Key Performance Indicators

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Key Performance Indicators

  1. 1. SAP Strategy Management 2007 September 2007 English Designing and Creating Key Performance Indicators (KPI) Tips for KPIs SAP AG Neurottstr. 16
  2. 2. 69190 Walldorf Germany
  3. 3. SAP Best Practices Building Block Title: Configuration Guide Copyright © Copyright 2007 SAP AG. All rights reserved. No part of this publication may be reproduced or transmitted in any form or for any purpose without the express permission of SAP AG. The information contained herein may be changed without prior notice. Some software products marketed by SAP AG and its distributors contain proprietary software components of other software vendors. Microsoft, Windows, Outlook, and PowerPoint are registered trademarks of Microsoft Corporation. IBM, DB2, DB2 Universal Database, OS/2, Parallel Sysplex, MVS/ESA, AIX, S/390, AS/400, OS/390, OS/400, iSeries, pSeries, xSeries, zSeries, z/OS, AFP, Intelligent Miner, WebSphere, Netfinity, Tivoli, and Informix are trademarks or registered trademarks of IBM Corporation. Oracle is a registered trademark of Oracle Corporation. UNIX, X/Open, OSF/1, and Motif are registered trademarks of the Open Group. Citrix, ICA, Program Neighborhood, MetaFrame, WinFrame, VideoFrame, and MultiWin are trademarks or registered trademarks of Citrix Systems, Inc. HTML, XML, XHTML and W3C are trademarks or registered trademarks of W3C®, World Wide Web Consortium, Massachusetts Institute of Technology. Java is a registered trademark of Sun Microsystems, Inc. JavaScript is a registered trademark of Sun Microsystems, Inc., used under license for technology invented and implemented by Netscape. MaxDB is a trademark of MySQL AB, Sweden. SAP, R/3, mySAP, mySAP.com, xApps, xApp, SAP NetWeaver, and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and in several other countries all over the world. All other product and service names mentioned are the trademarks of their respective companies. Data contained in this document serves informational purposes only. National product specifications may vary. These materials are subject to change without notice. These materials are provided by SAP AG and its affiliated companies ("SAP Group") for informational purposes only, without representation or warranty of any kind, and SAP Group shall not be liable for errors or omissions with respect to the materials. The only warranties for SAP Group products and services are those that are set forth in the express warranty statements accompanying such products and services, if any. Nothing herein should be construed as constituting an additional warranty. © SAP AG Page 3 of 8
  4. 4. SAP Best Practices Building Block Title: Configuration Guide Icons Icon Meaning Caution Example Note or Tip Recommendation Syntax Typographic Conventions Type Style Description Example text Words or characters that appear on the screen. These include field names, screen titles, pushbuttons as well as menu names, paths and options. Cross-references to other documentation. Example text Emphasized words or phrases in body text, titles of graphics and tables. EXAMPLE TEXT Names of elements in the system. These include report names, program names, transaction codes, table names, and individual key words of a programming language, when surrounded by body text, for example, SELECT and INCLUDE. Example text Screen output. This includes file and directory names and their paths, messages, source code, names of variables and parameters as well as names of installation, upgrade and database tools. EXAMPLE TEXT Keys on the keyboard, for example, function keys (such as F2) or the ENTER key. Example text Exact user entry. These are words or characters that you enter in the system exactly as they appear in the documentation. <Example text> Variable user entry. Pointed brackets indicate that you replace these words and characters with appropriate entries. © SAP AG Page 4 of 8
  5. 5. SAP Best Practices Building Block Title: Configuration Guide Contents 1 Tips on Designing Key Performance Indicators (KPIs)................................................................................6 2 Purpose..........................................................................................................................................................6 2.1 Applies to................................................................................................................................................6 2.2 Summary.................................................................................................................................................6 2.3 Author Bio..............................................................................................................................................6 3 Tips on Designing Key Performance Indicators............................................................................................7 3.1 Three criteria guiding KPI Designs........................................................................................................7 3.2 Start with Strategy When Developing Outcome-Oriented KPIs............................................................7 3.3 Setting a Grading System for KPIs Using Targets.................................................................................8 3.4 Summary.................................................................................................................................................8 4 Related Content.............................................................................................................................................8 © SAP AG Page 5 of 8
  6. 6. SAP Best Practices Building Block Title: Configuration Guide 1 Tips on Designing Key Performance Indicators (KPIs) 2 Purpose Key Performance Indicators (KPIs) are the measurements that directly or indirectly influence the effectiveness and success of an organization. The best indicators are those that explicitly connect with the overall corporate strategy. The purpose of this document is to provide guidelines that can be useful in developing which indicators are key. Audience: This document was prepared for all individuals directly or indirectly affiliated with SAP Strategy Management. This includes AEs, SEs, CEMs, Consultants, Implementation Partners and Customers. 2.1 Applies to This document is applicable to SAP Strategy Management. 2.2 Summary Key Performance Indicators (KPIs) are the measurements that directly or indirectly influence the effectiveness and success of an organization. The best indicators are those that explicitly connect with the overall corporate strategy. In addition, there are some guiding criteria that can be useful developing the key indicators. Author: Bob McGlynn Company: SAP Created on: 29 June 2007 2.3 Author Bio Bob McGlynn is a Solution Expert for SAP Strategy Management © SAP AG Page 6 of 8
