Developing Key Performance Indicators Tom Freas


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  • simiulation tree: changing the value of one KPI can have an effect on other KPIs, the effect is shown real time.
  • Developing Key Performance Indicators Tom Freas

    1. 2. Developing Key Performance Indicators Tom Freas Principal October 6, 2004
    2. 3. Sustainable high performance & measuring what is important to success… "You have to be a slave to data. You have to measure everything. You have to be willing to examine any small part of your body or bike to find extra time.” Lance Armstrong Lance Armstrong, Cyclist, Six Tour de France victories “ We played and graded what each player did on each possession…we handed out awards for the players who performed best in the categories that helped us succeed…offensive rebounding, assist/error ratio, deflections, charges drawn, screens set, blocked shots…” Dean Smith, The Carolina Way Dean Smith, Coach, University of North Carolina, Most wins in College Basketball
    3. 4. Developing Key Performance Indicators - Agenda <ul><li>Performance Measurement Today </li></ul><ul><li>Issues & Responses </li></ul><ul><li>Performance Measurement Framework </li></ul><ul><li>Performance Measurement Techniques </li></ul><ul><li>Knowledge Management as an Enabler </li></ul><ul><li>Performance Measurement Tools </li></ul>
    4. 5. <ul><li>Performance Measurement Today </li></ul>
    5. 6. In Today’s World , we keep it simple and expect staff to rally around a few bottom line measures ….that way, we are all on the same page… Right? Our market capitalization has declined, therefore we must improve ROCE, EVA, EBITDA... I wonder how Aunt Eva is doing? So, what does ROCE have to do with whether I get these drawings to the customer? EBITDA , hah!, most of the folks who get these reports cannot spell EBITDA! Wrong! …organization complexity increases the chances of the bottom line measures getting “lost in the shuffle”, ignored and…
    6. 7. <ul><li>Issues & Responses </li></ul>
    7. 8. The Issue - When performance measures get ignored, employee focus declines causing the organization to expose itself to issues that negatively impact sustainable performance . <ul><li>Are your managers just plain tired? </li></ul>Management Burnout  Who’s minding the store? Employee Theft <ul><li>Is the lack of focus causing an exposure to risk? </li></ul>Lawsuits <ul><li>How many more people do you have to hire? </li></ul>Low productivity <ul><li>How many customers have walked? </li></ul>Poor Customer Service <ul><li>What is the cost of hiring a new employee? </li></ul>Employee Turnover Impact Issues
    8. 9. The Response – Many organizations have had limited success in implementing performance measurement programs. Unsuccessful programs sometimes resemble… K.I.S.S. Program : The Company is asking the entire organization to keep it simple and focus on a “select few” measures. “ Have it Your Way” Program: The Company allows each function to select their own performance measures for success Program Result Most of the organization does not know what these few measures really mean. Functions pick the “self-serving” measures and walls between departments grow.
    9. 10. <ul><li>Performance Measurement Framework </li></ul>
    10. 11. Question: – How can Executive Leaders build a performance measurement program where staff are given a more clear understanding of what is strategically important? Answer: Build a performance management framework that includes: <ul><li>A set of performance measures that… </li></ul><ul><ul><li>all levels in the organization can understand </li></ul></ul><ul><ul><li>are clearly linked to the corporate strategy and goals </li></ul></ul><ul><ul><li>can be measured </li></ul></ul><ul><li>A consistent process for capturing, tracking, monitoring and disseminating these performance measures throughout the organization (typically business intelligence tools). </li></ul><ul><li>A culture that is willing to reward individual performance based upon these performance measures. (typically incentive compensation programs). </li></ul>So, how can an organization determine the right set of measures for a successful program?
