There are many terms around measuring the effectiveness of management and execution that can be confusing. Without a clear, shared definition, leaders can often get stuck in muddy discussions that result in misalignment. While there are no absolute definitions for many of these terms, these are the ones I suggest for the leadership teams and executives I work with.
1. Key Performance Indicator
Let's start with the infamous key performance indicator, aka KPI. These are often confused and conflated with many of the other terms on this list. Put simply, a KPI is a way of measuring something. It's an evaluation unit regarding some aspect of business performance.
It's important to note that while there are many ways to set KPI's, these settings are simply units of measure, not the actual results your seeking. I like to say that the KPI is the tape measure, not the measurement itself.
2. Critical Number
I often use the concept of a critical number with leadership teams to elevate one or more KPI's. A business has dozens of KPI's across many aspects of the business that give leadership insights into how the business is performing. By elevating one or more KPI's to the status of critical number, it provides focus and priority to areas of the business that need senior-level attention.
A critical number is generally tied to a strategic priority or organizational objective and drives alignment. If larger orders is a key goal, then a critical number might percent of orders over $50,000 each week. Often this is tied to a theme which can further drive motivation and cohesion.
3. Balancing KPI
Sometimes, when we set a goal and only focus on one aspect of the business, we skew our action to meet the goal, while inadvertently hurting other parts of the business. For example, it's easy to increase the close rate on a sales funnel by lowering the profit margin and selling contracts at a loss. However, that doesn't help the business overall.
A balancing KPI adds a second unit of measure to the strategic focus that prevents people from gaming the system to hit one goal by trading off another goal and hurting the business overall. Think of it as the check and balance to the main goal.
The vast majority of things you can measure in a business are not 'key' to the business but are needed to track or monitor performance. These are simply metrics. They describe how parts of the business are doing without becoming things that require senior leadership attention. A metric is simply a performance indicator, but it is not a key indicator.
If you're a long jumper, the goal is to get as much distance as possible between the line and the back of your heel where you land. Therefore, the KPI is the distance cleared and the units are in feet and inches. The target is what you are striving to achieve. It is specific to an individual and may change over time. If you're a state high school competitor you might start the season with 20 feet and and work your way up to the state record of 25 feet 3 inches. Targets are set based on your strategy and goals.
Forecasts are similar to targets in that they are specific results or measures related to a KPI. The difference is a target is something that you're trying to achieve based on a strategy and a goal, whereas a forecast is a prediction on future results. The key to any good forecast is not just the number, but also the confidence level of that number from the person/group issuing that forecast.
A forecast without a confidence level is not very useful and can lead to confusion and failures. For example, say the sales team says they are forecasting Q4 revenues to be $1.2 million and the company budgets their expenses based on that number. But then late everyone realizes that the $1.2 million is a stretch goal and the team is only 20 percent confident they will hit that number which puts the company at risk of overspending.
While the difference between all of these terms might seem academic and too subtle to spend time discussing, I've found that executives, who invest the effort, reap the benefits of clarity and alignment when it comes to successfully executing on strategy and management. If you're in a dynamic, high-growth situation, this can often mean the difference between predictable success and a company spiraling out of control.