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Overview of Key Performance Indicators

Using key performance indicators - what they are and how to use them.

Powerpoint for presentation to Fiji Institute of Accountants, September 2009.

Overview of Key Performance Indicators

  1. 1. Key performance indicators: How they work and how to use them<br />Presented by: Micheal Axelsen Director Applied Insight Pty Ltd<br />
  2. 2. Agenda<br />Introduction<br />Key performance indicators defined<br />Aligning KPIs with strategy<br />Implementing KPIs<br />Conclusion<br />
  3. 3. INTRODUCTION<br />
  4. 4. About this presentation<br />Objectives<br />To identify key performance indicators, their role in management and governance of the organisation, and how to implement key performance indicators for success.<br />
  5. 5. Case study: SME reporting gone wrong<br />The client<br /><ul><li>Medium-sized business with specialist reporting needs, and a legacy information system.</li></ul>The reporting process<br /><ul><li>The Financial controller set up the monthly reports with this process:
  6. 6. CSV export on Unix
  7. 7. FTP to Novell
  8. 8. Import to Access
  9. 9. Data conversion
  10. 10. Export to CSV
  11. 11. Import to Cognos
  12. 12. Reporting Queries
  13. 13. Export to HTML
  14. 14. CEO swore because it rarely worked
  15. 15. Then the financial controller left...
  16. 16. ... and the CEO swore some more.</li></li></ul><li>Key performance indicators defined<br />
  17. 17. Definition of KPIs<br />Key performance indicators<br />focus on the aspects or areas of our organisation’s performance that are critical or vital for our ongoing and future success <br />measure our success in key areas and processes that affect our customers, our employees, our shareholders or other stakeholders<br />Source: AusIndustry KPI Manual<br />
  18. 18. The characteristics of KPIs <br />Non-financial measures <br />Measured frequently (for example, daily, weekly)<br />Acted upon by CEO and the senior management team<br />All staff understand the measure and what corrective action is required<br />Responsibility can be tied down to the individual or team<br />Significant impact – that it is addresses most of the top topeight Critical Success Factors and Balanced Score Card perspectives <br />Has a positive impact – that is, it affects all other performance measures in a positive way <br />
  19. 19. Why do we need ‘key performance indicators’?<br />Businesses are frequently accused of focussing on the ‘bottom line’ and the ‘short term’<br />Kaplan and Norton (1996) promoted the use of the balanced scorecard to look at leading indicators of sustainable, longer-term performance<br />It is a more ‘balanced’ view of organisational performance, and is focussed on monitoring these performance indicators<br />Provides a more holistic view of the business’s progress<br />KPIs for each business will depend very much on its subjective view of the world<br />
  20. 20. It’s all about perspective<br />KPIs are usually drawn from four perspectives:<br />Financial perspective: Does implementation and execution of strategy contribute to the bottom line?<br />Customer perspective: What value proposition will the business apply to satisfy customers and thus generate more sales to the most profitable customer groups? <br />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<br />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. <br />
  21. 21. Example Balanced Scorecard (Kaplan & Norton)<br />Financial<br />Customer<br />Cash flow<br />Return on investment<br />Financial result<br />Return on capital employed<br />Return on equity<br />Residual income<br />Economic Value Added<br />New customers acquired<br />Status of existing customers<br />Customer attrition<br />Internal Process<br />Innovation & Learning<br />Number of activities<br />Opportunity success rate<br />Accident ratios & Environment compatibility<br />Overall equipment effectiveness<br />Investment Rate<br />Illness rate<br />Internal Promotions<br />Employee Turnover<br />Gender Ratios<br />
  22. 22. Uses of Balanced Scorecard & KPIs<br />Frequently the balanced scorecard & KPIs approach is used to:<br />Drive strategy execution<br />Clarify strategy and make strategy operational<br />Identify and align strategic initiatives<br />Link budget with strategy<br />Align the organisation with strategy<br />Conduct periodic strategic performance reviews to learn about and improve strategy<br />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<br />
  23. 23. Criticisms<br />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<br />Sometimes used inappropriately – can you really use Balanced Scorecard to govern internal processes?<br />Subjective and KPIs are not based in actuarial ‘fact’<br />Some criticise any effectiveness in operation as merely a placebo effect – that is, any other management approach might work equally as well<br />
  24. 24. Tips for success<br />A KPI has to be suitable for the specific business, industry and organisation and related to the targets on the long run<br />Make it possible to influence the results of the KPI<br />Make the KPI easy to quantify<br />Make the KPI linkable to other relevant data<br />Make the KPI comparable over time. <br />Make sure every KPI has a dedicated, committed owner<br />There may be 80 performance indicators, but you should not exceed 10 KPIs (that’s about 2 per quadrant)<br />These will build on each other and provide guidance on the strategies and initiatives pursued by the organisation in reaching its strategic goals<br />
  25. 25. Aligning kpi’s with strategy<br />Conclusion<br />
  26. 26. A contribution to strategy<br />A key reason to adopt key performance indicators is to operationalise strategy at the coalface<br />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<br />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<br />
