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Scorecard and KPIs 101

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After another question about “calculating the scorecard index” I understood that some of our clients don’t have a clear understanding of the math that stands behind a KPI, its performance, and the scorecard. I decided to create a “101”-level presentation that explains the basics of KPI from the mathematical point of view:

It is based on the article:
http://www.bscdesigner.com/scorecard-and-kpis-101.htm

Reviewed topics are:
- Calculating the performance using “min” and “max” of an indicator;
- Using linear and non-linear functions for the performance;
- Calculating the progress from the baseline towards target;
- Introduction of the indicator “weight” to reflect a relevant importance of an indicator;
- Calculating the total performance index of the scorecard.

-- For what task do you use them?
-- Do you define the relevant importance of indicators on the scorecard?
-- Do you calculate and use the total performance index?

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Scorecard and KPIs 101

1. 1. SCORECARD AND KPIS 101 Based on www.bscdesigner.com/scorecard-and-kpis-101.htm By Aleksey Savkin, bscdesigner.com BSC DESIGNER
2. 2. NOT ALL INDICATORS ARE KPIS • It doesn’t make sense to call something “KPI” until a business context is defined. BSC DESIGNER
3. 3. NOT ALL INDICATORS ARE KPIS • It doesn’t make sense to call something “KPI” until a business context is defined. • But I’ll be using the “KPI” term as it is more popularized. BSC DESIGNER
4. 4. NOT ALL INDICATORS ARE KPIS • It doesn’t make sense to call something “KPI” until a business context is defined. • But I’ll be using the “KPI” term as it is more popularized. • These aspects were discussed before… in the guide “from quantification to a metric” BSC DESIGNER
5. 5. WHAT PROBLEMS ARE KPIS AND A SCORECARD SUPPOSED TO SOLVE? • Indicators are numerical values that are linked to some kind of process. BSC DESIGNER
6. 6. WHAT PROBLEMS ARE KPIS AND A SCORECARD SUPPOSED TO SOLVE? • Indicators are numerical values that are linked to some kind of process. • Their primary goal is to show a number that can give us an idea about the current performance. BSC DESIGNER
7. 7. WHAT PROBLEMS ARE KPIS AND A SCORECARD SUPPOSED TO SOLVE? ON INDICATOR LEVEL: • Show the current value. BSC DESIGNER
8. 8. WHAT PROBLEMS ARE KPIS AND A SCORECARD SUPPOSED TO SOLVE? ON INDICATOR LEVEL: • Show the current value. • Introduce the performance function BSC DESIGNER
9. 9. WHAT PROBLEMS ARE KPIS AND A SCORECARD SUPPOSED TO SOLVE? ON INDICATOR LEVEL: • Show the current value. • Introduce the performance function • Interpret the value of an indicator on a baseline/target scale. BSC DESIGNER
10. 10. WHAT PROBLEMS ARE KPIS AND A SCORECARD SUPPOSED TO SOLVE? ON SCORECARD LEVEL: • Group indicators into categories. BSC DESIGNER
11. 11. WHAT PROBLEMS ARE KPIS AND A SCORECARD SUPPOSED TO SOLVE? ON SCORECARD LEVEL: • Group indicators into categories. • Specify the relevant importance. BSC DESIGNER
12. 12. WHAT PROBLEMS ARE KPIS AND A SCORECARD SUPPOSED TO SOLVE? ON SCORECARD LEVEL: • Group indicators into categories. • Specify the relevant importance. • Calculate the performance of category. BSC DESIGNER
13. 13. WHAT PROBLEMS ARE KPIS AND A SCORECARD SUPPOSED TO SOLVE? ON SCORECARD LEVEL: • Group indicators into categories. • Specify the relevant importance. • Calculate the performance of category. • Calculate the total performance. BSC DESIGNER
14. 14. INDICATOR LEVEL
15. 15. THE VALUE OF AN INDICATOR 530 \$ 20 hours/week BSC DESIGNER
16. 16. THE VALUE OF AN INDICATOR 530 \$ 20 hours/week Numeric value BSC DESIGNER
17. 17. THE VALUE OF AN INDICATOR 530 \$ 20 hours/week Numeric value Measure unit BSC DESIGNER
18. 18. THE ROLE OF THE PERFORMANCE FUNCTION • What the value “530\$” means? BSC DESIGNER
19. 19. THE ROLE OF THE PERFORMANCE FUNCTION • What the value “530\$” means? • Is it a high or low? BSC DESIGNER
