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.

Please, share your thoughts about the scorecards as a tool:
-- 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

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