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SMART Performance Indicators

Posted on August 19, 2014 by

Clayton & Mckervey

Clayton & McKervey

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How do companies measure business performance? Timothy J. Hilligoss, CPA, MST, Shareholder of International Accounting, Practice Leader for Asia at Clayton & McKervey, P.C., hosted the quarterly CFO/Controller Roundtable where participants discussed how their companies use Key Performance Indicators (“KPIs”) to strengthen the performance of their businesses.

Many businesses understand the benefits of tracking KPIs but run into difficulties in identifying and measuring them. The conversation at the roundtable focused on three specific areas:

  1. How do you determine what to measure?
  2. How do you measure it?
  3. What do you do with the information?

Like any goal, KPIs should follow the SMART criteria. They should be:

Specific – KPIs should measure the areas that have the greatest impact on the business’s performance.

Measurable – They need to be something that can
be identified and tracked in order for them to be used as a management tool.

Achievable – The cost of obtaining the
measurement should outweigh the benefit
gained from evaluating performance.

Relevant – KPIs should tie back to the organization’s overall strategic goals and objectives.

Timely – Measurement, analysis, and response to KPIs should be in a timeframe that enables management to react to changes inside and outside of the organization.

KPIs can be selected from a number of sources. Some are external to the organization, such as loan covenants or agreements with customers and suppliers. Others are generated internally based on feedback from management and employees.

In the case of external customers, it is important to discuss the reasoning behind the requested information. By doing this, it may be determined the KPI being requested is not the best indicator of the particular type of performance they are looking to review. In addition, these conversations can give business owners and managers a clearer understanding of how people from outside their organization evaluate a given industry or line of business.

Similarly, internal customers can also provide valuable insight about evaluating the performance of an organization. As noted by several participants, obtaining feedback from employees can be critical in the successful development and implementation of a KPI system. Employees – particularly those working on the front lines – have unique insights about how to improve the performance of organizations. By tapping into these resources, management can potentially identify KPIs it wouldn’t have been able to identify on its own. In addition, involving employees in the selection of KPIs helps address another major issue – employee buy-in. Many attendees noted getting employee buy-in was a major stumbling block for them when implementing KPI systems. Some recommendations for ensuring this were:

  • Align the KPIs with organizations strategic goals and plans and then cascade these through the organization so employees understand their importance.
  • Focus on outcomes as opposed to tasks. Allow the employees to determine the best way to achieve the desired outcome.
  • Tie the KPIs to employees’ performance plans to help keep them at the forefront for employees.
  • Consider tying KPI performance as part of a reward system. It is important to note, caution should be exercised in doing this as people have a tendency to focus on whatever is being measured. For example, if employees are being rewarded based on units of production they will shoot to achieve those goals even if it comes at the expense of quality.

Some examples of KPIs that were being used by attendees were:

  • Profit per employee
  • Revenue per machine
  • Machine utilization / downtime
  • Cycle time
  • On-time delivery
  • First-pass yield
  • Economic profit / economic value

Once the KPIs have been identified, the next challenge is to measure and report on performance. Some indicators are easily accessible through existing systems. For example, pulling financial information from the accounting software to prepare ratios to analyze financial performance or using production statistics to analyze quality performance. Other KPIs will require specific processes and / or systems to be implemented to capture the necessary information. Where possible, these systems should be as user friendly as possible. If the system used to collect KPI information is cumbersome or time-consuming to use, employees will find ways to work around the system. As a result, the KPI information management is able to collect will be incomplete and potentially useless.

Some measurement resources mentioned by participants were:

After collecting the data on KPIs, organizations must use the information for some purpose or action plan. In order to maintain employee buy-in it is important for this information to be analyzed and for that analysis to be shared with the employees. This continues to impress the importance of tracking these measures.

Analysis of and reaction to the KPI data also needs to happen in a reasonable timeframe so the information collected is beneficial in the decision making process. There is no standard period for review; frequency will be dictated by a number of different factors that may vary case-by-case and company-by-company. Management should determine how frequently – daily, weekly, monthly, etc. – these measures need to be evaluated and then commit to maintaining that schedule.

Some organizations use the KPIs to compare current performance against prior periods to determine if there are any areas of the business that require additional focus. Others compare their performance against companies or industry data. The benefit of this approach is it helps businesses identify areas where they may be stronger or weaker than other companies. This in turn can help them identify areas of weakness they can look to improve or areas of strength they can look to capitalize on in future strategic plans.

The following resources were mentioned for obtaining additional information on KPIs for businesses and industries:

The foundation of a good business is communication. An organization cannot be successful without support from employees, and employees cannot be successful without the support of the organization. The products and services you provide will fail without a commitment to quality during production and production will fail without dedicated employees. At the base of these functions is communication, beginning with the message to your employees of your goals and values, and coming full circle with communication from customers to the organization about product desires and quality. This creates an environment of continuous improvement which is ideal for a solid business in today’s growing economy.

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