Managing: Winning KPIs

Show me company with over 20 key performance indicators (KPIs) and I will show you lack of focus, lack of alignment and under achievement. Some organisations try and manage with over 40 KPIs, but many of these are performance measures, not winning KPIs.

I believe there are three types of performance measures (as set out in the diagram at right).
Hierarchy of performance measures
Critical success factor No. #
Result indicators
Performance indicators
Key performance indicators

Thus many performance measures used by organisations are an inappropriate mix of these three types.

So what are result indicators? They include:
* customer satisfaction
* net profit before tax
* profitability of customers
* employee satisfaction
* return on capital employed.

The common characteristic of these measures is that they give clear picture of whether you are travelling in the right direction. They do not however tell you what you need to do to correct the situation. Thus result indicators are information that is ideal for the board, who should not be involved in management.

When I am giving an example of result indicator I use the analogy of the speedo in one’s car. The board will want to know what speed the car is doing. However, the management need to know more information as your travelling speed is combination of what gear the car is in and what revs the engine is doing. In fact, management might be concentrating on something completely different, such as how economically they are driving eg, gauge telling them how many kilometres they are getting per litre.

In other words an organisation should have two balanced scorecards (BSCs), governance BSC made up of five to six measures covering high level result indicators and management BSC comprising up to 20 KPIs.

KPIs, which management needs to focus on, are sitting many layers beneath these result indicators.

Between result indicators and your true KPIs are all those other indicators of varying merit, which may be of use as team performance indicators but are certainly not ones that should find their way onto the organisation’s “management” balanced scorecard. Where they do you find management in confusion, as they fight their way through 40 or so performance indicators.

Performance indicators beneath the result indicators mentioned above could be:
* profitability of the top 10 percent of customers
* net profit on key product lines
* percentage increase in sales with top 10 percent of customers
* employees participating in the suggestion scheme
* duration of the cash to cash cycle.

Characteristics of good KPI
1. Often known to the organisation
2. Affects more than one BSC section (eg late planes)
3. Impact of movement in day/week can be significant
4. Responsibility can be tied down to teams/individuals
5. Positive movement affects many other indicators and all in positive direction

1) I have yet to come across KPI that was totally new to the organisation. They have either never been recognised, or the original KPI project work had been gathering dust somewhere unknown to the new management.

2) Probably the most important characteristic is the fact that KPI will affect more than one of the “sections” in balanced scorecard (BSC). The groundbreaking works that Kaplan & Norton1 did needs modification to include aspects that they themselves had already alluded to. The four quadrants now give way to six sectors when one includes employee satisfaction and environment/community. The latter is important as it means the BSC now incorporates all triple bottom-line issues. (See above.)

The famous example of true KPI that I frequently use is the British Airways KPI of late planes. This KPI affected all six of the above mentioned sectors.

The late planes:
* increased cost in many ways, including additional airport surcharges, passengers were having to stay in hotels overnight as planes were “curfew”;
• increased customer dissatisfaction, and alienated those people who were meeting the passengers at the other end (possible future customers);
• contributed more to ozone depletion (environmental impact) as additional fuel was used in circling around the airport, as the planes had missed their landing window;
• had negative impact in the learning and growth sector as staff would have been replicating bad habits as the late planes flew around the world;
• adversely affected supplier relationships and servicing schedules resulting in poor service quality;
• increased employee dissatisfaction, as they had to deal with frustrated customers.

3) KPI is monitored daily/weekly or at the very least monthly. An annual measure cannot be KPI. However KPI may only need to be operational for couple of weeks within year eg, monitoring the completion of performance reviews only needs to operate for four to six weeks when the performance review round occurs such as mid-June to mid-July and mid-December to mid-January.

Outside these times this KPI has no use and should not be reported. Likewise it is irrelevant to be reporting customer satisfaction results, on monthly basis, when the last survey was performed six months ago. Customer satisfaction, if measured six monthly, annually or worse, cannot be important to your organisation. It is therefore at best only result indicator; it certainly is not KPI. Leading organisations have been, for some time, undertaking systematic random samples on regular if not daily basis. In this case there would be couple of KPIs within the satisfaction measures reported.

4) KPI should tell you about what action needs to take place. The British Airways “late plane” KPI communicated immediately to everybody that there needed to be focus on recovering the lost time. Cleaners, caterers, ground crew, flight attendants, and liaison officers with traffic controllers would all work some magic to save minute here, minute there whilst maintaining or improving service standards.

5) good KPI has flow on effect. In other words an improvement in key measure within the critical success factor of customer satisfaction would have positive impact on many other measures. Timely arrival and departure of planes would have fed into better service by ground staff as there was less “fire fighting” to distract them from quality and caring customer contact.

Reporting performance measures
A possible way of reporting performance indicators is set out in the diagram How They Fit Together, on the opposite page.

One or two critical KPIs are reported each day electronically at 9am, or as at British Airways constantly updated 24 hours, seven days week.

In most organisations there will be top five KPIs that will need to be reported at least weekly (these will exclude the critical KPIs above). I am an advocator of reporting late projects and late reports to the senior management team each week. These two simple reports will revolutionise completions in your organisation.

The remaining KPIs can be reported monthly along with team and business unit BSCs reporting. The introduction of BSCs promotes more concise and prompt reporting.

The board will receive summarised one-page governance-based BSC covering five to six result indicators.

• There will be follow-up article with the material removed from earlier drafts of this article. I am grateful for the sound advice provider by my reviewers. M

(Footnotes) 1 Translating strategy into action “The balanced scorecard ” by R.S. Kaplan & D.P. Norton, HBS press, ISBN 0-87584-651-3.

David Parmenter is the managing director of waymark solutions, Wellington company specialising in helping organisations measure and improve performance. Email: [email protected], website: www.waymark.co.nz

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