The term KPI has become one of the most over-used and little understood terms in business development and management. In theory it provides a series of measures against which internal managers and external investors can judge the business and how it is likely to perform over the medium and long term. Regrettably it has become confused with metrics if we can measure it, it is a KPI. Against the growing background of noise created by a welter of such KPI concepts, the true value of the core KPI becomes lost.
The KPI when properly developed should be provide all staff with clear goals and objectives, coupled with an understanding of how they relate to the overall success of the organisation. Published internally and continually referred to, they will also strengthen shared values and create common goals.
What are the key components of a KPI?
The KPI should be seen as:
Only Key when it is of fundamental importance in gaining competitive advantage and is a make or break component in the success or failure of the enterprise. For example, the level of labour turnover is an important operating ratio, but rarely one that is a make or break element in the success and failure of the organisation. Many are able to operate on well below benchmark levels and still return satisfactory or above satisfactory results.
Only relating to Performance when it can be clearly measured, quantified and easily influenced by the organisation. For example, weather influences many tourist related operations but the organisation cannot influence the weather. Sales growth may be an important performance criteria but targets must be set that can be measured.
Only an Indicator if it provides leading information on future performance. A considerable amount of data within the organisation only has value for historical purposes for example debtor and creditor length. By contrast rates of new product development provide excellent leading edge information.
Obviously KPI's cannot operate in a vacuum. One cannot establish a KPI without a clear understanding of what is possible so we have to be able to set upper and lower limits of the KPI in reference to the market and how the competition is performing (or in the absence of competition, a comparable measurement from a number of similar organisations). This means that an understanding of
benchmarks is essential to make KPI's useful (and specific to the organisation), as they put the level of current performance in context both for start ups and established enterprises though they are more important for the latter. Benchmarks also help in checking what other successful organisations see as crucial in building and maintaining competitive advantage, as they are central to any type of competitive analysis.
Start with what you need to measure and monitor
Different organisations need to monitor different aspects of their environment. For example, the airline industry has a complex set of issues many of which (but not all) are different from the dairy farmer. Ibis has created a number of separate
business monitoring modules for medium sized companies which we believe cover the majority of requirements for the development and maintenance of their organisation, that are part of a bottom up planning system based around knowledge
centres.
Knowledge centre
Focus of activity
Possible KPI
Administration
Leadership, planning and monitoring, balanced scorecard, budgeting,
portfolio theory, golden circle, decision making, creativity, SCORE, corporate
governance, territorial imperative, impact analysis, standard
operating procedures,
mosaic management, prioritisation, trade offs, MBO, succession planning,
quality circles, technology audit, vision statement, SBU decisions,
Abacus principle, barriers to entry, critical success factors, business
model, legacy issues, successes failures/ lessons learnt, authority/
responsibility, recruitment appraisal, acquisitions, cascade investment,
disposals, premises review, stakeholder relationships, trade
associations, synergy, recruitment appraisal, risk management, planning
effectiveness, legal, health and safety, SBS, utilities, insurance,
security, design for operating efficiency, time study, complaints,
pensions, share options, employee share savings schemes, fringe
benefits, bonus systems,secrecy, meeting management, time management,
cost cutting, facilities management, stress, forecast grid, trade offs,
communication, investment appraisal, health and safety, environmental
audit, ISO 9000, ISO 14000, operating financial review (OFR), working
conditions, employee suggestion, team building, training, internal
service satisfaction
PEST elements, budget ratio, high impact/ high probability
assumptions and boundary conditions (strategic risk assessment),CGAL,
contractual, portfolio risk levels, % hurdle rate, insurance
costs/sales, BEV, capital spread ratio, cost per sqm or cost per
employee for facilities total space, % meeting time,utility cost, noise,
accidents, % outsourcing, complaint resolution speed, complaint
resolution cost, average meetings/ month, utility cost/ market cost
ratio, premises cost/ market cost ratio, space utilisation,
whistleblowing, temperature, noise, health and safety breaches, security
breaches, document loss, pension cost, theft, AER, budget ratio, KFR,
project success, certification, wages ratio, litigation, internal
service satisfaction levels
Planning and monitoring, balanced scorecard , budgeting,successes
failures/ lessons learnt, trade offs, MBO, investment appraisal,
succession planning, mosaic management, prioritisation, data mining,
technology audit, SCORE, decision making, creativity, Intranet,
Extranet, trade offs, telecommunications and IT platform, management
information systems (MIS), web design and management, cloud computing,
systems, time management, synergy, recruitment appraisal, SEO,
information flow map, security,mystery shopper, teleworking, cascade
investment,quantitative analysis, cost cutting, systems analysis, team
building, training, artificial intelligence, quantitative analysis,
modeling, encryption, recruitment appraisal, internal service
satisfaction
Management information system functionality,productivity, budget
ratio,stability, web hits, access speed, site downtime, site click
through, Intranet, Extranet, % outsourcing, ITER, budget ratio, security
breaches, data storage, EDI, web position, quality of data, information
overload, project success, internal service satisfaction levels
Product/ service development
Planning and monitoring, budgeting,innovation matrix, balanced
scorecard, mosaic management, prioritisation, successes failures/
lessons learnt, trade offs, MBO, succession planning,investment
appraisal, TBC, technology audit, SCORE, quality circles, decision
making, recruitment appraisal, creativity, product age profile, period
of grace, trade offs, halo effect, identification of new product/
service concepts, synergy, cannabilisation, protocol, IPLC,
certification, cascade investment, technology transfer, first mover
advantage, time management,recruitment appraisal, IPR, successful
development/ commercialisation, team building, training,internal service
satisfaction
Product age spread, R&D%,ideas, strategic fit, budget ratio,
protocol score, total cycle time, project review, team creation,
testing, % outsourcing, NPDER, budget ratio, license fees, IPR%, IPR
infringements, IPR maintenance costs, royalty rate %, time, budget,
specification, project success, internal service satisfaction levels
Contingency planning
Authority and responsibility, planning and monitoring, budgeting,
successes failures/ lessons learnt,,SCORE, investment appraisal,
assumptions, high risk/high probability, Black Swan theory, failure
points, reducing potential for failure, setting trigger points, action
plan, stage gate, team building, communication, training, TEWT,
simulations, role play, impact analysis
Establish current performance, benchmark and target levels
For each monitoring module, one can then establish what the current level of performance is in a measurable and understandable way. This is the current performance. From industry sources, the benchmark level can normally be introduced (getting to benchmarks is often a difficult process and one requiring a mixture of low cunning and/or sophisticated analysis). Then a target level of achievement can be entered. Let us take an example of a financial management module for an established manufacturing company and what it will tell us.
