Why KPIs don’t predict future performance is an important issue for executives who rely on dashboards and scorecards to make business decisions.
Most traditional Key Performance Indicators tell management what happened during the last week, month, quarter, or year. They may compare that result with a target and display the outcome as red, yellow, or green.
But knowing what happened is not the same as knowing what is likely to happen next.
That distinction can have a major impact on executive decision-making.
In the following video, I explain why traditional KPI reporting can lead leaders to inappropriate conclusions and how a predictive approach provides a much more useful view of organizational performance.
Traditional KPI Reporting Problems Can Lead to the Wrong Decisions
Traditional KPI reporting problems often begin with the way organizations interpret routine changes in their numbers.
Suppose an important KPI is green this month, yellow next month, and red the month after that. Management may conclude that performance first improved and then deteriorated.
But did the underlying process actually change?
Perhaps not.
The differences between reporting periods may simply reflect the natural variation that has always existed in the process. When managers react to every upward or downward movement, they can spend considerable time investigating changes that are essentially statistical noise.
Red-yellow-green scorecards are particularly susceptible to this problem because the color can change even though the underlying process has not fundamentally changed. Smarter Solutions’ existing work on KPI reporting describes how this can contribute to unnecessary firefighting and other counterproductive management behaviors.
The executive question should therefore move beyond: “What was our KPI last month?”
A much more useful question is: “What does our process tell us we can expect in the future?”
Predictive Performance Metrics for Executives Provide Foresight
Predictive performance metrics for executives change the conversation from historical reporting to understanding process behavior.
An executive does not simply need another dashboard containing more numbers. Leaders need information that helps them determine whether the process has fundamentally changed and, when appropriate, what its future performance is expected to be.
This requires separating routine variation from meaningful change.
When a process has demonstrated a recent region of statistical stability, its historical behavior can provide the basis for a prediction of future performance. If that predicted performance is undesirable, management has a fundamentally different decision to make.
Instead of demanding an explanation for the latest month’s number, leadership should focus on changing the underlying process.
This is an important distinction. A stable process that consistently produces unacceptable results does not need more explanations for individual monthly numbers. It needs process improvement.
30,000-Foot-Level KPI Reporting Separates Signal From Noise
30,000-foot-level KPI reporting provides a structured methodology for making this distinction.
The approach first evaluates the process response over time from a high-level perspective. When a recent region of stability exists, the data from that region can be used to estimate what the process is likely to produce in the future.
This creates a very different form of executive reporting.
Instead of reporting:
“Last month, on-time delivery was 97%.”
Management can receive a statistically based statement describing the level of performance that the current process is expected to deliver in the future.
That is much more actionable.
If the prediction is satisfactory, management may have little reason to intervene.
If the prediction is unsatisfactory, the organization knows that something fundamental about the process or its inputs must change to achieve better performance.
This approach helps leaders distinguish signal from noise and avoid wasting resources reacting to routine fluctuations.
Predictive Business Performance Management Connects Metrics to Improvement
Predictive business performance management should do more than improve the appearance of an executive dashboard.
Performance measurement needs to be connected to strategy, financial objectives, and process improvement.
This is a fundamental principle of the Integrated Enterprise Excellence (IEE) business management system.
See how these concepts fit together within an integrated business management system that improves business performance.
Within IEE, predictive performance metrics help management understand how processes are behaving. When an important metric has an undesirable prediction, leadership can determine whether improving that process should become a strategic priority.
The objective is not simply to make individual KPIs look better.
The objective is to determine where improvement efforts will have the greatest impact on the enterprise as a whole.
This creates a closed-loop management system in which measurement supports better decisions, better decisions drive appropriate improvement efforts, and improvement efforts are evaluated according to whether they produced a lasting change in process performance.
Why Executives Need to Look Forward, Not Just Back
Traditional dashboards can give executives an enormous amount of information while still failing to answer one of the most important management questions:
What should we expect in the future?
A KPI that is green today may turn red tomorrow without anything fundamentally changing. Conversely, a KPI can remain green while the underlying process continues to deliver economically undesirable performance.
Predictive performance reporting provides a better framework.
Executives can understand:
- whether the process has fundamentally changed,
- whether current performance is predictable,
- what level of performance can reasonably be expected in the future, and
- whether process improvement is necessary.
The goal is not to eliminate KPIs.
The goal is to transform KPI reporting from a rear-view mirror into a management system that provides foresight.
That is the difference between simply reporting performance and actually managing the enterprise.
Learn More About Predictive KPI Reporting
For a deeper explanation of this methodology, see Smarter Solutions’ material on Key Performance Indicators Reporting 2.0 and How to Create Predictive Performance Metrics. These pages provide additional examples of how conventional scorecards and dashboards can be transformed into predictive performance reporting.
The 30,000-foot-level methodology is designed to provide predictive statements when the process has an appropriate region of stability, giving management a more meaningful basis for determining whether improvement is actually needed.
Forrest W. Breyfogle III
Founder, Smarter Solutions, Inc.