    11. 12. Strategies represent executable statements defining key focus areas that position the company to meet its long term vision and overall mission Goals are measurable and time bound targets that support the company strategy Competencies describe how the company differentiates itself from its competition to achieve it’s goals Critical Success Factors define what activities the company must do well to successfully excel at their competencies Goals Competencies Competencies Competencies Critical Success Factors Critical Success Factors Critical Success Factors Performance Measurement Answer – Build a performance measurement framework around the “performance building blocks” unique to your company. Strategies
    12. 13. Results Measures Cascading Performance Measures Linked 6 5 Goals Competencies Competencies Competencies Critical Success Factors Critical Success Factors Critical Success Factors 2 3 4 Strategies 1 (Tier 1: Sr. Executive) (Tier 2: VPs/Directors & Tier 3: Managers) Performance Measurement Answer – and link the building blocks to performance measures.
    13. 14. <ul><li>Executive level measures </li></ul><ul><li>Typically financial metrics </li></ul><ul><li>Results measures </li></ul>Tier 1 <ul><li>VP/Director level measures </li></ul><ul><li>Typically a combination of financial and non-financial metrics </li></ul><ul><li>Competency level measures </li></ul>Tier 2 These measures involve setting the strategic goals and metrics regarding organizational results which are managed by the most senior executive level. These are considered results based and typically contain a strong financial component. These measures are identified and set around those things a company must do well to compete and succeed in the market at the division level. They may be both financial and non-financial in nature. <ul><li>Manager and Supervisor level Measures </li></ul><ul><li>Some financial and most non-financial metrics </li></ul><ul><li>Operational </li></ul>Tier 3 These measures relate to Critical Success Factors that define what activities a company must do well to successfully excel at their competencies . These measures are at an operational level. They may be both financial and non-financial in nature. Accountability – The results and performance measures can be stratified into multiple tiers for assignment of staff accountability Results Measures Performance Measures 5 6 Goals Competencies Competencies Competencie s Critical Success Factors Critical Success Factors Critical Success Factors 2 3 4 Strategies 1
    14. 15. Results – Using this approach allows organizations to select a set of performance measures for the enterprise scorecard that… <ul><li>Are linked to all levels in the organization via a set of concrete critical success factors that are in a language the organization understands </li></ul><ul><li>Are linked to the corporate strategies via a set of organization competencies that link the critical success measures to the organization goals. </li></ul><ul><li>Contain a set of distinct measures that are linked to the critical success factors and the results measures. </li></ul>
    15. 16. <ul><li>Performance Measurement Techniques </li></ul>
    16. 17. Balanced Scorecard – is a strategic management system used to drive performance and accountability throughout the organization <ul><li>The scorecard balances traditional performance measures with more forward-looking indicators in four key dimensions: </li></ul><ul><ul><li>Financial </li></ul></ul><ul><ul><li>Operational Excellence </li></ul></ul><ul><ul><li>Employees </li></ul></ul><ul><ul><li>Customers </li></ul></ul><ul><li>Benefits include: </li></ul><ul><ul><li>Alignment of individual and State of Ohio objectives </li></ul></ul><ul><ul><li>Accountability throughout the organization </li></ul></ul><ul><ul><li>Culture driven by performance </li></ul></ul><ul><ul><li>Support of shareholder value creation </li></ul></ul>
    17. 18. Strategy Mapping – methodology translates high level strategic vision into measures, and ensures alignment of objectives throughout the organization Financial Strategies Customer Strategies Operational Excellence Strategies Sample Department A Strategies Employee Strategies Improve brand performance Attract the diversity, skills and competencies we need Maximize market share while meeting current year revenue & profit commitments Develop effective, sustainable marketing programs Develop new products / solutions Sample Department Balanced Scorecard <ul><li>Revenue / Total market </li></ul><ul><li>Operating profit </li></ul><ul><li>Marketing spend / Revenue </li></ul><ul><li>% increase in marketing reach </li></ul><ul><li>Brand recognition rating </li></ul><ul><li>New product ramp rates </li></ul><ul><li>New product revenue/Total revenue </li></ul><ul><li>Global diversity rating </li></ul><ul><li>Meeting employee retention plans </li></ul>. Sample “Department A” Strategy Map World-class cost structures Focused Innovation Simple and rewarding experiences Best return on information technology (RoIT) State of Ohio Objectives Capture the XYZ market potential Establish organization as a leader in technology Build direct business capabilities Protect Supplies Business Department A Objectives
