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Putting the “Key” into KPIs – Part One. By Adrian Ryan

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16th Oct 2007
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jigsawPerformance reporting is a vital management tool but requires careful crafting and execution to be effective. This article, by Adrian Ryan of Parson Consulting, outlines the key considerations in designing an appropriate performance management process, from selecting the best Key Performance Indicators (KPIs), to deploying an appropriate and sustainable management structure.

Installation of a performance metrics process and the associated selection of KPIs is one of the most important responsibilities of corporate management. Yet it is often executed in an ad-hoc and unstructured manner, resulting in poor information reporting and misalignment between individual and corporate objectives.

A performance metrics process is not just a list of KPIs on a reporting dashboard or scorecard; it is a system for linking the performance management of all units in an organisation behind the company strategy in an action-oriented and controlled manner.

Key considerations when designing a performance metrics process

KPIs should be framed within the organisation’s strategy such that those of each business unit support the overall corporate objectives, whilst also facilitating local operational management. For example, if an organisation had made a strategic decision to focus on manufacturing quality improvements over throughput, the KPIs should emphasise quality measures such as ‘the number of customer product complaints/1000 units’ over traditional productivity measures. The latter, though, would still have a role to play at operational level.

This is not to say that all entities within an organisation should have uniform KPIs. They should vary depending on departmental or business unit focus and key business drivers. However, KPIs at all levels should support the corporate objectives, allowing senior management to gain insight into overall corporate performance.

Disciplined selection

In selecting KPIs, avoid the temptation to overpopulate the reports as this tends to dilute the impact. It’s best to limit them to the critical few necessary to understand business performance. Taken together they should paint an overall picture of the organisations health. This does not preclude operational groups at lower hierarchical levels using more detailed metrics. For example, an operations group may need to regularly review demand versus capacity metrics such as WIP levels/FTE, absence rates, rework levels, etc, but the overall KPI at senior management level could encapsulate all the detail metrics with a result indicator such as on-time-delivery.

Furthermore, a quality performance metrics process will go beyond the traditional financial metrics to include critical non-financial business drivers (e.g. not just cost of rework but impact of delays to customer). It must be dynamic, with respect to changing business needs, to maintain relevance and add value to the business.

Finally, a well designed process will still fail to meet its potential if it is not managed and maintained, and an appropriate delivery and governance mechanism put in place.

Checklist: Key elements of a quality performance metrics process

  • 1 KPIs are framed within the organisation’s strategy
  • 2 KPIs are focused on key business drivers
  • 3 Avoid proliferation, focus on the critical few KPIs
  • 4 Balance of KPIs between financial and non-financial measures
  • 5 Balance of internal and external information
  • 6 Contains both historic tracking and future predictive metrics
  • 7 Deployment supported with a robust management structure
  • 8 Periodically reviewed against strategic change and refreshed
  • 9 Linked to organisational rewards
  • 10 Championed by senior management

Organisational considerations

A credible performance metrics process must address two critical elements: the business unit and departmental operational environment; plus the corporate strategic agenda. These two elements may not always be in direct harmony. For example, a technology company may initially compromise on engineering or design best practice in favour of speed to market, in order to gain a competitive advantage. In such a scenario, the engineering unit must forego its ideal aspirations of operational standards for those that are deemed adequate for the company’s early stage of market development. In this example, engineering would be assessed on speed of response rather than ‘best of breed’ quality. Thus their KPIs, or the associated targets, will change.

There must be a direct link between operational KPIs at all levels within a business unit, and between the business unit and the stated strategy of the organisation, to facilitate assessment of performance against strategic objectives. Therefore the corporate KPIs should be selected to measure performance of the key business drivers against the corporate strategic deliverables. The KPIs for an individual business unit, or function, should be selected to measure performance against supporting the corporate objectives.

Just as strategic objectives are managed through deployment of business targets down through the hierarchy, so too should the performance metrics process be deployed in support of these targets and the overall strategy. To be meaningful, the KPIs should be linked to the rewards structure of the organisation.

The first steps: establishing an operational framework

  • Start by ascertaining what the key business drivers are and relate these to the deployed strategy of the organisation. This may seem obvious but it is surprising how many organisations bypass this rigour in the desire to rush into KPI selection, resulting in ‘metric proliferation’ and disconnected performance reporting
  • Next, develop the key questions that KPIs should address, ensuring that these questions are aligned to business unit objectives, which should in turn be aligned to corporate strategy. For example, a key business driver for an FMCG business might be that its brand is seen as a leader in innovation. Therefore one of the key questions that performance metrics should provide information on could be, “Is there a sufficient R&D pipeline to sustain the brand image?
  • Then, develop the hierarchy or levels of performance metrics within the business; remember that different level audiences have differing needs from shop floor to executive office. Finally, select the KPIs that are important for the senior management to run the business and simultaneously support the corporate strategic reporting requirements. The KPI set should provide management with sufficient performance insight to inform decision making and to focus further investigations

About the author
Adrian Ryan is an Engagement Manager with specialist financial management consultancy Parson Consulting, with over 15 years of experience identifying and implementing business performance and finance function improvements in commercial companies. [email protected]. Parson Consulting’s website is www.parsonconsulting.com. Tel: 020 7710 5200

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