Goals and KPI’s: The Essentials of Strategic Alignment

High level goals: not so SMART

If you’ve been keeping up, you’ll remember we spent the last three weeks discussing strategic direction. First, how to find your company’s competitive advantage through analysis of industry trends, competitors, and internal strengths and weaknesses. Next, we covered vision and mission statements – how they’re best used and what the qualities are that characterise good statements. You may remember that vision statements are linked to high level goals. These set the course for your company, and provide some protection from volatile winds and waves that could otherwise carry you onto hostile terrain.

High-level goals serve primarily to motivate and create focus

These high-level goals are also quite different from the goals your company sets for its day-to-day operations. To return to our war metaphor, your day-to-day goals will include things like capturing terrain, seizing strategic points, and constructing fortifications; these are relatively straightforward, and it’s rare for anyone to be confused about them. But for any given war, these small-scale operations all contribute to a higher purpose, the reason the conflict started in the first place. Perhaps this is regime change, the maintenance of a particular geopolitical order, or the legitimization of a colonial power structure. But most of the time, whether this grand goal has been achieved won’t be immediately self-evident, and sometimes the ramifications can take years to unfold.

In business, we face analogous situations. While day-to-day goals are typically formulated with the SMART criteria in mind (that’s Specific, Measurable, Assignable, Realistic, and Trackable, although there are some popular variations), some elements that are core to lower-level project goals, like measurability and trackability, don’t really apply to high level goals. The purpose of the war (or the business) isn’t measurable. Rather, goals at the highest level of the organization serve primarily to motivate staff and to guide the company’s focus. To do this, they must be both idealistic and ambitious, as well as simple and feasible. It’s a precarious balance to strike. For example, let’s look at Microsoft. In a report last year, they laid out three “ambitions” or high level goals:

  • Reinvent productivity and business processes.
  • Build the intelligent cloud platform.
  • Create more personal computing.

These are clearly not SMART operational goals: they’re not measurable, assignable, or particularly specific. But they do set the boundaries for Microsoft’s business – any initiative or project will be required to contribute to them. Typically you’ll want to define your high-level goals in such a way that they could be achieved in about a decade (since these days, it’s near impossible to account for technological developments beyond that time frame), but there’s no need to put a specific deadline on them. Since the long-term goalposts are always moving, you don’t need to worry about reaching them. In fact, if your high-level goals start looking like they’re within close reach, that probably means you’re not looking far enough ahead!

Operational goals & objectives

While goals at the highest level of an organization thus serve primarily rhetorical and signpost purposes, companies will have a far greater number of operational goals and objectives. These are typically made to fulfill SMART criteria and will set the targets for projects, strategic initiatives, departmental operations, and so on. By tracking these goals, you’ll be able to tell whether your forces are marching according to schedule.

 

 

 

 

There is some hubbub on the internet’s aggregate of management blogs about the differences between goals and objectives. In general it may be said that ‘objectives’ are somewhat smaller in scope and more specific in their formulation than goals, but the two are commonly used interchangeably. High-level goals (the not-so-SMART ones) are clearly distinct, but when the SMART criteria are applied, it’s near impossible to tell the difference between a goal and an objective. To prevent confusion, we will differentiate broadly between non-SMART “high-level goals” on the one hand and “operational goals/objectives” on the other.

Since high level goals aren’t typically measurable or time-bound, they have to be made tangible through a translation into lower-level operational goals/objectives, which in turn are linked to strategic initiatives and projects. The coherence between Vision, goals, and initiatives is commonly called “strategic alignment”, and can be represented visually in a “goal tree” as seen below:

 

Such a goal-tree shows at a glance how high-level goals are split up into SMART goals, which in turn have initiatives and projects connected to them. If your strategic alignment is in order, you should be able to connect every single one of your company’s projects to one of its goals. Vice versa, you shouldn’t run into any goals that aren’t connected to projects or initiatives (after all, as anyone who’s set and failed a New Years Resolution knows, goal-setting without concrete disciplined action results in nothing.) But just setting goals isn’t enough – you also need to track your progress towards them. This is done with nifty little things called KPIs.