    18. 19. Strategy Mapping - Use consistent terms and definitions throughout the strategy mapping process for communication across departments and functions Objectives support the overall vision and provide areas of emphasis for the organization to focus its activities Strategies break down the objectives into more actionable elements and in aggregate should represent the overall organizational focus <ul><li>Measures are directly linked to strategies of the organization and should include all major performance drivers for each strategy. </li></ul><ul><li>Measures should be: </li></ul><ul><ul><li>Timely, accurate, focused and relevant </li></ul></ul><ul><ul><li>Leading indicators of performance </li></ul></ul><ul><ul><li>Linked to controllable events </li></ul></ul><ul><ul><li>Cost effective to collect and compute </li></ul></ul><ul><ul><li>Easy to communicate broadly to the organization </li></ul></ul>To monitor progress, targets are set for each measure in given time period. Targets should be based off the strategic planning financials and assumptions.
    19. 20. <ul><li>Knowledge Management as an Enabler </li></ul>
    20. 21. <ul><li>Which subprocesses do we do (well)? </li></ul><ul><li>Where do we need to focus? </li></ul><ul><li>Who owns or manages each one? </li></ul><ul><li>What human and technical enablers apply? </li></ul>Capture/ Store Refine Distribute Use Monitor Create Knowledge Management - is a process; and is closely linked to Performance Measurement How do we assure a continuous and natural flow of information? To the benefit of performance improvement.
    21. 22. Personalized Information – The right information to the right Audience <ul><li>The web application is fully automated and interactive, providing a personalized combination of push and pull information sources: </li></ul><ul><ul><li>Information about company’s products and services </li></ul></ul><ul><ul><li>Industry and firm specific applications, services, articles, m arket s tudies, f inancial i nformation etc. </li></ul></ul><ul><ul><li>Personalized data and content from other existing WebSites / Portals / Marketplaces etc... </li></ul></ul><ul><ul><li>Computer based training (WBT) </li></ul></ul>Information
    22. 23. <ul><li>Performance Measurement Tools </li></ul>
    23. 24. Balanced Measures – A personalized Dashboard shows at a glance the performance of any department across a balanced set of performance measures Note: Dashboard measures are fully customizable. The Service Operations Dashboard has been selected--Dashboards can also be constructed for Call Centers, Dispatch Centers, Network Operations, etc. Actual results for selected organizational unit Results for the rest of the company Management specified targets point in desired performance direction and change color to reflect positive or negative results The user can select any organizational unit and period for performance results
    24. 25. Distribution Channel Production Line Geographic Area Period Assets Turnover 0.503 Equity $ 2,389 Leverage 36.14% ROE 18.09% ROA 6,54% Operational Margin 13,09% Net Profit $ 36 Sales $ 277 Assets $ 6,610 Liabilities $ 4,222   !       ! Monitoring Tools – provide management with the operational information, required to make strategic decisions Return on Equity Return on Equity Return on Equity Change the Value ! Simulate the Effect ! Simulate the Effect ! Simulate the Effect !
    25. 26. Tomorrow – The organization has a clearly defined approach to linking what people should be doing to what is important for the organization. Now we can focus on measurements of success... Now that we are buying the right PCs, I can help finish this job faster If I get these annual plans done accurately, they will get approved today, and we will be able to… Thank goodness Bob quit asking for those crazy reports, now I can start following up on our past due inquiries
    26. 27. Contact Info. Thomas Freas [email_address] CFO Principal, Deloitte Consulting LLP
    27. 28. <ul><li>Questions and Answers </li></ul>