Overview of Key Performance Indicators

Key performance indicators: How they work and how to use them
Presented by: Micheal Axelsen Director Applied Insight Pty Ltd

Agenda
Introduction
Key performance indicators defined
Aligning KPIs with strategy
Implementing KPIs
Conclusion

INTRODUCTION

About this presentation
Objectives
To identify key performance indicators, their role in management and governance of the organisation, and how to implement key performance indicators for success.

Case study: SME reporting gone wrong
The client

Medium-sized business with specialist reporting needs, and a legacy information system.

The reporting process

The Financial controller set up the monthly reports with this process:
CSV export on Unix
FTP to Novell
Import to Access
Data conversion
Export to CSV
Import to Cognos
Reporting Queries
Export to HTML
CEO swore because it rarely worked
Then the financial controller left...
... and the CEO swore some more.

Key performance indicators defined

Definition of KPIs
Key performance indicators
focus on the aspects or areas of our organisation’s performance that are critical or vital for our ongoing and future success
measure our success in key areas and processes that affect our customers, our employees, our shareholders or other stakeholders
Source: AusIndustry KPI Manual

The characteristics of KPIs
Non-financial measures
Measured frequently (for example, daily, weekly)
Acted upon by CEO and the senior management team
All staff understand the measure and what corrective action is required
Responsibility can be tied down to the individual or team
Significant impact – that it is addresses most of the top topeight Critical Success Factors and Balanced Score Card perspectives
Has a positive impact – that is, it affects all other performance measures in a positive way

Why do we need ‘key performance indicators’?
Businesses are frequently accused of focussing on the ‘bottom line’ and the ‘short term’
Kaplan and Norton (1996) promoted the use of the balanced scorecard to look at leading indicators of sustainable, longer-term performance
It is a more ‘balanced’ view of organisational performance, and is focussed on monitoring these performance indicators
Provides a more holistic view of the business’s progress
KPIs for each business will depend very much on its subjective view of the world

It’s all about perspective
KPIs are usually drawn from four perspectives:
Financial perspective: Does implementation and execution of strategy contribute to the bottom line?
Customer perspective: What value proposition will the business apply to satisfy customers and thus generate more sales to the most profitable customer groups?
Internal process perspective: concerned with the processes that create and deliver the customer value proposition – focuses on activities and key processes required in order for the company to excel at providing the value expected by the customers both productively and efficiently
Innovation and learning perspective: Focuses on the intangible assets of an organisation, mainly on the internal skills and capabilities that are required to support the value-creating internal processes.

Example Balanced Scorecard (Kaplan & Norton)
Financial
Customer
Cash flow
Return on investment
Financial result
Return on capital employed
Return on equity
Residual income
Economic Value Added
New customers acquired
Status of existing customers
Customer attrition
Internal Process
Innovation & Learning
Number of activities
Opportunity success rate
Accident ratios & Environment compatibility
Overall equipment effectiveness
Investment Rate
Illness rate
Internal Promotions
Employee Turnover
Gender Ratios

Uses of Balanced Scorecard & KPIs
Frequently the balanced scorecard & KPIs approach is used to:
Drive strategy execution
Clarify strategy and make strategy operational
Identify and align strategic initiatives
Link budget with strategy
Align the organisation with strategy
Conduct periodic strategic performance reviews to learn about and improve strategy
The purpose to which the balanced scorecard and its KPIs is put affects the KPIs to be monitored – leading indicators are preferred, as they show what future performance will be

Criticisms
A balanced scorecard is by definition ‘balanced’ – if you wish to achieve quick business growth then perhaps the inherent ‘balance’ is of less value, rather than an unbalanced focus on performance activities that grow the business
Sometimes used inappropriately – can you really use Balanced Scorecard to govern internal processes?
Subjective and KPIs are not based in actuarial ‘fact’
Some criticise any effectiveness in operation as merely a placebo effect – that is, any other management approach might work equally as well

Tips for success
A KPI has to be suitable for the specific business, industry and organisation and related to the targets on the long run
Make it possible to influence the results of the KPI
Make the KPI easy to quantify
Make the KPI linkable to other relevant data
Make the KPI comparable over time.
Make sure every KPI has a dedicated, committed owner
There may be 80 performance indicators, but you should not exceed 10 KPIs (that’s about 2 per quadrant)
These will build on each other and provide guidance on the strategies and initiatives pursued by the organisation in reaching its strategic goals

