KPIs: Get the communication right
Communication is the key to making key performance indicators (KPIs) work for your business, experts told an AccountingWEB seminar audience this week.
'Making KPIs work for your business' presented both the theory behind KPI-driven strategy management and practical examples from PA Consulting Group, Pilot Software and AccountingWEB's contributing editor Richard Murphy.
To set the scene PA principal consultant Lee Merchant said that a Harvard Business Review study had identified five characteristics of high-performing organisations. "All five characteristics touch on KPIs," he said.
The first ingredient of high performance was having a common business model, so that managers would know what happens when they pull particular organisational levers. Computer services giant IBM, for example, devised a customer satisfaction index that closely correlates with its revenue. "Improving the customer satisfaction index by 1% adds £5m to IBM's revenue. That's the kind of understanding you need to get to enable sensible investment decisions about where you can improve the business," Merchant said.
The second and third performance factors are strategic alignment and focus. These are closely linked, he explained, and draw heavily from the godfathers of the KPI movement, Robert Kaplan and David Norton, who devised the four-part balanced scorecard to help companies get everyone working in the same direction.
Fourth, the high performance company is able to adapt to change, which comes from having a real understanding of KPIs and how the business trajectory will deflect if you pull a particular lever.
KPIs are not set in stone - and they are constantly changing within many organisations as they refine their business models or their strategy changes.
The fifth and final element was data, he said. "Managers spend 25% of their time looking at reports that are of questionable value." "The measures need to be based on valid data and part of the process is to make sure you pick up all the information you need, and that it's valid."
Merchant's colleague, Bettina Pickering, backed up the theory with a couple of examples from her consulting casebook. The case of a large construction equipment hire company confirmed the point about data quality.
"They reported monthly so when they didn't rent out as many machines in some areas, they only found out a long time after the horses had bolted," she said.
"The company collected huge amounts of data, but didn't do much with it, and the information didn't go down to detailed areas. Managers didn't know what equipment was being rented. People on the ground did, but that was not being communicated and no KPI was owned by an individual manager."
Faced with this situation, the incoming finance director approached FD, which helped to identify and document the cost and revenue drivers within the business to define a business model that ensured the company kew what it did, Pickering said. The finance team knew and understood the cost drivers, but there was not the same level of understanding for revenue drivers and performance measures. Some of the measures they devised from the new model included measuring the percentage of rentals made, an analysis of lost revenues and cost recoveries.
Initially the new KPI regime encountered huge resistance from managers. "but once it ran for a few months, they could see that it would communicate how well they were doing. If they made a change the could see the difference and they wouldn't get beaten up for something they couldn't change," she said.
"Every employee could see how what they were doing affected the KPIs, which had an impact on the bottom line. It changed the culture and people finally took pride in what they were doing."
Get the communication right
The people aspects, and good communication, cropped up again and again during the seminar.
"From KPI projects I've worked on, you need to think about the implications on stakeholders and employees when you do this. Think about the people aspects of change, because you need to take people with you," Pickering said.
KPIs were a component of performance management, and this needed to be treated as a disciplined process in itself, she said. "Don't just put in KPIs and send out monthly reports."
Management strategies are often a confusing bundle of buzzwords, and even though consultants often confused the picture, PA's team emphasised the need to demystify the jargon and nail the KPI strategy down in language that everyone understood. Merchant suggested defining your KPI objectives by asking the following questions:
- What really gives value to the business
- What can I do that will make a difference?
- What are the levers you can pull to make a change to the value drivers?
Colin Cooper, commercial director of Pilot Software distributor ISSEL, expanded on the communication and strategic managment issues, including how you can tackle some of the challenges issued by the PA Consulting speakers.
One of the most common phrases he hears is "head office just doesn't get it", Cooper said. The key to motivating and communicating people with KPIs was to ensure that you can pick up their feedback - and provide a meaningful context for the measures.
"How do we understand what these things mean?" he asked. "You may have pretty pictures that mean something to the people who devised it, but you need to spread understanding. All the way through, it's about culture and language. So people doing things can see what is relevant to them.
Fans of the Hitchhiker's Guide to the Galaxy will appreciate the context issue, he continued. "Is the answer 42 good or bad? When you look at the numbers, there should be commentary around them."
Cooper's presentation displayed a variety of different business models and balanced scorecards, subtly demonstrating how the web-based Pilot Software tools could cater for almost any requirement within the performance management cycle. The software is available as a selection of modules, which could be matched to users' requirements. The reason for this approach, he said, was because companies approached strategy and KPIs from different places.
"Just because you don't have the numbers now, that doesn't mean you have to wait. You can get the strategy process started now." One example he showed involved more than 90 people in trying to pull together 400 metrics. "Sometimes the monthly executive dashboard took them six weeks to produce," he said. "It's an incremental process - you don't have to do everything at once."
He also recommended, like Pickering and Merchant, testing the KPI approach within a smaller, receptive business unit.
True life tales from Richard Murphy
For the seminar finale, Richard Murphy recounted how he had used KPIs in his working life.
"If KPIs aren't about what the business is about, they're a waste of time," he told the audience.
"You need to check that your objectives aren't woolly. 'Maximising profit' is an absolutely useless objective to set. Profit is a residual number. You can control sales and control costs, but you can't control profit, which is the number that falls out at the bottom when you subtract one from the other.
Murphy is probably best known as the former senior partner of south-west London accountants Murphy Deeks Nolan, which he and his partners sold several years ago. But Murphy has also had a career in commerce, for example when he found himself appointed the finance director of the European distributor for Trivial Pursuit at the age of 27.
The firm's main problem was the four-fold gameboard, which no one in Europe could manufacture to start with. After jetting in thousands and thousands of boards in the first year, the firm set up its own plant.
"We had a single customer, who would take everything we could make in the run up to Christmas, so we didn't have to worry about marketing, and I had enough capacity to deliver what they asked for," he said. "This was a cash cow and we had one KPI in the organisation.
"It was the only variable I had within the system that if I managed it effectively, I could make profits."
The KPI was waste - which he could measure each morning by the volume of spoiled boards discarded into skips by the night shift. "We stuck glue on the boards in the afternoon, and if any of them didn't set right, we had to throw them out. We managed wase with absolute enthusiasm, because that would push our margins up. It was my first ever KPI and we made a lot of money with it."Further information about AccountingWEB's event programme, and copies of the KPI presentations are available on our events page.
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