Financial knowledge centre monitoring components
Factor
Current
Benchmark
Target
Gross profit %
68
52
72
ROCE %
13
10
20
FCF
12
n/a
10
Gearing (DER)
15
38
15
Interest cover X
8.3
3.7
10
AER %
8
12
6
SER %
10
12
6
Debtor length (days)
102
95
60
Creditor length (days)
60
63
60
Stock turn/year
5
4
8
Current ratio
4
3
4
Budget ratio
95
n/a
n/a
Capex ratio
8
4
7
WCR
1.7
3.2
1.7
Z score
3
7
3
Tax charge %
12
19
10
Depreciation %
15
12
n/a
Cost of finance %
3
8
3
EFT
82
n/a
88
Overdue accounts %
2
n/a
1
STP%
92
n/a
95
FER%
3
n/a
2.6
Project success ratio
90
n/a
90
Internal satisfaction level %
67
n/a
90
We can gain an enormous amount of information and control from such a chart, but obviously not all components will meet the criteria of being a KPI otherwise we are back into the problem of measuring everything and not concentrating on a limited number of core criteria.
Add KPI project control elements
This ratio based analysis is combined with a review of individual projects normally based around the three key performance criteria, whether the project is on time, on budget and on specification. For projects involving significant expenditure the measurement of stage gate components will also significantly add to the level of control at a knowledge center level.
An example from the same knowledge centre would look like this:
Project
Due date
On time
On budget
On spec
Stage gate
Debt refinancing
August
Yes
Yes
Yes
None
Tax review
September
Yes
Yes
Yes
None
Sales insurance
August
Yes
Yes
Yes
None
How do I use such a format to develop and understanding of what is a KPI?
As different individuals and organisations will put a different emphasis on each item of information a definitive list of what is and what is not a KPI will depend on individual decisions, and will vary considerably according to the stage of company development. Start up enterprises need to place their emphasis on structural factors; established companies on operational performance.
However, one can set some guidelines. The most rapid way to establish the KPI within any set of monitoring information is to work through the three criteria in sequence.
Is the control information key to the success of the organisation?
Can we measure it and influence it?
Does it provide leading edge indications of future developments?
Which measures in the above chart are key?
Gross profit is one key measure to the success of the organisation. Research shows that survival rates are linked to levels of gross profit; gross profit margins above that of the competition provide clear evidence of competitive advantage.
Return on capital employed is another key measure of the success of the organisation. The ability to use investment effectively is central to effective long term development.
Z score is a measure of the liquidity of the enterprise and clearly defines positive or negative trends.
It would be the Ibis argument that the other components of the chart are not key they are valuable items of information but are not make or break aspects of company management (unless they are grotesquely different from benchmark values).
Are these performance measures can we quantify them and influence them?
Yes
Do these provide leading edge indications of future performance?
Yes
The conclusion from this analysis is that in financial reporting the company should concentrate on gross profit, return on capital employed and Z scores as their key performance indicators. Both gross profit and return on capital employed are part of the model balanced scorecard for overall objectives that Ibis propose for the majority of enterprises as part of their planning platform.
Other components within the financial reporting module that might be considered as KPI's are factors such as the levels of gearing (debt/ equity ratio DER), project success rates, bad debt rates, and free cash flow (FCF). Including time, budget and specification to project reporting would also be a natural addition.
The balanced scorecard and KPI's
In addition to the creation of the enterprise balanced scorecard, in which gross profit, return on capital and Z scores are standard elements, the identification of KPI's in each of the operational areas or knowledge centres also assists the enterprise in plan development. These KPI's will change over time, but their creation as part of the initial creation of each knowledge centre will focus and direct their operational activities.
Where else are KPI's valuable?
The KPI is central to a number of other elements in the planning platform which provides the basis for answering the three crucial planning questions:
Where are we?
Where do we want to be (and when)?
How are we going to get there cost effectively?
In addition to the creation of knowledge centres and business monitoring, KPI's have a vital role to play in:
Action planning and implementation with an emphasis on management by objectives which will include a standardised rate of return and detailed project control;
Training as part of a company wide approach to focusing staff and management on essential operational requirements;
They set priorities for investment appraisal, and the choice of emphasis that should be given to the main strategies within the golden circle, consolidation (including
cost cutting), market penetration, ,market development and product development.
Training on key performance indicators, the creation of a business plan and standard operating procedures is available from Ibis.
More information on the way in which Ibis can contribute to your business plan development is provided at
Advantage Ibis
More information on the Ibis approach is also available on the FAQ
page..
Business Plan SOP
A comprehensive, easy to use 188 page manual containing scores of worksheets and notes. The contents follow the
business plan outline, and have been rigorously tested during years of
training throughout the world. The Ibis business plan manual is delivered in Word format, so that users can complete the worksheets and transfer them into the body of their own business plan.
