"Not everything that counts can be counted and not everything that can be counted counts." – Albert Einstein
In operations, numbers are everything, but in today’s world of overwhelmingly available information, it’s easy for an operations manager to get bogged down in data and lose sight of the metrics that matter. So how do you choose the correct performance metrics to focus on?
While there’s no question that key performance indicators (KPIs) are needed to help drive operational efficiencies, there is a big difference between "need to know" and "nice to know". In the former, the resources required to track, collect, analyze, and act upon the KPI data and information will almost certainly be worth the effort. This "need to know" information is what management will ultimately use to make its decisions for moving forward. However, "nice to know" information is usually not worth the time, effort, or expense. For operations, "need to know" KPIs should be directly linked to the critical factors that drive the performance of the organization.
Here are 5 key performance indicators that you should be watching for operational success:1. Return on Investment (ROI)
ROI is a benchmark used to measure the financial gain/loss (or “value”) of a project in relation to its cost. Typically, it is used in determining whether a procedure or project will yield a positive payback and have value for the business. Perhaps the most important aspect of ROI is its ability to show business leaders dollar figures of a project’s worth. For instance, it's clear that employee training will improve performance and productivity, but how does that translate to bottom-line savings or revenue growth? Spending thousands of dollars on automating business processes is likely to improve work efficiency, but what’s the dollar-value improvement of that efficiency?2. Operating Margins
By comparing operating income to net sales, operating margins show how successful a company's management has been at generating income from the operation of the business. Operating margin gives analysts and investors an idea of how much a company makes (before interest and taxes) on each dollar of sales. Generally speaking, the higher a company’s operating margin is, the more attractive it looks to investors. This is because a larger operating margin means the company has more cash to spend on fixed costs or expansion, rather than products to be sold.3. Productivity
In today's competitive environment, companies that don't continue to increase productivity won't survive. Measuring productivity can be tricky as not all processes are repeatable or standardized. Depending on the nature of the business, productivity metrics can vary widely. In most cases you will need to customize your productivity metric to your specific industry/product/service. For example, in manufacturing a common productivity measurement is throughput: the number of units (or transactions or actions) per unit time. In telco, KPIs to watch are average handling time and employee error rates.4. Customer Satisfaction Score
Customer satisfaction is an important KPI for every sales organization looking to fuel growth and achieve success. There are many metrics that can be used to gauge customer satisfaction: Voice of Customer (VOC), Customer Satisfaction (CSAT) and Net Promoter Score (NPS) are the most popular measures. Apart from the primary objective of knowing how well the organization is serving its customers, this score can help to zoom in on process gaps and operational lapses within the organization.5. Employee Turnover Rate
Employee turnover or attrition leads to high recruitment and training costs, lower average skills and a more costly operation. According to the Leadership Development Press website, on average, it costs $17,000 to replace an employee making the median wage in the United States. If you have handfuls of employees leaving, you not only have these costs to consider, but you should also think carefully about the reasons these employees want to jump ship. If otherwise satisfied employees start to see the team shrink little by little, they may be motivated to jump ship as well.
Regardless of the KPIs you choose to track, be sure to review them periodically – business is dynamic and these metrics are subject to change as well. What makes sense to measure in today’s business scenario may be irrelevant tomorrow. Also, keep in mind that measuring KPIs is not enough - action is required! No KPI is useful unless there is an action plan, otherwise it becomes just another number on a report that is easily ignored.