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From Accountingnet.ie In Business From my research, very few organisations really monitor their true KPIs. The reason is very few organisations, business leaders, writers, corporate accountants, and consultants have explored what a KPI actually is. This brief paper hopefully will help you unearth what a KPI is and point where to look for them in your organisation. A balanced scorecard with six perspectives  “Timely arrival and departure of planes” impacted all six balance scorecard perspectives. Late planes:
A distribution company A CEO of a distribution company realised that a critical success factor for their business was trucks leaving as close as to capacity as possible. A large train truck capable of carrying more than 40 tonnes were being sent out with small loads as despatch managers were focusing solely on “deliver in full on time” to customers. Each day by 9am, the CEO received a report of those trailers that had been sent out under weight. The CEO rang the Despatch manager and asked whether any action had taken place to see if the customer could have accepted that delivery on a different date that enable better utilisation of the trucks. In most cases the customer could have received it a day or two earlier or later, fitting in with a past or future truck going in that direction. The impact on profitability was significant. Just with the airline example, staff some did their utmost to avoid a career-limiting phone call with their CEO. The characteristics of KPIs KPIs represent a set of measures focusing on those aspects of organisational performance that are the most critical for the current and future success of an organisation. There are only a few KPIs in an organisation (no more than 10) and they have certain characteristics. KPI characteristics include:
When you put a Pound or Dollar sign to a measure you have not dug deep enough. Sales made yesterday will be a result of sales calls made previously to existing and prospective customers, advertising, amount of contact with the key customers, product reliability etc. I term any sales indicators expressed in monetary terms as result indicators which will be further explained in this article. In many organisations a KPI may rest with certain activities undertaken with your key customers who often generate most if not all of your profit. KPIs should be monitored and reported 24/7, daily and a few perhaps weekly. How can a KPI be measured monthly, as this is “shutting the barn door well after the horse has truly bolted”. KPIs are “current” or “future” measures as opposed to “past” measures. When you look at most organisational measures, they are very much past indicators measuring events of the last month or quarter. These indicators cannot be and never were a KPI. That is why a satisfaction percentage (e.g. 65%) from a customer satisfaction survey performed every six months can never be a KPI. All good KPIs that I have come across, that have made a difference, had the CEO’s constant attention, with daily calls to the relevant staff. Having a potentially “career limiting” discussion with the CEO is not something staff want to repeat, and in the airlines case, innovative and productive processes were put in place to prevent a reoccurrence. A 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 a 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 “a minute here and a minute there” whilst maintaining or improving service standards. A KPI is deeply enough within an organisation to be tied down to an individual. In other words, the CEO can ring someone and ask “why”. Return on capital employed has never been a KPI as it cannot be tied down to a manager, it is a result of many activities under different managers. Can you imagine the reaction if a GM was told one morning by the CEO “Pat, I want you to increase the return on capital employed today”. A KPI will affect most of the critical success factors and more then one balanced scorecard perspective. In other words, when the CEO focuses on the KPI, and the staff follows, the organisation scores goals in all directions. A KPI has a flow on effect on other performance measures. Reducing late planes would improve performance measures around improved service by ground staff as there is less “fire fighting” to distract them from a quality and caring customer contact. The four types of performance measures From the research I have performed, from workshop feedback across diverse industries and as a by-product of writing my book “Key Performance Indicators – developing, implementing and using winning KPIs” , I have come to the conclusion that there are four types of performance measures:
I use an onion analogy to describe the relationship of these four measures. The outside skin describes the overall condition of the onion, how much sun, water and nutrients it has received, how it has been handled from harvest to supermarket shelf. The outside skin is thus a key result indicator. The layers represent the various performance and result indicators and the core is where you find the key performance indicators. The 10/80/10 rule Kaplan and Norton recommend no more than 20 KPIs, and Jeremy Hope (of beyond budgeting fame) suggest less than 10. To aid those involve in performance measurement I have developed the 10/80/10 rule. This means an organisation should have about 10 KRIs, up to 80 PIs and RIs and 10 KPIs. Very seldom do there need to be more measures than these numbers, and in many cases less can be used. Key Result Indicators (KRIs) The common characteristic of KRIs is that they are the result of many actions. They give a clear picture of whether you are travelling in the right direction, and of the progress made towards achieving desired outcomes and strategies. They do not, however, tell management and staff what they need to do to achieve desired outcomes. Only performance indicators and KPIs can do this. KRIs are measures that have often been mistaken for KPIs include:
A cars speedometer provides a useful analogy. The Board will simply want to know the speed the car (the organisation) is travelling at. Still using this analogy management needs to know more information since the cars speed is a 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 e.g. a gauge telling them how many kilometres they are getting per litre, or how hot the engine is running. These are two completely different performance indicators. Separating out KRIs from other measures has a profound impact the way performance is reported. There is now a separation of performance measures into those impacting governance (up to ten KRIs in a dashboard) and those impacting management. Performance and Result Indicators (PIs and RIs) The 80 or so performance measures that lie between the KRIs and the KPIs are the performance and result indicators (PIs). The performance indicators while important are not “Key to the business”. The PIs help teams to align themselves with their organisation’s strategy. PIs complement the KPIs and are shown with them on the organisation’s, divisions’, departments’ and teams’ scorecards. PIs could include:
RIs could include:
Removing the lead / lag confusion Many management books talk about “lead and lag indicators” which I believe merely clouds the KPI debate. Using this new way of looking at KPIs we dispense with the terms lag (outcome) and lead (performance driver) indicators. I have presented to nearly two thousand people on KPIs and I always ask “is the late planes in the air KPI, a lead or lag indicator?” The vote count is always evenly split. Surely, this is enough proof that lead and lag labels are not a useful way of defining measures. Key result indicators replace outcome measures, which typically look at activity over months or quarters. PIs, and KPIs are now characterised as either past, current or future measures. The new concept called “current measures” are those monitored 24/7 or daily. You will find the real KPIs in your organisation are either “current” or “future” measures. Past measures (last week / fortnight / month / quarter); e.g. number of late planes last week/ last month. Current measures (24/7 and daily); e.g. planes over 2 hours late (updated continuously) Future measures (next day / week / month / quarter); e.g. number of initiatives to be commenced in the next month / two months to target areas which are causing late planes. The lead lag division did not focus adequately enough on the timing of the measures. Most organisations who want to create alignment and change behaviour need to be monitoring what corrective action is to take place in the future. In other words if quality improvements are to happen we need to measure the number of initiatives which are about to come online in the next week, fortnight, month, if we want to increase sales what is important to know is what are the number of meetings which have already been organised/scheduled with our key customers in the next week, fortnight, month. Next steps Listen to the webcasts KPIs I have recorded on www.bettermanagement.com search “parmenter” using the search engine on the site. Acquire the book “Key Performance Indicators –developing, implementing and using winning KPIs”. Engage an in-house or external public relations expert to help sell concept. Deliver a PowerPoint presentation to the SMT to get buy-in for your KPI / BSC project. Review www.waymark.co.nz for new material. Link with an external expert who can contribute to brainstorming sessions designed to ascertain the CSFs for your organisation.
David will be presenting "The Corporate Accountants Autumn Workshop" in Dublin on 18th-19th Sept. The course is based around his groundbreaking book 'Pareto's 80/20 Rule for Coporate Accountants". If you are insterested in more information or would like to reserve your place at this event please contact: Sinead Keating - OmniPro skeating@omnipro.ie 059 91 83888 www.omnipro.ie OmniPro
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