Aligning KPIs to Ensure Strategy Success

Culture eats strategy for breakfast. But culture is not this amorphous entity that companies do not have control over. Culture is what happens when companies reward certain behaviors and punish others. And that’s good news. It means that we can influence our culture.

We talked previously about how you can define KPIs to drive the culture that you want, but that article was mostly focused on encouraging the experimental and collaborative behaviors within teams. We need to ensure that the KPIs we set are aligned with our strategy as well.

In this article, we'll explore how to align KPIs with strategy effectively, using a case study of a health tech startup to illustrate key concepts. By the end, you'll have a clear understanding of how to choose and implement KPIs that drive your product strategy forward.

KPIs and Behaviors

As we discussed in funding and governing empowered teams, there are actually four different types of KPI that we can measure: effort, output, outcome and impact. Ultimately the company cares about the impact (revenue, costs, market share etc.), but these metrics are too lagging and too far removed from the day-to-day work of the people building products that they are not useful to help drive effective decision making.

Let’s examine some common KPIs and their unintended consequences.

Effort: Hours Worked

While it might seem foreign to a lot of people working in technology there are still places that require employees to clock-in and clock-out of the office. Let’s examine some of the unintended consequences:

• Presenteeism: Employees may feel pressured to be visibly present or online for long hours, even when they're not being productive, leading to burnout and decreased overall efficiency.

• Reduced Creativity: Creative problem-solving often requires downtime and mental space. Constant pressure to log hours can stifle innovation and out-of-the-box thinking.

• Penalty for Efficiency: More efficient workers who complete tasks quickly might be inadvertently penalized or perceived as less valuable if hours worked is a key metric.

The underlying assumption here is that hours-in equals more output out. But since hours worked does not take into account the effort expended during those hours they are a very poor measure for tracking efficiency and effectiveness. This led a lot of companies to start tracking outputs instead of effort.

Output: Time and Cost or Features Built

Consider a product team that's primarily measured on the number of features it builds as well as the time-to-market and development costs. While well intentioned these metrics can lead to behaviors that conflict with broader strategic goals:

1. Resistance to Change: Teams may push back against scope changes, even if they would ultimately benefit the customer or align better with the strategy.

2. Short-term Thinking: There might be a tendency to choose quick, easy solutions over more robust, scalable options that would provide long-term benefits.

3. Quality Compromises: In the rush to meet deadlines and stay under budget, teams might cut corners on quality assurance or user testing.

These may seem like reasonable tradeoffs if the underlying assumption is that customers want the scope that has been identified upfront. Unfortunately over 90% of the time that isn’t the case. What the company really wants is customer adoption of their products, so companies are starting to shift from outputs to outcomes.

Outcome: Customer behavioral Metrics

The success of your product relies on whether customers want to use it or not. This means that by tracking customer behavioral metrics such as adoption rate, daily active users or customer retention rate you can increase your change of your product development efforts achieving your strategic goals.

But similar to the other KPI types there are challenges. Let’s take the example of user acquisition. This metric can lead teams to:

1. Prioritize Quantity Over Quality: This could lead to aggressive marketing tactics that bring in users who aren't a good fit for the product.

2. Neglect Retention: The focus on new users might come at the expense of features that would improve the experience for existing users.

3. Overlook Profitability: Rapid user growth doesn't always translate to a sustainable business model.

The challenge here is that a single KPI is open to abuse. This is why we need to pair KPIs with health metrics that provide a counter balance to the primary KPI. For example, in the book Working Backwards, Amazon had a team responsible for growing the product catalog but they found that the warehouses were filling up with more and more stock. When they looked into it customer’s didn’t want the new products they were stocking. This led to a health metric that the team would only be able to count a new catalog items after it had received page views as well.

Impact: Revenue, Cost, Market Share, User Satisfaction

As mentioned earlier these impact metrics are ultimately what the business is trying to achieve. But it can be very hard for teams to tie their actions directly to an impact metric. And because the metrics often lag behind product releases, how can the teams get quick feedback that their ideas are working?

While a lot of companies have moved away from revenue and costs for product teams, KPIs like Net Promoter Score (NPS) or Customer Satisfaction (CSAT) are still used. The challenge with these metrics is that they are lagging in the same way as Revenue and Costs and they are the result of many different changes within a product.

I’m not saying that companies should not track impact metrics. These are critical for the product team to understand how the product is performing as a whole, as well as to identify when Outcome metrics are not performing as expected.

Defining outcome metrics is an art more than a science and mistakes will be made. By tracking the impact metrics alongside the outcome metrics, product teams can identify where the metrics are not as correlated as expected and adjust the outcome metrics accordingly.

KPIs in action

In our previous article about crafting a product strategy we introduced a Health Tech company that had a strategy of targeting individuals managing chronic conditions in English-speaking countries. They were going to stand out in the market by developing an AI-driven recommendation engine for personalized health insights and fostering a supportive community of users with similar health challenges.

Let’s examine how we might align KPIs with each aspect of this strategy:

1. Target Market KPIs

• % growth of new users

• % of new users with chronic conditions

2. Geographic Focus KPIs

• % of daily active users from target countries

• Relative engagement rate of users in target countries vs. non-target countries

3. AI Recommendation Engine KPIs

• Frequency of user-initiated interactions with AI recommendations

• % of users reporting improved health decisions due to AI recommendations

4. Community Engagement KPIs

• % growth in daily active users in community features

• Average time to first post

Conclusion: Putting KPI Alignment into Practice

Aligning KPIs with strategy is a crucial skill for product managers. When done effectively, it ensures that teams are working towards the right goals and that progress can be measured in meaningful ways. Here are the key takeaways:

1. Understand the power of KPIs: Remember that KPIs don't just measure progress—they shape behavior and culture.

2. Choose KPIs thoughtfully: Focus on outcome KPIs that measure customer behavior, balancing them with carefully selected output and impact KPIs.

3. Align with strategy: Ensure each aspect of your strategy is represented in your KPI framework.

4. Consider unintended consequences: Always think about what behaviors your chosen KPIs might inadvertently encourage.

5. Review and adjust: Regularly assess whether your KPIs are driving the right behaviors and outcomes, and be willing to adapt them as your strategy evolves.

As you apply these principles to your own products, remember that the goal isn't to create a perfect set of KPIs from the outset. Instead, view KPI alignment as an ongoing process of refinement and learning. Start with your best understanding of what drives success for your product, measure it, learn from the results, and iterate.

By thoughtfully aligning your KPIs with your strategy, you'll create a powerful tool for guiding your team's efforts and driving your product towards success. This alignment can be the difference between a product that merely exists and one that truly thrives.