Editor’s note: Chelsea C. Hammond is director, knowledge management, of The Pert Group, a Bloomfield, Conn., research company. This article appeared in the November 22, 2010, edition of Quirk’s e-newsletter.

The question most organizations ask on a regular basis is: How are we doing? Performance assessment plays a central role in business management and is an integral part of brand health, organizational development and strategic initiatives. Robust performance assessment provides insight beyond simply addressing the “How are we doing?” question by informing scenario planning; aiding benchmarking and norm establishment; guiding resource allocation and strategic imperatives; and identifying changing need-states.

But not all performance assessment programs are alike, varying in their degree of intensity, depth of insight and analytic sophistication. Simple programs infrequently track a handful of success metrics and are utilized as touchstones for basic understanding and insight. More vigorous programs use sophisticated statistical techniques to analytically target indicators, tracking them with frequency and leveraging their predictive power through forecasting and scenario modeling.

Success metrics vs. performance indicators

One of the most frequently used - and often misunderstood - sources of performance information are key performance indicators (KPI). The problem is not that KPIs are being used to evaluate business success; it’s that the metrics many believe to be indicators of performance are not indicators, but stationary measurements of success outcomes.

It’s important that the distinction be made between a success metric and a performance indicator. A success metric is a quantitative measurement of a business outcome defined as a marker of success. Examples of common success metrics include customer satisfaction, net profit and viewership ratings. These measures provide current (or lagging) insight into performance but do not offer any leading indication of changes in performance or directive regarding how to influence success. Success metrics play a vital role in performance assessment, providing essential information about the health of the organization, product, brand or service and are a resulting outcome influenced by a multitude of market factors.

Conversely, performance indicators - such as economic factors, consumer behaviors or attitudes - measure those market factors that directly influence success and determine how they impact it. In contrast to success metrics, performance indicators provide insight into expected changes in success and can be used to provide leading insight into future changes in success outcomes.

The relationship between success metrics and performance indicators can be thought of in terms of a cause-effect interaction, where performance indicators are measurements of the market causes that influence or effect change in the outcomes of achievement measured by success metrics. More simply, success metrics are evaluative while performance indicators are strategic.

Robust performance assessment programs include both success metrics and performance indicators, where performance indicators have been proven to affect change in the outcomes the success metrics measure. Assessment of both success metrics and performance indicators provides insight into current/lagging performance (success metrics) and leading changes (performance indicators).

Selecting success metrics

Success metrics should be carefully selected for their application and relevance, as well as their ability to accurately capture current and future variation in performance. When selecting success metrics, it is often helpful to begin by defining what success means to the organization and using that definition to pinpoint success outcomes to be measured. For many, success outcomes of interest tie back to the business market or vertical and general measures of business acumen such as profitability. However, some organizations may also wish to understand success outcomes directly tied to a specific product or brand or that uniquely relate to the organization itself, including mission or goals.

Once the appropriate success outcomes have been identified, the metrics used to quantitatively capture those outcomes should be defined. This may be something as simple as deciding upon a numeric measurement or as complicated as creating a set of questions and response sets to be used in a consumer survey. The metric quantification should not only be an appropriate measurement of the success outcome but should be understandable and useful to those who will be utilizing it. For example, let’s take customer satisfaction as a success outcome of interest. Development of a success metric for this outcome may include creation of a satisfaction index score; this index could be generated from a series of five questions capturing aspects of the customer experience affecting satisfaction. The score could be tracked monthly, and relative changes would indicate increases or decreases in performance.

While success metrics can provide insight into relatively current performance (although it’s more often lagging because the metrics are not typically available in a timely manner), they provide virtually no insight into why changes in performance may be occurring. Performance indicators take success metrics to the next level of insight and performance assessment.

Identifying performance indicators

Those seeking to get a leading view of performance will want to utilize an assessment program targeting and leveraging performance indicators. Effective performance indicators should be proven to have an impact on the success outcomes of interest, with the direct impact being clearly quantified. This is typically determined through multivariate analyses, which statistically identify market factors having a significant impact on the success outcome of interest and quantify direct influence.