20. 20. THE ROLE OF THE PERFORMANCE FUNCTION • We need a measurement scale ! BSC DESIGNER
21. 21. We need a measurement scale ! BSC DESIGNER
22. 22. We need a measurement scale ! BSC DESIGNER
23. 23. VALUE TIME We need a measurement scale ! BSC DESIGNER
24. 24. VALUE TIME Max Max – means the maximal possible value of an indicator We need a measurement scale ! BSC DESIGNER
25. 25. VALUE TIME Max Max – means the maximal possible value of an indicator Min Min – means the minimal possible value of an indicator We need a measurement scale ! BSC DESIGNER
26. 26. VALUE TIME Max Min We need a measurement scale ! BSC DESIGNER
27. 27. THE PERFORMANCE OF AN INDICATOR CAN BE CALCULATED AS Performance (Value), % = x 100% (Value – Min) (Max – Min) BSC DESIGNER
28. 28. In our example: Value = 530 Min = 0 Max = 600 THE PERFORMANCE OF AN INDICATOR CAN BE CALCULATED AS BSC DESIGNER
29. 29. THE PERFORMANCE OF AN INDICATOR CAN BE CALCULATED AS Performance (Value), % = x 100% = 88% (530– 0) (600 – 0) BSC DESIGNER
30. 30. The performance function of KPI Source: www.bscdesigner.com Performance (Value), % = ((Value – Min) / (Max – Min)) * 100% With a linear growth of the “value” the performance will also grow linearly
31. 31. THE PERFORMANCE FUNCTION IS NOT ALWAYS LINEAR ! BSC DESIGNER
32. 32. THE PERFORMANCE FUNCTION IS NOT ALWAYS LINEAR • For example, the performance might grow very slowly in the beginning, but then increase rapidly BSC DESIGNER
33. 33. The performance function of KPI Source: www.bscdesigner.com Performance (Value), % = Power(Value,10) / Power(Max, 10) The performance might grow very slowly in the beginning, but then increase rapidly.
34. 34. Performance (Value), % = x 100% Power (Value,10) Power (Max, 10) THE PERFORMANCE FUNCTION IS NOT ALWAYS LINEAR BSC DESIGNER
35. 35. WITH THE INCREASE OF THE VALUE THE PERFORMANCE MIGHT BE DECREASING ! BSC DESIGNER
36. 36. WITH THE INCREASE OF THE VALUE THE PERFORMANCE MIGHT BE DECREASING • For example, the more waiting time there is in the support center, the lower is its performance. BSC DESIGNER
37. 37. The performance function of KPI Source: www.bscdesigner.com Performance (Value), % = ((Max – Value) / (Max – Min)) * 100% With the increase of the value the performance might be decreasing as well.
38. 38. Performance (Value), % = x 100% (Max – Value) (Max – Min) WITH THE INCREASE OF THE VALUE THE PERFORMANCE MIGHT BE DECREASING BSC DESIGNER
39. 39. CALCULATING THE PROGRESS • Sometimes it is necessary to focus attention on a very specific part of the performance interval. BSC DESIGNER
40. 40. VALUE TIME Max Min CALCULATING THE PROGRESS BSC DESIGNER
41. 41. VALUE TIME Max Min CALCULATING THE PROGRESS Planning horizonHistorical values BSC DESIGNER
42. 42. VALUE TIME Max Min CALCULATING THE PROGRESS Planning horizonHistorical values Baseline Target BSC DESIGNER
43. 43. VALUE TIME Max Min CALCULATING THE PROGRESS Planning horizonHistorical values Baseline Target “Min” and “Max” are used to calculate the performance of the KPI. BSC DESIGNER
44. 44. VALUE TIME Max Min CALCULATING THE PROGRESS Planning horizonHistorical values Baseline Target “Min” and “Max” are used to calculate the performance of the KPI. The performance answers the question: “What is the overall performance of the KPI?” BSC DESIGNER
45. 45. VALUE TIME Max Min CALCULATING THE PROGRESS Planning horizonHistorical values Baseline Target “Baseline” and “Target” are used to calculate the progress. BSC DESIGNER
46. 46. VALUE TIME Max Min CALCULATING THE PROGRESS Planning horizonHistorical values Baseline Target “Baseline” and “Target” are used to calculate the progress. The progress answers the question: “To what extent was the target achieved?” BSC DESIGNER
47. 47. THIS MIGHT SOUND A LITTLE BIT COMPLICATED TO DO… • This might sound a little bit complicated to do if you use MS Excel or similar software • A professional scorecard software, like BSC Designer will automate these tasks for you. BSC DESIGNER
48. 48. SCORECARD LEVEL
49. 49. THE RELEVANT IMPORTANCE OF KPIS A support center has two KPIs: – “Average email response time,” hours BSC DESIGNER
