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How to devise KPIs that work. By Richard Murphy

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24th Jun 2006
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Richard Murphy continues his discussion of setting and reporting on management targets with a detailed look at how to compile effective key performance indicators.

The biggest mistake to make when setting KPIs is, in my experience, to confuse the goal you're trying to achieve with the KPI that lets you monitor it. Take an example of a typical CEO (if there is such a thing). Actually, they're a good example because being top of the pile (however big the pile might be) means they're much alike. Give or take, their goals might be:

1. to give strategic direction to the business;
2. to manage the management team;
3. to deliver budgeted (or better) performance;
4. to represent the business to third parties.

That might not look like a lot of tasks ' but it's definitely a full-time job.

Now, remember a KPI is a quantifiable measure of things that are important to long-term success. For KPIs to be useful, they must therefore be measurable, have a clear relationship with the goals to which they are related and must give accurate information. In that case the KPIs needed to assess the CEO are those that indicate whether he or she is on target in meeting these objectives. That's when the difficulties start.

Take the first objective. It is forward looking. But you need a KPI that can be assessed objectively. It has to be clear as to what it means. It may need to imply the management behaviour necessary to achieve it. A first KPI for this goal might be: "Key targets for the development of the business are achieved on time."

Implicit in this statement are assumptions that:
1. there is a business development plan;
2. targets are set within it;
3. a timescale for their completion has been set;
4. a tangible measure of completion has been set in advance;
5. a monitoring process is in existence;
6. the monitoring process is used.

As a result of these implicit assumptions this KPI can be assessed. Because of the work required to enable that assessment to take place, the business plan for the enterprise will have to be a living document that receives regular attention, which is what the objective is really all about.

It might be possible to set a second KPI for this goal. After all, setting development goals is one thing. Communicating them is another, but is essential if they are to be acceptable. So it could be that a KPI could be set that requires: "Meet with at least two teams affected by the company's development plans each month to communicate the impact of those plans on those persons and to obtain feedback."

A team could be an individual, it could be an entire subsidiary assembled in mass meeting. The important point is that the CEO is reminded that he or she has to take the entire company with them on the journey they are planning for it, and they have to persuade the company to be willing to follow.

A tangible target is set (2 meetings). A measure (by implication, a recorded note of the meeting) is established by which the success or otherwise of the meeting can be appraised in more detail if required.

After setting the strategic goals for the business nothing is more important for a CEO than keeping their key team players happy. They have the power to make or break the CEO's ability to deliver results. So, the team has to be managed.

Now management is intensely personal and intangible. So what is a reasonable KPI? Is more than one needed given the complexity of the issue? A first KPI might be relatively straightforward: "There is no more than one departure from the key management team a year, internal promotions being ignored."

This puts an emphasis upon recruiting, developing and retaining key team players (of whom there should be no more than six). Necessarily this means the CEO has to spend time with each member of the team, mentoring them, understanding their needs, and making them understand his or her needs, and ensuring they both perform (because if they don't they'll count as a departure, and that does not reflect well on the CEO) and are happy. The intangible becomes tangible as a result.

There could be a second KPI. It might be: "Ensure each member of the management team delivers their KPIs."

This might be implicit in the previous KPI, but it's so important that it can be worth drawing out in its own right. What it's saying is that the CEO has a role to play in setting these KPIs fairly, because if they're unattainable it's partly the CEO's fault. And it means the CEO has to take an interest in what each manager is doing. This guarantees them the support they need.

As a result it might seem that the objective of delivering the budget should be achieved almost by implication, and so it might be if the KPIs are set properly. But given the importance of the shareholder relationship delivering the budget seems a key objective in its own right. It also happens to be one where the KPI appears to fall straight out of the objective, since it could be stated to be: "Deliver on budget performance over the period as a whole."

Actually, and again, there are many implicit assumptions in this KPI. The first one is that a budget is set. The second is that monitoring procedures are available. The third is that reporting takes place. The fourth is that if target s not being met as the period progresses action will be taken to correct it so that the target is met, and so on. These are all actions that a short KPI inspires. In which case it works. Although the KPI is set for the whole period, the implication is that it will be monitored regularly throughout it.

By now you should be getting my drift. The last goal requires a KPI that follows the theme. It implies that there are key external relationships which require the involvement of the key player in the organisation. These might be key customers or suppliers, trade unions or other staff representatives, regulatory agencies or other issues related to governance. It could be a trade association. Each could be considered, and a list might be prepared. The KPI might be: "Meet or make contact with ten key stakeholders in the business each month (with allowance for holidays) and report on the outcomes of the meeting."

Implicit in this KPI is the need to determine who the stakeholders are. This in turn might well require an active quest by the CEO to discover who he or she should be meeting. If the relationship is being managed good governance is implied. Internal communication of the external result is required. Key objectives are being fulfilled.

And six manageable KPIs have been set to fulfil just four goals. But within their scope is the essence of good management of the organisation. It would be quite a task to score full marks at getting them right. Which is why setting tem also takes time and effort.

And what you'll notice is that none are explicitly about the accounts. So reporting systems might need to be created to monitor these KPIs, but who said management reporting was just debits and credits?

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    Richard Murphy
    AccountingWEB contributing editor Richard Murphy is a sole practitioner chartered accountant but was previously senior partner of a firm for 11 years. He has also been chairman, chief executive or finance director of 10 SMEs.

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    Richard Murphy
    By Richard Murphy
    13th Oct 2005 20:23

    The problem in the NGS is much easier to define
    Alastair

    The NHS problem is simple to define

    It's the assumption that a market model can work when there is no market, and what is more there cannot be one. A market requires the existence of excess capacity to work. The taxpayer does 2 things with regard to the NHS:

    1) absorbs all capacity available the instant it is mad available (it is not that it is getting less efficient that is creating the problem - the problem is that the quantity of services demanded of it exceeds the growth in funding available to supply them)
    2) there is no chance of that funding ever being sufficient to create excess capacity.

    In that case objectives such as KPIs are needed because all market based solutions cannot, and never will work.

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    By listerramjet
    12th Oct 2005 09:40

    lovely stuff, BUT
    problem with this is that they will cause the CEO to modify his behavior to ensure the KPIs are hitting their targets, but the KPIs are not the goals themselves and hitting the measures does not necessarily mean achieving the goals.

    I believe much of the mess that is the NHS arises from following the sort of logic expounded in this article.

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    By velayudh
    05th Aug 2012 03:57

    KPIs

    The article was great to read.

    In todays globalised world, there are still countries where it is better to have a representative office but the do the actual transaction from the manufacturing country/home country.

    The job of the Country Representative becomes very difficult to measure as the actual sales to that country may or may not happen due to profitability issues. In this situation how does one frame out KPIs for country representatives?

     

     

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