Module 4: Key Performance Indicators

Reasons for measuring performance

- Learn and improve performance - Provide external reporting (for shareholders and compliance requirements) - Monitor and control internally within the organization

Problems with KPIs

- can be difficult to implement and use - may have limitations regarding accuracy. - can be difficult to change without causing disruption - can impact comparison with historical data - are backward looking - can involve many measurements - targets can be unrealistic and distort perception of performance.

What is the 80% rule to avoid analysis paralysis

- develop metric to a point where there is 80% confidence that it will have the desired effect

What does monitoring of KPIs enable

- enables management to remain informed - assumptions to be challenged - provide ongoing learning and improvement

Metrics should include

- financial and non-financial measures - existing metrics and custom metrics - leading and lagging indicators

Developing and keeping metrics effective: obtain buy-in

- involve users in the process of defining metrics, targets, and thresholds. - individuals who have vested interest in making them work can develop more accurate metrics

Business metric

- is a measurement used to gauge a company's performance - provides raw measurement of a quantifiable component of an organization's performance such as revenue per customer, gross margin, and average cost per customer

What is a measure?

- is a unit or standard of measurement, which consists of a number and a unit - raw data that is collected such as revenue or sales

Metric

- is used in business performance and has a goal or performance associated with it. - a measurement standard, which provides a target value that must be achieved for success.

strategic measures

- monitor indicators that indicate long term performance - can typically cover monthly, quarterly or annual periods

Selected KPIs should enable the organization to:

- monitor its performance - provide a true picture of how it is progressing towards achieving its goals - no universally accepted set of KPIs exist for any business or function because they depend on the organization's business strategy and priorities, which vary across different organizations

operational measures

- monitor measures in a shorter time frame, which can be daily or even more frequently

Objective of metrics and related targets

- monitor progress towards the achievement of strategic goals and, ultimately, the implementation of the organization's strategy.

Basic indicator rules

- must trace back to the source data - be a representation of the underlying detailed data - must also be actionable, which helps limit the number of indicators

Example of measurement and dimension

- revenue is the measure (dollars) - time is the dimension (month)

Characteristics of key performance indicators

- strategic - relevant - quantifiable - reflect strategic goals of the organization - based on corporate standards - based on valid data - defined by management - do not change frequently - easily understood across the organization - measured frequently - trigger action at appropriate levels - provide context - empowers users - have a significant impact on the organization - can be used to assign responsibility

What is a key performance indicator?

- type of measurement used to gauge or compare performance - metric that is tied to a target. (metric is not necessarily a KPI)

Measurements for controlling and monitoring

KPIs are routinely used to monitor and control performance and behavior of employees at all levels of the corporate hierarchy.

Developing and keeping metrics effective: Benefit of simplicity

To avoid cluttering a dashboard or scorecard - display only a handful of metrics on a single screen - 4-7 is the best practice number.

KPI management basically involves:

defining what the organization needs to do, such as grow revenues at a certain rate and what needs to be prioritized for achieving the objectives

In order to avoid pitfalls of incentives

do not attach incentives, in the form of bonuses or compensation, to metrics that have not been fully vetted make sure to deploy metrics for a while to identify and close potential loopholes, change calculations to more accurately reflect reality and provide training to users to understand how to impact outcomes.

What do key performance indicators do?

provide information to users for making informed and, hence, better decisions so that performance can be improved.

External and compliance reporting requirements

requirements are generated due to: - need to inform external stakeholders and shareholders - compliance with external reporting requirements - special requests for information or data