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Key performance indicators: Picking the right ones. By Robin Tidd

In the second in a series of four articles, Robin Tidd advises on how to pick the right key performance indicators (KPIs).

In the previous article, the most common problems experienced with KPIs were highlighted. These problems can easily hinder the implementation and proper use of KPIs in an organisation that lacks complete commitment.

Some of the problems include essential statistics that exist but are hidden in the clutter; ad hoc investigations that take up management time when things don’t look right; ‘high level’ KPIs used to manage the frontline that don’t work, are not constructive and produce frustration; and finally, no financial evaluation of the annual effect of performance factors.

These problems relate mainly to the task of deciding the right KPIs, at the right intervals. The rules or principles involved in this are fairly simple.

Visible control

Firstly, there is the principle of ‘coverage’. This means that you need to have visible control over all areas of the business so that the whole management team can see what is going on in all areas. In other words, all of the major parts or functions of the business (marketing, sales, production, delivery and finance) must have their high level results on display in a top level dashboard, a one page presentation of figures for the period (month or four week periods) and cumulative. This list will cover the most important processes of the business.

From this dashboard it must be possible to see the big picture and to get confirmation of performance on such issues as:

• Numbers of customers trading (or numbers of projects being won).


• Some kind of market trend analysis, if the business is exposed to fluctuation in the market.


• The cost and effect of marketing, maybe in terms of the numbers of enquiries or leads being generated and the cost of those leads.


• The conversion rates from prospects and enquiries to secure new business


• Performance levels in the delivery or fulfilment of that business to the customer. Such statistics as percentage of delivery on time and in full would be typical here.


• Customer satisfaction rating, complaints, returns etc.


• A breakdown of sales levels with value added or gross margin by market sector. This could also be shown by product group.


• Key efficiencies of operations processes.


• Overhead spending vs budget, sometimes broken down into two or three elements or functions.


• Staff/labour turnover figures.


• Key financial management figures such as debtor days, creditor days, stock levels and cash liquidity.


• Return on capital employed and on owners’ capital is often desirable if that is not confidential information.

This information needs to be confirmation of the big picture because the lower level information in each of these areas should be coming out at least weekly. Therefore, the period review can ask: “What have we done about this?”

Limitations of high level KPIs

The most important limitation of top management KPIs is that they cannot themselves be used for frontline motivation. They do not often make sense to people in the process unless those people are able to relate a change in their performance or their efforts directly to a change in the figures shown in the KPIs. Top level KPIs contain a number of variables all ‘mixed in’.

Again, in themselves, top management KPIs do not provide accurate and incisive enough analysis of what to do to change things. They are not usually about root causes.

Second, there is the principle of ‘analysis’, which involves the ability to drill down easily to the lowest level of detail, in order to understand what is happening at ground level in the frontline in each process.

Lastly, the principle of ‘short interval control’ means that you have to look at figures with your people every day or even at hourly intervals in some cases. This is actually where the management control is won or lost.

Two factors are vital in management control and process improvement. Firstly if the information does not quickly indicate ‘cause’ i.e. why things are happening or how results can be improved, it is unlikely to lead to action. Secondly, if we do not find out, in real time, when things are not happening as we wish, then the information is not part of the processes of management, which means we are always looking backwards.

Information needs to be part of the process, so that we are constantly thinking not only about doing the job but about doing it well and preventing things from going wrong.
This then allows major gains in the profit and loss and has a big effect on team motivation.

A real life example will illustrate the point about timing. In monthly sales meetings, certain organisations have become unhappy with the level of leads generated, the number of sales visits, or the fluctuation in activity levels of different sales people. After exhorting people to do better, they come back a month later and find that they still have a shortfall. Instead of having the review six weeks after the event, they could have known within two days that they were off the beam. This would demand a plan and daily figures, and that is called management.

The right figures

Businesses should look for the right kind of figures for frontline managers to use every day to manage their processes. Some examples of the kind of information that must be examined are:

In the management of a production process, root causes of downtime on a machine (daily):

• Electrical breakdown


• Mechanical breakdown


• Planned maintenance


• Operator’s error


• Waiting materials


• Waiting operator

In marketing, sources of leads generated (weekly):

• From exhibitions


• From advertising – analysed by media


• From direct mail – analysed by campaign


• From telephone marketing - by operator


• From website

In distribution, failure rate to deliver ‘on time and in full’ by cause:

• Lead time longer than standard quoted


• Delivery after the specific date quoted


• Failure to process order to production within allowed time (turnaround)


• Failure to manufacture within allowed lead time (turnaround)


• Carrier failure


• Warehouse and despatch failure.

Customer complaints:

• Delivery was not on time


• Delivery was not in full


• Packaging damaged (returnable)


• Product damaged (returnable and reworkable)


• Product damaged (returnable and scrapped)


• Wrong product specification


• Wrong price


• Poor quality product

In every one of the above cases, daily scores can be calculated and there can be discussion about how to do things better, how to stop negative things happening and how to replicate good results more consistently. In every case, if the root cause is verified immediately, the learning curve will be steep and the people in the process will be able to contribute.
Unfortunately there could be thousands of other statistics that detract from the focus on the most important ones, so remember to avoid these.

Blind spots

Where the cause and effect are in different departments and in a different timeframe, there can be great potential for improvement. This could be called a blind spot. An example is poor recording or interpretation of customer specification for bespoke products or services. The bruise comes out weeks later in production, or even after delivery, and unless the teamwork is good it is all too easy for no-one to own up to the problem. The answer is to have a process which will investigate, understand, record and quantify, in financial terms, the root causes.
Finally, you need to translate statistics into annual financial effect. Improvement does not usually come free; it costs money and you cannot expect commitment without being reasonably confident of a pay-off. From time to time, all high level KPIs should be translated into cost or even loss of profits (opportunity cost) to put them into perspective.

Related articles

AccountingWEB's guide to KPIs

KPIs: Getting them right by Robin Tidd

Getting the information out by Robin Tidd

Building behaviours

by Robin Tidd

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