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KPI Development: When to Use Ratios

Let’s say you are managing a large organization and your HR director comes to you with bad news. The total number of employees leaving the company has skyrocketed. They show you the chart to the right to indicate that the raw number of employees leaving last year was below 20 and this year it is 50. Should you panic?

The answer is that it depends. What if I told you that this year the company acquired a competitor and that the total number of employees had expanded from just over 500 to over 2200 (see the chart below), and so the turnover percentage (# leaving / total # of employees) had actually decreased slightly (see Turnover ratio). Would that make you panic? Probably not.






The point is that raw counts can be misleading if you are not careful about the comparisons you are making relative to the underlying population. You might have seen debates in the news about how political leaders or writers have highlighted raw COVID 19 counts to support an argument when a per capita ratio suggests a different conclusion. It’s not that raw counts aren’t sometimes useful, but it is important to be aware of what you are comparing and how the overall population might impact interpretation. We recommend that any measures that could be misinterpreted be expressed as a ratio. Common examples of ratios include:

  • Percent completion
  • Coverage, fraction of the total possible
  • Error or defect rate
  • Per capita
  • Efficiency = Output / Input
  • Productivity = Output / Cost (or Output / work hour)

Beginners in the KPI space often make the mistake of developing raw count measures where ratios would be more meaningful.

One type of ratio you do NOT see on this list is percent increase. Many of our clients mistakenly think that if they create a ratio comparing the current period with the previous period that they have solved this problem. While a percent increase is technically a ratio, creating a ratio using the 2017 raw count and the 2016 raw count is still just as misleading, as more than 150% increase in turnover from year to year is still unnecessarily alarming. Of course, you could choose to track a percent increase of the ratio, but that would be addressing a different question, one that I will address in an upcoming blog.

To learn more about ratios and other KPI development issues, please see our KPI Professional Certification program.

David Wilsey is the Chief Executive Officer with the Balanced Scorecard Institute and co-author of The Institute Way: Simplify Strategic Planning and Management with the Balanced Scorecard.

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