how to find leading measures - ready to use guide

LEADING MEASURES SPECIFIC RECOMMENDATIONS TO FIND THEM

Based onhttp://www.bscdesigner.com/find-leading-measures.htm

By Aleksey Savkin

LEADING LAGGING

THE DIFFERENCE BETWEEN LAGGING AND LEADING MEASURES

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• Knowing the score or the distance between the ball and the cap is easy (lagging measure)

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• Knowing the score or the distance between the ball and the cap is easy (lagging measure)

• Knowing and controlling the parameters of golf swing that lead to an excellent score are hard (leading measures)

MEASUREMENT TOOLKIT

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THE NATURE OF MEASUREMENT

• Before we were talking about such steps as observation and quantification that one needs to follow in order to come up with a metric,

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• Before we were talking about such steps as observation and quantification that one needs to follow in order to come up with a metric,

• In the business world most of the measures are actually simple calculations.

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• Before we were talking [1] about such steps as observation and quantification that one needs to follow in order to come up with a metric,

• In the business world most of the measures are actually simple calculations.

• Still in the business we often forget about scientific nature of measurement and replace it with simple calculations.

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• The measurement is probably as old as science itself

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• The measurement is probably as old as science itself,

• still in the business we often forget about scientific nature of measurement and replace it with simple calculations.

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• Scientific research implies a certain level of uncertainty about a subject of the research and the goal of measurement is to reduce the uncertainty.

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• If we have a look at business measures from this point of view then we will be really disappointed.

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• If we have a look at business measures from this point of view then we will be really disappointed.

• The majority of “measures” are actually calculations [2] or are based on the information obtained directly from the subject of the research.

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[2] “How to Measure

Anything: Finding the Value of

Intangibles in Business”

• Douglas W. Hubbard, “How to Measure Anything: Finding the Value of Intangibles in Business”, 2007, Wiley; 1 edition

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AN EMPLOYEE TURNOVER EXAMPLE

• An HR manager calculates turnover by dividing the number of employees who left the company over a period by the average number of employees that were in the company during this period.

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MEASUREMENT VS. CALCULATION

• All of the variables are available in the company’s ERP system and are simply divided.

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• We could call it Big Data,

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• We could call it Big Data, • But the idea is as simple as running two

database queries to get two variables and divide one by another.

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• There is nothing bad about calculating something that might be insightful for HR,

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• There is nothing bad about calculating something that might be insightful for HR,

• But let’s not call it measurement, as it is just a calculation.

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SOCIAL SCIENCE MEASUREMENTS

• The idea is to ask the persons that are in the focus group (the subject of the research) to share their opinion about something.

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• One supposes that well formulated questions will minimize the risk of receiving wrong information and making wrong conclusions as a result.

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• One supposes that well formulated questions will minimize the risk of receiving wrong information and making wrong conclusions as a result.

• It is not a calculation, but still we are doing only what social scientists can do – ask people directly about their opinion.

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TRADITIONAL SCIENTIFIC MEASUREMENT

• Traditional scientific measurement method is about observation.

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• They observe, they come up with hypothesis, and they test them to see if one worked or not.

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• They observe, they come up with hypothesis, and they test them to see if one worked or not.

• It is always about the reduction of uncertainty and almost never about precise calculations.

DIFFERENT WAYS TO FIND MEASURES

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Source: www.bscdesigner.com

Measure Why use

CalculationsNot a measurement, but still…

We can "calculate." It is not a measurement, but still it gives us a number

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Measure Why use

Surveys Social science measurements

We can communicate with the subject of the research (with our customers, prospects or employees), for example via surveys

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Measure Why use

Observe and concludeTraditional scientific measurement

We can observe and do conclusions (we are not limited to observing our own business only or the present day only)

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Measure Why use

Observe and concludeTraditional scientific measurement

We can observe and do conclusions (we are not limited to observing our own business only or the present day only)

Artificially created conditionsTraditional scientific measurement

We can formulate a hypothesis and test it under artificially created conditions

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• A practical conclusion from the ideas described above is that we always have several measurement options.

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1. We can “calculate.” It is not a measurement, but still it gives us a number

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1. We can “calculate.” It is not a measurement, but still it gives us a number

2. We can communicate with the subject of the research (with our customers, prospects or employees), for example via surveys

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3. We can observe and do conclusions (we are not limited to observing our own business only or the present day only)

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3. We can observe and do conclusions (we are not limited to observing our own business only or the present day only)

4. We can formulate a hypothesis and test it under artificially created conditions

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CALCULATIONS

• We could calculate satisfaction rate by calculating the number of repeat purchases.

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CALCULATIONS

• This is not a measurement, it is a calculation

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CALCULATIONS

• This is not a measurement, it is a calculation • but it still reduces the level of uncertainty

about the subject in the sense that it allows managers to see the problem from a different perspective.

