A Key Performance indicator is a quantifiable measure used to evaluate the success of an organization, employee, etc. in meeting objectives for performance.”

Oxford Dictionary

In the previous post I compared objective and subjective performance measures. However, we didn’t discuss what a performance measure is. So whether you call it a metric, a Key Performance Indicator (KPI), a performance measure or something else, all these terms refer to something that measures performance.

While I think this is a pretty good definition I want to expand our definitions to also reflect the consequences (the monetary or non-monetary rewards and sanctions) that the KPIs are linked to as I believe this approach provides clarity around the use and intent of the KPIs. So what does this framework look like?

Using the framework that my colleagues and I have created, firstly, rather than all measures being labelled KPIs, we refer to a more generic term, performance measure. Secondly, we introduced the notion of Key Result Areas (KRAs) to represent themes of performance measures such as Safety, Cost, Behaviours, Availability, etc. which may have 1 or more performance measures within that theme. Finally, we created 3 tiers of performance measures using labels that reflect their role (requirement) and consequence (reward or sanction). They are as follows:

1. Strategic Performance Measure (SPM). A SPM is a recent term (24 months) used to reflect a high level focus (i.e. at the strategic level) assessing performance against areas such as safety, cost and behaviours. Additionally, SPMs can be used to reflect “enterprise” outcomes; that is, the highest level outcome (e.g. an aircraft completing a mission) acknowledging that the contractor is not solely responsible for failure or success of this outcome. However, by explicitly including “enterprise” outcomes in the performance framework highlights the buyers desired overall outcome. Given the indirect nature of SPMs, they are typically not linked to payment, but rather to other non-monetary rewards and sanctions such as contract extension.

2. Key Performance Indicator (KPI). A KPI in our context is a performance measure that is directly related to contractor performance against the scope of work. Importantly, in our framework a KPI is linked to payment and as such, is a quantitative, lag performance measure. But more on this notion of lead and lag in a later post.

3. System Health Indicators (SHIs). SHIs are performance measures that give us insight into past and future contractor performance by highlighting drivers and constraints to this performance. Typically, the role of an SHI is to provide confidence in the delivery of the KPIs. Again, given the nature of SHIs, they are typically not linked to payment, but rather to other non-monetary rewards and sanctions such as contract extension.

The relationship between SPMs, KPIs and SHIs is provided in the diagram below.

Figure 1 – Tiers of Performance Measures

 To assist in understanding the framework we developed a diagram called the performance measure hierarchy, which show the relationship between all these performance measures and the KRAs. As you can see in the diagram below, the vertical direction (up/down) shows the KRAs highlighting which performance measures are being used to measure the theme (say safety), while also highlighting the various consequences they are linked. Alternatively, the horizontal direction (left/right) highlights the 3 tiers of performance measures (i.e. SPM, KPI or SHI) allowing a better understanding of the risk (e.g. what performance measures are linked to monetary sanctions).

 Figure 2 –Performance Measures Hierarchy

 So while this framework may seem a little contrived, we would encourage it’s use to aid both the buyer and seller in understanding the intent of the performance measure since sometimes a KPI is not really a KPI.