Key Performance Indicators
CFOs, controllers, and business owners recently gathered to discuss Key Performance Indicators (“KPI”). Summarized below are key points of conversation.
KPIs are objectives to be targeted that will add the most value to the business.
Why use KPIs?
- Evaluate – to reduce the number of decisions that are based solely on instinct or gut feel, and make decisions based on objectivity and facts
- Control – as an organization grows it becomes more difficult for everyone to remain as close to all the operational details
- Budget – measure against a standard or target
- Motivate – employees respond to the metrics by which they are judged
- Celebrate – recognize achievements when objectives are met
- Promote – create focus on areas that drive value for the organization
- Learn – allows the organization to focus on facts when difficult times arise and adapt to changes in the business environment
Major Categories of KPIs
- Quantitative – presented as a number
- Practical – interface with existing company processes
- Directional – specifying whether an organization is improving or not
- Financial – used in performance measurement
- Actionable – within an organization’s control to effect change
Characteristics of KPIs
- May be used at multiple levels
- Linked to targets
- Based on controllable factors
- Routinely applied
- Specific, Measurable, Achievable, Relevant, and Time-phased (“SMART”)
A KPI can follow the SMART criteria. This means the measure has a Specific purpose for the business, it is Measurable to really get a value of the KPI, the defined norms have to be Achievable, the improvement of a KPI has to be Relevant to the success of the organization, and finally it must be Time-phased, which means the value or outcomes are shown for a predefined and relevant period.
- Have a pre-defined business process
- Have requirements for the business process
- Have a quantitative/qualitative measurement of the results and comparison with set goals
- Investigate variances and adjust processes or resources to achieve goals
KPIs are commonly used by an organization to evaluate its success or the success of a particular activity in which it is engaged. Sometimes success is defined as making progress toward strategic goals, but often, success is simply the repeated achievement of some level of operational goal (on-time delivery, productive hours, etc.). Accordingly, choosing the right KPIs is reliant upon having a good understanding of what is important to the organization.
The need to develop a good understanding of the organization’s business processes is extremely important. While gaining an understanding of the business processes in place, ask “Why is this being done? Is it adding value to the organization?” Asking these questions can lead to removing inefficiencies and non value-added activities, as well as the identifying potential improvements; as a consequence, performance indicators are routinely associated with “performance improvement” initiatives.
Performance indicators differ from business drivers and goals; KPIs can even differ within the same industry. Therefore, no one “golden” software package will suit the needs of tracking all KPIs for every company. The process can be extremely labor intensive until the indicators important to the organization are determined. Only once the performance indicators have been identified should a software package be purchased to streamline the aggregation of data and the process.
A very common method for choosing KPIs is to apply a management framework, such as the Balanced Scorecard, which can have KPIs tailored at the corporate level, department level, all the way down to the individual level.
In general, when choosing KPIs, the organization should select measures that relate to financial, operational, satisfaction, and safety areas. KPIs can vary by department or division, however, each identified level should focus on three to five measures, but not more than six. It is important to keep the number of KPIs small to prevent information overload and/or distractions, and foster a narrow focus on the key aspects where value is driven.
Creating “buy in” and accountability from everyone in the organization is essential to reap the benefits of tracking KPIs. Everyone involved in the process or solution needs access to the information that will be tracked. Creating a competitive environment, for example, a competition between two teams to reduce set up times or hit sales targets, is one way to create “buy in” and participation.
It is important to consider the potential “gaming of the system” by employees who will be judged and compensated based on indicators in their control. The indicators must be evaluated and create value for the organization; they cannot be susceptible to gaming or manipulation by employees.
Evaluation of KPIs
Once the KPIs have been established and implemented, it is important to establish evaluation timing for your KPIs. Whether it be real-time, weekly, monthly, or quarterly, timely evaluation of the results is the first step to a timely response.
There is substantial time associated with, and considerations to be given when developing and assessing KPIs. The attendees who invested the time and resources are realizing the benefits of the invested time establishing and monitoring their KPIs.