  27. 27. Strategy maps<br />A central theme<br />Successful approach to balanced scorecard understands organisational focus and strategic alignment<br />Organisational focus points you to the KPIs to focus on<br />Alignment places the perspectives in order and how they support your organisation<br />Organisational strategy can be presented as a strategy map<br />These strategy maps identify the organisation’s strategic objectives, which in turn assist with identifying key performance indicators<br />
  28. 28. Customer value proposition<br />
  29. 29. Strategy maps<br />
  30. 30. Linking the workface to the strategic objectives<br />
  31. 31. KPI Development & Implementation<br />Enoma et al (2007)<br />
  32. 32. Implementing kPIS<br />
  33. 33. Reporting requirements<br />Report key result indicators (lagging indicators) to the Board <br />Management reporting of KPIs and Balanced Scorecard:<br />daily<br />weekly<br />monthly<br />Team reporting (team KPIs/Pis)<br />Automated and real-time updating of staff of their performance via the intranet<br />Design features should include:<br />Cover all the six perspectives<br />Show linkage to strategy and critical success factors<br />A mix of KPIs and PIs<br />No more than 20<br />Show trend information (15+ months)<br />No right answer (sculpture)<br />Use a name that means something to staff<br />
  34. 34. How do we implement?<br />Working out our response<br /><ul><li>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
  35. 35. A combination of surveys and workshop might be useful to identify critical weaknesses and, perhaps, seek suggestions regarding possible responses</li></ul>Common mistakes<br /><ul><li>Jumping straight to the 'how' (technology solution) without knowing the 'why' (strategic alignment) and the 'what' (process needs)
  36. 36. Underestimating the riskiness of 'big bang' compared to an incremental approach
  37. 37. Producing accurate, timely and complete reports that are never used (poor validity) or are meaningless (low integrity & consistency)‏
  38. 38. Not being prepared to just walk away – to keep pursuing options that are clearly not viable</li></li></ul><li>Assess-Plan-Do-Advance<br />
  39. 39. The overall approach<br />
  40. 40. Factors in effective reporting<br />
  41. 41. Measuring effectiveness<br />
  42. 42. Improve or buy<br />Why wouldn&apos;t I just buy a new system?<br /><ul><li>Buying a new system can be risky (although this may be the only way to create a new platform to build upon)‏
  43. 43. Frequently the problem is not technological – the problem is process or people-related (or even financial), and a new system won't fix that
  44. 44. Sometimes the effort required is just not worth it</li></ul>Other considerations<br /><ul><li>Sometimes though, no matter how much lipstick you put on it, a pig is still a pig
  45. 45. Some systems will just never work, or be too dangerous or unwieldy
  46. 46. Consider the enironment and the factors, with technology being your last consideration, before investing in a new system</li></li></ul><li>Respond to the &apos;why&apos; - environment<br />Strategic alignment<br /><ul><li>A statement of where the business is heading and what is important
  47. 47. Business growth plans – are we focussed on Operational Excellence, Customer Intimacy, or Product Excellence</li></ul>Regulatory compliance<br /><ul><li>Data governance framework
  48. 48. Role of the audit committee
  49. 49. Governance calendar
  50. 50. Compliance audit</li></ul>Financial<br /><ul><li>Fund software acquisition adequately
  51. 51. Don’t buy the software and cut down on the professional services – buy cheaper software if you need to and grow
  52. 52. Insist on ROI, BUT include the intangible benefits</li></li></ul><li>Respond to the &apos;what&apos; – process <br />Process<br /><ul><li>Information management
  53. 53. Quality control framework
  54. 54. Policies and procedures
  55. 55. Service delivery methods
  56. 56. Project management methods
  57. 57. Know what is to be done, and do it
  58. 58. This is about ensuring maturity and organisational readiness for the implementation of KPIs</li></li></ul><li>Now do the &apos;how&apos; – people and technology<br />People<br /><ul><li>Training
  59. 59. Reports Interpretation
  60. 60. Only write reports that are used and relevant
  61. 61. Attraction and retention strategies
  62. 62. Role sharing
  63. 63. Reduce technical complexity</li></ul>Technology<br /><ul><li>Common Technology Framework – fewer technologies is better
  64. 64. IT is often downside risk
  65. 65. Single view of the truth
  66. 66. Consistency and compatibility of technologies is most important
  67. 67. Role of in-house development
  68. 68. Technology to help automate or obliterate</li></li></ul><li>Conclusion<br />
  69. 69. Conclusion – meeting the challenges of IT<br />Information Technology & Management Centre of Excellence<br />
  70. 70. Conclusion<br />More information<br /> <br /> <br /><br />Speaking Notes<br />Speaking notes for this presentation may be downloaded from<br />Questions and answers<br />Questions from the audience<br />
  71. 71. Contact details<br />Micheal AxelsenDirector, Applied Insight Pty Ltd<br />m: 0412 526 375t: +61 7 3139 0325e:<br />blog:<br />Applied Insight Pty LtdPO Box 603Toowong DC 4066AUSTRALIA<br />
  72. 72. About the speaker<br />Services<br />Micheal Axelsen provides business systems consulting services in the governance of information technology, and development and implementation of IT business strategy<br />Position and qualifications<br />Director, Applied Insight Pty Ltd<br />Chair, CPA Australia IT & Management Centre of Excellence<br />Member of ISACA<br />Qualifications<br />Bachelor of Commerce (Hons)<br />Masters of Information Systems<br />FCPA<br />