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CALCULATIONS

• With calculations we could normally generate excellent lagging measures, but not leading ones

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CALCULATIONS

• We suppose that satisfied customers are those who make repeat purchases within 2 months.

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CALCULATIONS

• We suppose that satisfied customers are those who make repeat purchases within 2 months.

• But we have no idea about what leads them to a repeat purchase.

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SURVEYS

• We could calculate some customer activity by taking some variables

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SURVEYS

• But sometimes it is easier to conduct a survey by asking customers about their preferences and decisions.

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SURVEYS

• But sometimes it is easier to conduct a survey by asking customers about their preferences and decisions.

• the procedure of measurement is easier itself, but the formulation of survey questions is always a challenging task.

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OBSERVE AND CONCLUDE

• We just observe what they do and make appropriate conclusions.

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• You might install a special script on the website that will show you the most clickable zones.

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• You might install a special script on the website that will show you the most clickable zones.

• You can observe the process of customer choice in the physical shop.

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ARTIFICIALLY CREATED CONDITIONS

• A measurement by observation as described above might be as difficult as finding black holes in the space by tracking light behavior.

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• A measurement by observation as described above might be as difficult as finding black holes in the space by tracking light behavior.

• We are not pretending to do a space science in the business, and we can artificially create some conditions and see what will happen.

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• Instead of asking customers for their opinion, or silently observing their behavior,

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• Instead of asking customers for their opinion, or silently observing their behavior,

• One could create two options and see which one works better.

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• These two measurement methods actually give us more opportunities to find excellent leading measures.

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• These two measurement methods actually give us more opportunities to find excellent leading measures.

• Under artificially created conditions you can test business hypotheses and get closer to the drivers of performance excellence.

ALL THESE APPROACHES MIGHT GIVE CONTRADICTORY RESULTS

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THE DIFFERENCE BETWEEN VARIOUS TYPES OF MEASUREMENT Measurement Results

Calculation Information from CRM system is calculated. 70% of customers buy while balls.

Survey Survey was conducted. Customers prefer white balls because they like the white color 60% more than the black one.

Source: www.bscdesigner.com What change will lead to more sales?

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Observation 1 Observation was done within a company's own sales history. 20% of customers who buy white balls buy a black one during the next 6 months.

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Observation 2 Observation was done in competitor's business. In ABC company they have balls of 4 colors and they all are equally popular.

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Artificial Condition 1

Hypothesis of price perception was tested. When black balls are 10% more expensive than white balls, then 60% of customers buy black balls.

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Hypothesis of price perception was tested. When black balls are 10% more expensive than white balls, then 60% of customers buy black balls.

Hypothesis of a bundle was tested. When a white ball is bundled with a white hat 75% of customers buy the bundle.

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• It is not a real business case, but I think you do agree that we are faced with situations like this very often:

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• Our CRM system gives us a number, but we don’t know how we can change it.

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• Our CRM system gives us a number, but we don’t know how we can change it.

• We do some survey and sometimes we get some ideas, but they might not be coherent with real customers’ actions.

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• We obverse and do some conclusion about what might work

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• We obverse and do some conclusion about what might work

• We try various options and it appeared that something unmentioned works better

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• It is obviously that the company needs to do some more tests or conduct more specific surveys to understand the challenge better.

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• It is obviously that the company needs to do some more tests or conduct more specific surveys to understand the challenge better.

• Finding leading metrics is actually about finding a solution that works.

FINDING EXCELLENT LEADING MEASURES

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HOW TO FIND A BETTER LEADING MEASURE

• We need to have a balance between various measurement methods.

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HOW TO FIND A BETTER LEADING MEASURE

• We need to have a balance between various measurement methods.

• We need to combine the results of calculations, the survey results, the results of observations and the results of tests under artificial conditions.

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SAFETY RULES NEED TO BE FOLLOWED

• Have your business context in mind. We don’t want to measure something just because we can measure it.

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• Have your business context in mind. We don’t want to measure something just because we can measure it.

• Don’t believe people who tell you that it is impossible to measure, as it is possible to quantify and measure anything [2].

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• If you cannot quantify something then you need to decompile the subject into measurable pieces

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• If you cannot quantify something then you need to decompile the subject into measurable pieces

• Combine various measurement and research methods like calculations, surveys, observations and a/b tests.

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• [1] Aleksey Savkin, The difference between quantification, measure, metric, and KPI, January 2014, BSCDesigner.com

• [2] Douglas W. Hubbard, “How to Measure Anything: Finding the Value of Intangibles in Business”, 2007, Wiley; 1 edition

RESOURCES

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MORE ABOUT THE BALANCED SCORECARD

Find more insightful articles about the Balanced Scorecard in ”Articles” section at www.bscdesigner.com

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THANK YOU!

Feel free to send us your questions using the contact form at www.bscdesigner.com

how to find leading measures - ready to use guide

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