50. 50. THE RELEVANT IMPORTANCE OF KPIS A support center has two KPIs: – “Average email response time,” hours – “First contact resolution rate,” % BSC DESIGNER
51. 51. THE RELEVANT IMPORTANCE OF KPIS A support center has two KPIs: – “Average email response time,” hours – “First contact resolution rate,” % What KPI is more important? BSC DESIGNER
52. 52. THE RELEVANT IMPORTANCE OF KPIS • A company can make ”Average email response time” equal to 10 minutes, BSC DESIGNER
53. 53. THE RELEVANT IMPORTANCE OF KPIS • A company can make ”Average email response time” equal to 10 minutes, • But this will not make customers happy, as the “First contact resolution rate” will be very low. BSC DESIGNER
54. 54. THE RELEVANT IMPORTANCE OF KPIS • A company can make ”Average email response time” equal to 10 minutes, • But this will not make customers happy, as the “First contact resolution rate” will be very low. • Good response time is important, but what is more important is the high quality of the answers.
55. 55. THE RELEVANT IMPORTANCE OF KPIS • To reflect this idea we need a concept of “weight” : – “Average email response time,” hours – “First contact resolution rate,” % BSC DESIGNER
56. 56. THE RELEVANT IMPORTANCE OF KPIS • To reflect this idea we need a concept of “weight” : – “Average email response time,” hours; weight = 4 – “First contact resolution rate,” %; weight = 6 BSC DESIGNER
57. 57. THE RELEVANT IMPORTANCE OF KPIS • To reflect this idea we need a concept of “weight” : – “Average email response time,” hours; weight = 4 – “First contact resolution rate,” %; weight = 6 Now we know that “First contact resolution rate” is more important than “Average email response time.” BSC DESIGNER
58. 58. CALCULATING THE TOTAL PERFORMANCE • The performance of a category can be calculated by taking in account the performance values of each indicator and their weights. BSC DESIGNER
59. 59. CALCULATING THE TOTAL PERFORMANCE • Here we have the structure of the scorecard C1..4 – are categories. Metric-i,j are indicators together with their weight and performance values: BSC DESIGNER
60. 60. CALCULATING THE TOTAL PERFORMANCE • Let’s convert this into a different notation: BSC DESIGNER
61. 61. CALCULATING THE TOTAL PERFORMANCE • We had our weight on a scale 1..10, so before moving ahead we need to calculate a normalized weight: BSC DESIGNER
62. 62. CALCULATING THE TOTAL PERFORMANCE • The total performance value for the selected category is be calculated as: Where: – Ni is the number of metrics on i-level; – NWi,j – is a normalized weight of j-metric on i-level; – NSi,j – is a performance of j-metric on i-level. BSC DESIGNER
63. 63. CALCULATING THE TOTAL PERFORMANCE • The final formula for the total performance index of the scorecard will be: Where M is a number of categories. BSC DESIGNER
64. 64. CALCULATING THE TOTAL PERFORMANCE • These calculations are simple if you don’t have subcategories in your scorecard. BSC DESIGNER
65. 65. CALCULATING THE TOTAL PERFORMANCE • These calculations are simple if you don’t have subcategories in your scorecard. • If you had subcategories, the weight of these subcategories should be taken into account in a similar way. BSC DESIGNER
66. 66. CALCULATING THE TOTAL PERFORMANCE • These calculations are simple if you don’t have subcategories in your scorecard. • If you had subcategories, the weight of these subcategories should be taken into account in a similar way. • Professional scorecard software like BSC Designer will automate these calculations so that you can focus on the business side. BSC DESIGNER
67. 67. CALCULATING THE TOTAL PERFORMANCE • Professional scorecard software like BSC Designer will automate these calculations so that you can focus on the business side.
68. 68. MORE ABOUT THE BALANCED SCORECARD Find more insightful articles about the Balanced Scorecard in ”Articles” section at www.bscdesigner.com BSC DESIGNER
69. 69. THANK YOU! Feel free to send us your questions using the contact form at www.bscdesigner.com