Aligning kpi’s with strategy
Conclusion

A contribution to strategy
A key reason to adopt key performance indicators is to operationalise strategy at the coalface
It turns the organisation’s lofty vision, expressed in the strategic plan, into cold hard numbers that can be used to guide everyone’s efforts
Like many management measures and approaches, effectiveness will be dependent upon the emphasis placed upon the approach in the organisation – the manner in which it is used

Strategy maps
A central theme
Successful approach to balanced scorecard understands organisational focus and strategic alignment
Organisational focus points you to the KPIs to focus on
Alignment places the perspectives in order and how they support your organisation
Organisational strategy can be presented as a strategy map
These strategy maps identify the organisation’s strategic objectives, which in turn assist with identifying key performance indicators

Customer value proposition

Strategy maps

Linking the workface to the strategic objectives

KPI Development & Implementation
Enoma et al (2007)

Implementing kPIS

Reporting requirements
Report key result indicators (lagging indicators) to the Board
Management reporting of KPIs and Balanced Scorecard:
daily
weekly
monthly
Team reporting (team KPIs/Pis)
Automated and real-time updating of staff of their performance via the intranet
Design features should include:
Cover all the six perspectives
Show linkage to strategy and critical success factors
A mix of KPIs and PIs
No more than 20
Show trend information (15+ months)
No right answer (sculpture)
Use a name that means something to staff

How do we implement?
Working out our response

Need to know what are the critical weaknesses and focus upon those – there is little point fixing non-critical weaknesses when, for instance, there's no validity
A combination of surveys and workshop might be useful to identify critical weaknesses and, perhaps, seek suggestions regarding possible responses

Common mistakes

Jumping straight to the 'how' (technology solution) without knowing the 'why' (strategic alignment) and the 'what' (process needs)
Underestimating the riskiness of 'big bang' compared to an incremental approach
Producing accurate, timely and complete reports that are never used (poor validity) or are meaningless (low integrity & consistency)‏
Not being prepared to just walk away – to keep pursuing options that are clearly not viable

Assess-Plan-Do-Advance

The overall approach

Factors in effective reporting

Measuring effectiveness

Improve or buy
Why wouldn't I just buy a new system?

Buying a new system can be risky (although this may be the only way to create a new platform to build upon)‏
Frequently the problem is not technological – the problem is process or people-related (or even financial), and a new system won't fix that
Sometimes the effort required is just not worth it

Other considerations

Sometimes though, no matter how much lipstick you put on it, a pig is still a pig
Some systems will just never work, or be too dangerous or unwieldy
Consider the enironment and the factors, with technology being your last consideration, before investing in a new system

Respond to the 'why' - environment
Strategic alignment

A statement of where the business is heading and what is important
Business growth plans – are we focussed on Operational Excellence, Customer Intimacy, or Product Excellence

Regulatory compliance

Data governance framework
Role of the audit committee
Governance calendar
Compliance audit

Financial

Fund software acquisition adequately
Don’t buy the software and cut down on the professional services – buy cheaper software if you need to and grow
Insist on ROI, BUT include the intangible benefits

Respond to the 'what' – process
Process

Information management
Quality control framework
Policies and procedures
Service delivery methods
Project management methods
Know what is to be done, and do it
This is about ensuring maturity and organisational readiness for the implementation of KPIs

Now do the 'how' – people and technology
People

Training
Reports Interpretation
Only write reports that are used and relevant
Attraction and retention strategies
Role sharing
Reduce technical complexity

Technology

Common Technology Framework – fewer technologies is better
IT is often downside risk
Single view of the truth
Consistency and compatibility of technologies is most important
Role of in-house development
Technology to help automate or obliterate

Conclusion

Conclusion – meeting the challenges of IT
Information Technology & Management Centre of Excellence

Conclusion
More information
www.cpaaustralia.com.au
www.isaca.org
www.itgi.org
Speaking Notes
Speaking notes for this presentation may be downloaded from www.appliedinsight.com.au
Questions and answers
Questions from the audience

Contact details
Micheal AxelsenDirector, Applied Insight Pty Ltd
m: 0412 526 375t: +61 7 3139 0325e: micheal.axelsen@appliedinsight.com.au
blog: www.michealaxelsen.com
Applied Insight Pty LtdPO Box 603Toowong DC 4066AUSTRALIA

About the speaker
Services
Micheal Axelsen provides business systems consulting services in the governance of information technology, and development and implementation of IT business strategy
Position and qualifications
Director, Applied Insight Pty Ltd
Chair, CPA Australia IT & Management Centre of Excellence
Member of ISACA
Qualifications
Bachelor of Commerce (Hons)
Masters of Information Systems
FCPA