Business Analysis and World of Indicators

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This was another interesting question that was supposed to be by one of my workshop participants.

She asked, "LN, I hear so many terms about measurements, such as metrics, indicator, key performance indicator, scorecard, and balance scorecard. Why so many terms? What do they mean and how do they relate?"

This reminded me of a very famous treatment by Dr. Edward Deming who said, "In God we trust. For rest, please bring data."

Measurements and business analysis are closely linked. If we can't measure something, we really don't know whether we performed well or something needs to be improved. At the same time, let me warn, everything that should be measured can't be measured, and same time everything we measure, are not necessarily worth measuring.

I have seen umpteen organizations who measure wrong things and then create trouble for themselves. That's another topic for discussion. Today, let me try to explain how these terms related to each other and where to use what.

The very first outer universe that you can think of is indicators. Everything that we will discuss now is essentially a subset of indicators.

So what's an indicator? In simple terms, an indicator indicates something that is of interest to stakeholders. All of us know traffic light indicator which tells you whether should move or you should stop.

Moving away from pure indicator which does not have a numeric value, we could start looking at providing a numeric value to the indicator. That's when we call it as a metrics.

For example, we could say our profitability is 25%. This indicates that it's a healthy profit margin that the organization is making. Metrics are measurable indicators.

Next comes is among the metrics which ones are key indicators or key performance indicators. An organization may have hundreds of metrics that it collects over a period of time, but not all metrics are equal.

Some metrics are critical to the operation of the business and must be monitored very closely. That's what we will call it as a key performance indicator. For example, the cash in the bank is a great KPI for any organization to monitor. If you run very low on cash, then your business can stop.

Now, what's a scorecard? A scorecard typically provides a combined performance indicator using multiple KPIs. We can create a performance scorecard for a department where we include key performance expectations that we are expecting from the organization.

Now, what's a balanced scorecard?

A balanced scorecard is one which is balanced with respect to different perspectives, such as financial perspective, people perspective, process perspective and customer perspective. It is also balanced with respect to past performances and likely future performances.

In my personal experiences, most organizations build balanced scorecard at an organization or enterprise level than building it at the system level. Metrics and KP are typically used at the processor system level. However, these are not iron cast and you may be able to use any of this at any level.