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Phil Green
Phil Green
author, misLeading Indicators: How to Reliably Measure Your Business

Greenbridge Management Inc.
President

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The importance of structural information

Posted almost 9 years ago

Business writers and consultants today typically advise managers to calculate indices and percentages to measure the state of their enterprises. For example, Kaplan and Norton, in the “Balanced Scorecard”, suggest measuring “strategic information availability” with the “percentage of processes with real-time quality, cycle time, and cost feedback available” and “percentage of customer-facing employees having on-line access to information about customers.”  Meyer and Ross, authors in Peter Senge’s collaboration “The Dance of Change,” advise readers to develop similar measures, to strive for simplicity, and to display them on an “Operational Dashboard.”

Many management writers advise their readers to limit the number of things they measure to some arbitrarily small number. Meyer and Ross, for example, state “If you could only track six or eight things, what would they be? The point is to avoid devising so many numbers and gauges that your dashboard looks like a 747 cockpit. Otherwise you’ll spend all your time looking at the dashboard and forget to ‘look out the windshield’—to actually implement the work.”

I doubt many would disagree with their advice to “look out of the windshield,” but it is not very helpful. As for the rest, you should measure what you need to measure to prompt timely and specific action, while preserving the structural integrity of the data. Every instrument on the 747 is there to help fly the plane. The instruments prompt the pilots to take specific actions. There is virtue in simplicity, but the number of things you should measure is dictated by the structure of the information and the actions that need to be taken, not by simplicity for simplicity’s sake.

Simplicity is of course a desirable attribute of an information display. Many  “operational dashboards”, however, use a lot of ink and space to display very little. (Go to Google images and search for “business operational dashboard” for many examples.)

Many of the displays in these dashboards can be almost totally useless. They only give broad measures of progress because they throw out structural information. Without structural information, it is hard to know what corrective action to take. Furthermore, displaying the information in the form of dials makes the displays unnecessarily complicated.

Edward Tufte said that graphical displays should “show the data; present many numbers in a small space; avoid distorting what the data have to say; induce the viewer to think about substance; reveal the data at several levels of detail, from a broad overview to the fine structure.”  He says data displays should reveal the complex.”

Unfortunately, many dashboards don’t reveal it but conceal it, because they crunch numbers into single indices.

For example, a performance indicator of inventory turns for a consumer products manufacturer may suggest to management that there is too much inventory. “Twelve inventory turns per year” is how it is often reported. This gives the false impression that all inventory turns at the same rate. It ignores the structural information. There is not an equal amount of inventory for every product. Nor is there an equal proportion of inventory for every unit of sales.  Capturing, displaying and acting on this structural information takes more effort than calculating overall averages and observing the overall direction they indicate.   It also leads to greater improvements.

Both a logistics manager and a sales manager should know, for example, that the two percent of products that accounted for the top twenty percent of sales last year are currently taking up twenty-eight percent of the inventory, and are thus turning relatively quickly. They might also find it useful to know that more than half their current product offerings account for less than 20% of sales, taking up 10% of inventory space.    This information can prompt several specific actions: changing product mix, getting rid of slow-moving products, sourcing raw material differently or changing manufacturing strategy based on the relative speeds at which various products turn.

You may be able to calculate indices in a way that makes them mathematically valid, but by throwing out the structure of the data, they are not “structurally valid.” Peter Drucker, in his classic book “Management” wrote in 1973 “to enable controls to give the right vision and to become the grounds for effective action, the measurement must also be appropriate. Thus, it must present the events measured in structurally true form. Formal validity is not enough.”

Yet the advice has not been heeded, and to a large extent, our creative and data crunching ability with computers has made it worse.

Comments (2)

I agree that it is not always possible to limit the amount of KPIs to for example 6. However it usually is possible to limit the amount of current KPIs to 6. The 747 cockpit is an example of this. A lot of meters the pilot must know about, but only a limited amount to be followed at the same time. The importance of various different performance indicators change in different situations in a 747 as well as in a corporation. However, the amount of critical success factors usually can be limited and having awareness of those is vital.

Posted almost 9 years ago | permalink
Phil Green
Phil Green
author, misLeading Indicators: How to Reliably Measure Your Business

This is a good point—you can only look at so many KPIs at once. The main point of my post is to point out the importance of preserving structural information when creating a KPI. Otherwise, the KPI may be misleading.

Posted almost 9 years ago | permalink

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