  7. 7. SAP Best Practices Building Block Title: Configuration Guide 3 Tips on Designing Key Performance Indicators Time is a precious commodity in the workplace. That is why it is important to focus attention on the key / strategic drivers of your business. Key Performance Indicator (KPI) is a term used for these key drivers. KPIs are those chosen indicators that can directly or indirectly influence the effectiveness of a product or process. For a KPI to be a key driver, it is used to gauge movement toward an objective or a goal. It needs to be actionable as well as measurable. Being measurable alone is not enough, because there are many areas and elements of a business that are measured. Organizations define a few critical KPIs to direct efforts and resources to achieve outcomes and not merely track output. Output is an amount produced and an input is the resources applied to producing a product, or providing a service. Most organizations track hundreds, maybe thousands, of these input and output numbers. Both input and output metrics are usually not related to any value or quality. Outcome determines evidence of change and accomplishment. It focuses on what is getting done rather than what is being done. 3.1 Three criteria guiding KPI Designs • Outcome Oriented - If you cannot describe the business goal it is monitoring, then it is not a KPI. • Target-based – It has at least one defined time-sensitive target value. To best set a critical context, use Milestone-based targets • Graded or Rated - Explicit levels are set to determine actual versus targets with an easy- to-understand grading system. This will tell if the difference is good or bad and whether the KPI is on / off the target. 3.2 Start with Strategy When Developing Outcome- Oriented KPIs To design KPIs with outcomes in mind, start with strategy. Don’t use an approach that looks at the collected existing metrics and then try to decide which are important. Starting with strategic objectives, you may discover that there are important key indicators that are not currently being tracked by existing metrics. The most important reason for starting with the strategy is to greatly reduce the numbers of measures and metrics, so everyone can focus on the critical few. As an example of starting with your strategy to determine a KPI is a story of a logistics company. Their strategy was based on operational excellence and reducing operating costs to provide low cost shipping. One way of doing that would be to make sure all trucks leaving the dock maximized their loads. A key performance indicator would be % Underweight Trailer Loads with a strongly reduced percentage as target. How could a KPI change if the strategy changes? Let’s take another logistics company that has a different strategy of total customer satisfaction. It has % Deliveries in Full & On Time with a high target percentage. This would be a KPI for that company. Each company moves down a different path. The first company will have to shift loads and may even miss delivery dates to ship at full capacity. The second company will have to dispatch trucks with smaller loads to meet that goal. Companies in the same industry will always have a number of shared indicators. The strategic approach a company uses to differentiate itself in the © SAP AG Page 7 of 8
  8. 8. SAP Best Practices Building Block Title: Configuration Guide marketplace will determine which performance indicators will be key for their success. If either of those trucking companies uses the other’s KPIs, they would be on the wrong road for measuring their performance. 3.3 Setting a Grading System for KPIs Using Targets KPIs need a target and a grade. Can you tell from the number alone, whether your performance is good or bad, improving or deteriorating? Would that same number be good today and bad six months from now? The KPI has to be structured to give you that kind of information. Having an easy-to-understand grading system like the letter-grade scoring (A, B, C, D, F) or a color system like a traffic signal (red, yellow, green) are ways to communicate context. Setting target goals and monitoring trends for KPI keeps attention on action and activity. Targets are associated with a specific timeframe. Here is an example of how to set a target within a timeframe. One KPI for an organization could be to Reduce the Cost of Service. If the target is set at a total cost reduction by 10% for the calendar-year, it could be structured with incremental milestones of 0% for the first two months, with 1% per month reduction for the remaining ten months. Achievable goals with milestones providing early-warning alerts are required so attention can be directed if changes are necessary. There is one cautionary to consider when using traffic signal style to grade your KPIs. If there are only three choices, everything moves to the middle. A consideration is using two additional colors, for a total of five, to better grade indicators. Make sure that there is enough difference between the additional colors so that it is easy to distinguish the darker or brighter shade and what it indicates. 3.4 Summary The focus of an organization is to reach strategic objectives. The ability to collect and store data offers a great temptation to get lost in the minutiae. Key performance indicators have to be explicitly linked to an objective that can translate strategic execution into quantifiable terms. Defining those few Key Performance Indicators that focus efforts and resources on outcome- oriented results will make the greatest impact on achieving strategic goals. 4 Related Content • SAP Solutions for performance management discussion forum • Wiki@SAP > Corporate Performance Management > SAP Strategy Management • Additional Information about SAP Strategy Management © SAP AG Page 8 of 8

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