The Art and Science of KPIs

Key Performance Indicators (KPI)

All businesses today strive to identify Key Performance Indicators (KPI) which help them understand how successfully their operations are performing.  The nature of the business will help dictate what KPIs are meaningful to any given organization; sales companies for example may look at activity in a sale funnel or individual win/loss ratios, while a customer service-based organization may focus on customer satisfaction scores and average longevity with clients.  Regardless, businesses identify and track KPIs as a means to quantify some intangible metric they deem meaningful.  There is a downside to this practice, however: surrogation.Surrogation by definition is a psychological phenomenon in which the measurement of a construct of interest evolves to replace the construct itself.  In other words, the measurement becomes more meaningful than the thing being measured.  This is a slippery slope which can lead to business practices that serve to undermine the original goal of the metric.  Take sales funnels for example.  If a company pressures its sells staff to maintain a robust funnel and report solely on volume of opportunities within that funnel, staff may divert their efforts from focusing on identifying realistic targets and put more time and energy into filling the funnel with improbable placeholders.Organizing the data which speaks to a business in a concise and consistent way provides that business with invaluable reporting capabilities that allow KPIs to be tracked and understood.  This is the science of KPIs.  The ability to measure the abstract strategies and attributes that make any given business unique.The art of the thing is understanding how to use these measurements to the advantage of the organization without inadvertently allowing them to steer the company in the wrong direction.  Data for the sake of data can be as much harmful as it can be helpful.  When data is understood and interpreted properly, however, it is exceptionally powerful.In insurance, we use many KPIs to understand how a given set of exposures have preformed historically regarding premiums and losses, and use this data to try to understand how these exposures will continue to perform moving forward.  Taking the data at face value, however, can be risky.  This is why we have actuaries; individuals who have spent their lives learning to see past the numbers.  Artists capable of taking the science that is the data, and turn it into a lens which illuminates a reality we would have otherwise overlooked.  For a PEO, nothing can be more valuable in understanding past, present and future performance of their book of clients than an actuarial review.For additional reading see:ArticlesDon’t Let Metrics Undermine Your BusinessBooksThanking, Fast and Slow by Daniel Kahneman 

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