KPIs

Kay-pee-whats? KPIs – key performance indicators – are the variables which can be used to determine whether a company is on course to achieve its operational goals. The way you do this will depend on the nature of the goal, and particular types of goals will require creative solutions to track progress.

KPIs can be subdivided into lagging and leading indicators. The basic question behind lagging indicators is: what are the signs that tell us whether we did a good or bad job? Because your company likely has access to all sorts of historical data (whether it’s sales, customer satisfaction surveys, market share, or profit), trends and developments can be traced to give you some idea of your progress towards strategic goals. Because they’re so easy to access, lagging indicators are the most common measure of performance. But of course, as TV ads for investment products are apt to tell you, past results offer no guarantee for the future.

Hence the use of leading indicators. These are the things you can measure today in order to predict and influence future performance. Leading indicators are the precursors of trends, the proverbial first swallows that, to paraphrase Aristotle, may not a summer make, but nevertheless tell you that it is likely on its way. Unfortunately, as statisticians know all too well, the world abounds with correlations that don’t actually imply causations. For example, US federal spending on science, space and technology correlates closely with suicides by hanging, strangulation, and suffocation – but that is hardly a convincing argument to start cutting science investments.

 

To give an easy example, Pampers (the diaper company) would keep a close eye on the birth rate. The number of babies born, after all, would be a useful leading indicator for the number of nappies that might be sold. For most companies, however, finding useful leading indicators isn’t so easy, especially when they are delivering a complex service. It requires an in-depth understanding of your processes, and you’re often chasing a moving target. Customer expectations are, after all, constantly shifting. Competitors may be raising the bar; cultural shifts may be affecting consumers’ priorities; simple habituation will cause customers to start feeling less satisfied with the same services over time. As such, any correlations you can establish are likely to lose accuracy over time.

Leading indicators, then, are often referred to as “the holy grail of performance management” – elusive yet powerful. Since they are influenced both by customer expectations on the one hand, and your own actions on the other, it can be taken as a good sign when customer experience factors like the friendliness of staff become leading indicators. This will generally mean that you are moving up Maslow’s hierarchy of needs towards more immaterial values.

To give an example of how KPIs work, let’s consider an imaginary company that provides some kind of service – let’s say a mobile communications operator. Anyone who has a cell phone contract will be familiar with the generally low quality of customer service and day-to-day annoyances that phone operators tend to offer. So this imaginary company – let’s call it Z-Mobile – aims to turn the industry around by emphasizing the quality of its customer service as the focal point of its strategy. Its goal tree might look something like this:

High-level goal: providing the best customer service in the industry.

SMART goal: achieving a customer satisfaction rating of at least 8/10 at all times.

  • KPI 1: average rating of service by customers in relevant surveys (lagging indicator).
  • KPI 2: % of customer problems resolved within 24 hours (leading indicator).
  • KPI 3: % of customer service calls answered within a maximum wait time of 1 minute (leading indicator)

 

 

 

 

Z-mobile thus not only measures the customer satisfaction rating, but they’ve also thought about the drivers behind a high customer satisfaction rating. They might know from their internal research, for example, that customers are frustrated with long wait times when they call the service helpdesk. They also know that the speed with which problems are resolved has a significant effect on customer satisfaction. In this case, they’ve supplemented a lagging indicator with two leading indicators. This allows them to know where they stand in the present (customer satisfaction rating) as well as having two leading indicators (problem resolution and call answering time) serving as warning signals that customer satisfaction may be set to drop.

The mechanics of KPIs and goal-setting are easier than the strategy of it. How do you translate your high-level goals into strategically chosen operational goals? How do all these competitive analyses and SWOTs tie into your business and product roadmaps? In our next post, we’ll talk strategy and the importance of strategic alignment to competitive advantage, using some real companies as examples.