Because business success doesn’t occur in a vacuum, it is pertinent to target performance indicators within a holistic context. This often means bringing together disparate sources of data, such as consumer surveys, tracking and econometric data, when conducting multivariate analyses to identify indicators. Those indicators shown to have the most influence on the success outcome of interest are then dubbed KPIs.

Not all performance indicators are alike. Performance indicators are intimately tied with the success outcomes they have been shown to influence. As such, varying sets of performance indicators may be needed dependent upon the number and variety of success outcomes of interest. For example, the performance indicators associated with the success outcome of customer satisfaction may be very different than the performance indicators of profitability.

Once relevant performance indicators have been identified they can be used to gain a leading view of the success outcome they are linked with, becoming signals of future performance. For example, if brand awareness has been determined to be an indicator of sales (success outcome) then an increase in awareness can be expected to generate an increase in sales. As such, in this case, assessing brand awareness as a KPI would provide a leading indication of expected corresponding changes in sales.

Performance tracking

For best utilization of success metrics and key performance indicators, track them regularly. Regular tracking not only provides current assessment and leading insight but also generates time series data (data collected consistently throughout a period of time) that can be used for forecasting and other predictive modeling. Simply put, a program of performance assessment that utilizes tracking offers strategic advantages beyond short-term contextual assessment - providing insight used for tactical and timely responses as well as sophisticated and targeted planning.

Tracking allows for:

  • relative comparisons and loss-gain assessments situated within time;
  • trending;
  • development of norms and ability to benchmark;
  • determination of the influence of time and event occurrences on success outcomes; and
  • assessment of seasonality.

Employing performance assessments

Robust performance assessments provide much more than just simple gauges of stationary performance and can be powerful tools for business decisions and strategic outcomes. Here are a few applications of performance assessments:

Determine changing need-states. Consumer behavior is ultimately driven by need-states, and many performance indicators are assessments of these needs. Changes in needs signal transformation or evolution of consumer behavior and can be captured through KPI tracking - providing a leading indicator of market shifts. Initiatives, such as sales goals, can then be adjusted accordingly.

Scenario planning. As mentioned, more sophisticated programs of performance assessment allow for predictive modeling and forecasting. One of the advantages to these techniques is the ability to simulate market and business scenarios, gaining insight into the effects of specific combinations and levels of market factors and their influence on success outcomes. Understanding of the factors influencing optimal performance and other scenarios allows for strategic planning and effective resource allocation.

Establish norms and benchmarks. Relativity is a critical component of assessing performance. Performance tracking provides a series of data that can be used to determine variability and central tendency and that can then be used to establish norms, including overall norms and those for specific groups or populations. From this data, benchmarking can then be set and strategic imperatives/planning targeted to achieving or surpassing benchmarking goals.

Determining the appropriate program of assessment

Because programs of performance assessment can have varying degrees of sophistication and depth of insight, organizational needs should be carefully considered when selecting a program. Several factors should be assessed when determining the program that’s right for your organization.

Information needs. Do you need a periodic check-in around a handful of key success metrics or are more frequent and exhaustive assessments needed to provide more depth and currency of insight? Assessing the level of detail and insights needed helps to determine if a simple program measuring success metric or a more sophisticated program utilizing indicators is right for you.

Application of insights. Are performance metrics needed to make timely decisions, such as changes in ad placement? Or are they added to quarterly or even bi-annual reports or planning initiatives? How and when performance assessments will be applied should be clear and drive program development.

Commitment and investment. Does the performance assessment program have support from senior management? Is there time and financial commitment to the program? More sophisticated programs require significant investment both up front and throughout the life of the program. Consider the level of commitment, both culturally and monetarily, when deciding upon a program.

With some careful planning, you can develop an effective program of performance assessment that will meet organizational and business needs - providing insight necessary for market success.