created with an end result in mind. Whether that end result is lower cost, better customer service, more focus on core competencies or other reasons, simple metrics will start to indicate whether the goals sought can be obtained given the current performance. For example, if the shared services business case indicated that 10 people could process payroll for the entire organization and it currently takes seven and shared services is only implemented for 30% of the company, improvements need to be made to the process in order to achieve the business case. While this example is very simple, this concept can be utilized for every process by starting your metric program with the end result in mind. Every new process, idea or improvement should be filtered through the goal of achieving the end result for each process. Formulated properly, an improvement in the metrics will lead directly to the end result.

The next step in the metric program is determining improvement which is done through benchmarking. Unfortunately, benchmarking is a buzz word that carries with it confusion. However, this confusion is not necessary because in the early and middle stages of shared services, the most effective benchmark is also the easiest. As an example, if someone is trying to lose a few pounds and get in better shape, they should not compare their body fat and aerobic conditioning to a prize fighter or distance runner. They should judge their efforts on their own improvement and not others who may have different backgrounds, goals, lifestyles or professions. Shared services is no different. Because each center has a unique business case, culture, ROI and set of circumstances, external benchmarking can be difficult and misleading, but internal benchmarking against oneself is always effective.

As it should, benchmarking - whether internal or external - always leads to questions. Usually those questions are centered on lack of improvement or moderate improvement. In order to answer those questions, the metrics now need to get more detailed. If metrics, for example, show that despite being operational for more than a year, the accounts payable department does not process any more invoices per employee than it did when the center opened, then more analysis needs to be done to determine why. Initially, one would expect that the processors would be more efficient simply because they are now more experienced. Unfortunately, it is rarely that simple. There are many factors that determine the efficiency of any shared services department. If acceptable progress is not being made then it is time to measure and analyze these other factors. Some of the other variables include department turnover, level of automation, timeliness and accuracy of inputs, data input errors, duplicate invoices and a host of many others.

In order to continue to make improvements, it is necessary to be able to gather and report more and more detailed metrics. In the aforementioned example, one of the variables mentioned is probably one of the reasons satisfactory improvement is not being made, assuming there are not any difficult-to-quantify variables such as poor supervision or management. Similar to visiting a physician, where a simple set of metrics, temperature, pulse and blood pressure lead to more detailed tests if needed, a metric program for shared services should start simple and get more detailed when and where needed. Measuring for the sake of measuring is rarely productive, whereas measuring for a purpose, with a stated goal and an appropriate level of detail will almost always lead to improved performance.

Finally, metrics and the summarized results need to be communicated to the appropriate stakeholders. In the case of shared services, the stakeholders include those who sponsored the shared services initiative, customers and shared services team members. When communicating metrics outside of the shared services organization, it is imperative to design the reporting so that it is easily understood. One of the most effective ways to do this is to emulate reports that Corporate or the customers use when evaluating their businesses. For example, if they have a manufacturing or warehousing report that shows productivity, steal shamelessly and copy the format and style of the report. They designed their report for a reason and therefore will appreciate the fact that the report is similar to theirs. As well, they will see shared services more as a business similar to their operations simply because the reporting is similar.

Reports that are communicated to shared services teams should always be summarized by team and not individual. It is not a good idea to publicly display individual/employee results. The reasons for this are many but the most important reason is team reporting encourages teamwork. On the flip side, individual or employee reporting can discourage teamwork because people might be inclined to ignore more difficult or timely tasks because it will make their individual statistics look bad. Also, what is most important to all of the stakeholders is the results for the teams and shared services as a whole, not the individuals, and what is important to the stakeholders is what should be communicated.

Metrics will certainly not ensure the success of a shared services organization nor will they replace the difficult job of managing and motivating people, but they are a very effective tool for every manager and should be used as such. Each of us has individually achieved goals such as losing weight, increasing our savings account or a getting an education and we have been able to do this by creating, refining and communicating metrics. When designing metrics remember to keep the end goal in mind, start simple, compare internally, refine along the way and communicate to those who can help achieve the desired goal.

Dan Melchior
Posted: 07/09/2012

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