Background

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 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 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, return on premises, 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, project ratio, employee expenses

Finance

Planning and monitoring, balanced scorecard, budgeting, cash flow, profit and loss, balance sheet, successes failures/ lessons learnt, trade-offs, MBO, mosaic management, prioritisation, IFRS, GAAP, succession planning, accounting assumptions, technology audit, SCORE, decision making, creativity, quality circles, asset register, invoicing, profitability, activity, and liquidity ratios, revaluation accounting, fraud, capital allocation profile, James' rule, contingent liabilities, deferred consideration, cost capitalisation, brand accounting, cost cutting, payment systems, trade offs, documentary credits, dividend policy, cash management, currency management, sales tax, depreciation, synergy, recruitment appraisal, funding options, financial reporting, audit, cascade investment, recruitment appraisal, source and application of funds, sensitivity analysis, investment appraisal, convertibles, tax management, credit management, hedging, team building, time management,training, internal service satisfaction

Financial ratios, budget ratio, % outsourcing, FER, budget ratio, cost of finance, capital allocation ratio, capex, EFT%, CER, tax charge, SPT %, gross yield, P/E,PEG, EPS, project success, DER%, BDR, FCF, FCFPS, overdue accounts, market dynamics capital allocation,  EBITDA currency/ debt currency ratio, sales tax rate %, cash interest rate%, depreciation %, internal service satisfaction levels, Z score, M score, depreciation, CAT score, bank charge ratio

Marketing/ sales

Planning and monitoring, balanced scorecard , budgeting, portfolio analysis, trade offs, MBO, successes failures/ lessons learnt, succession planning, recruitment appraisal, mosaic management, prioritisation, technology audit, SCORE, decision making, creativity, market drivers, marketing mix, branding, Single Block Theory, entrants, substitutes, market research, customer panel, sales channels, distribution channels, sales management,investment appraisal, call centres, marginal profitability, quality circles, customer loss, products/services (width/depth), cross selling, value chain, expectation fulfillment gap,  market size, customer transition, seasonality, networking, price elasticity,cascade investment, pricing terms and conditions, quantitative analysis, customer satisfaction, reference sale, synergy, pricing power, cost cutting, market spread, customer investment review (CIR), marketing myopia, product age spread, organisational buyer behaviour, reference sale, customer spread, product age, competitive advantage, competitive bidding, trade offs, negotiation, recruitment appraisal, game theory, channel management, customer care, complaints, warranties, mystery shopper, time management, branding, team building, training, internal service satisfaction

CLV, budget ratio, market share by segment, sales channel ratio, trial rate, competitive score, sales by channel, % repeat purchase, average sales value, sales productivity, market share, advertising productivity by channel, cost per lead, cost per converted lead, bid success rates, range sale%, average discount, service call out times, enquiry response time, seasonality ratio, customer satisfaction, advertising awareness, % branding %, customer investment review, customer transition rate, value chain, % outsourcing, MER, budget ratio, EGMG ratio, customer investment return, customer churn,  complaints, warranty claims, project success, channel members, product positioning variance, SER, AER, pricing, price elasticity, country spread, seasonality ratio, customer spread, product spread, product age spread ratios, segmental leadership, TDA's, project success, CIR%, competitive bidding success %, internal service satisfaction levels, brand empathy level, joint planning

Production/logistics/ service delivery

Planning and monitoring, balanced scorecard, budgeting, successes failures/ lessons learnt, standard costing, activity based costing, trade-offs, MBO, succession planning, mosaic management, prioritisation, investment appraisal, design for operating efficiency, JIT, FMS, technology audit, SCORE including cost cutting, decision making, creativity, production efficiencies, PLM, aggregate demand policy, synergy, management accounting, OR, suppliers, supply chain management, MRP, inventory levels, production equipment age, quantitative analysis, design, sophistication, capacity, TQM, TPM, waste management, condition monitoring, recycling, complaints, technical support, recruitment appraisal, distant data capture, distribution structure (warehousing, outlet location) and physical distribution management, cascade investment, time based competition, time management, quality circles, order processing, trade-offs, scheduling, purchasing, recruitment appraisal, vendor ranking, networking, postponement, standardization, product/ service design, team building, training, internal service satisfaction

Cost variances, budget ratio,order processing cycle, production cycle times, downtime, % outsourcing, PLER, budget ratio, STR, capacity utilisation, logistics cost,  SPC, load utilisation, failure rates, return on plant, space utilisation, set up time, waste rates, pollution levels, emergency delivery, out of stock %, recycling%, energy efficiency ratio, peak capacity  %, supplier ratio, partnering, obsolescent stock, EOQ, number of suppliers, supplier spread ratio, number of components, emergency call out, delivery failures, E-enablement, vendor rating, project success, internal service satisfaction levels, joint planning, POD score

Personnel

Planning and monitoring, balanced scorecard, budgeting, successes failures/ lessons learnt, MBO, succession planning, mosaic management, prioritisation, quality circles, Noah principle, decision making, creativity, technology audit, SCORE, eight “S”, absenteeism, timekeeping, trade-offs, overtime, industrial relations, stress, bonus systems, training needs analysis, recruitment appraisal, time management, team building, cost cutting, cascade investment, wages, employee record keeping, synergy, vacation planning, training, internal service satisfaction

Productivity, budget ratio, turnover, absenteeism, % outsourcing (temporary staff ratio), PER, budget ratio, labour cost%, wages ratio, CNCER, employee satisfaction levels, CH/WH ratio, overtime%, skills, training, discipline, disputes, appeals, timekeeping ratio, apprenticeship,  recruitment costs, training days, whistle-blowing, span of control, appraisals, wages ratio, diversity index, PDP, project success, internal service satisfaction levels

IT

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, tele-working, 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, worker access, quality of data,  information overload, project success, internal service satisfaction levels, digitization, device interconnectivity, channel usage

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, technology transfer, joint planning

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, risk profile, stage gate, team building, communication, training, TEWT, simulations, role play, impact analysis

Risk score, response times, budget ratio, KFR, % outsourcing, % SOP, % training, % above/below barrier conditions, success rates, % budget

 

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

M score

3

1

3

F score

8

6

8

Tax charge %

12

19

10

Depreciation %

15

12

n/a

Cost of finance %

3

8

3

Bank charge ratio

0.1

n/a

0.05

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

Complaints

0

n/a

0

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.

Within this list, gross profit, return on capital employed, budget ratio, project ratio and Z scores are the most obvious candidates to be considered KPI

 

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

Review the MIS

The development of an effective control system demands that the knowledge centre team regularly review the management information system to ensure that it meets the requirements of SATURNS:

Simple;

Accurate;

Timely;

Useful (much information is useless for decision making purposes and leads to information overload);

Researchable (background data will be vital for complex – especially “wicked” problems);

Network accessible (data should be accessible from all areas of the business);

Secure

Integrate KPI’s into planning and control

Where a knowledge centre system is in place monthly reviews are standard with each KC reporting on their area of responsibility. KPI’s are also fundamental to the way in which the company develops a bottom up planning system, with KC’s responsible for reporting on:

 

Strategy

Risk profile

Legacy

Key performance indicators and benchmarks

MIS

Reference material

Software

Action plan

Budget

Cost base

Trade offs

Standard operating procedures

Quality circles

Creativity

Design for operational efficiency

Complaints

Contingency plan

Training

Stakeholder relations

KISS & SCORE

Build trust and confidence in a methodology that works to gain competitive advantage

The creation of a knowledge centre based organisation coupled with bottom up planning and a focus on key performance indicators and benchmarks creates a positive feedback mechanism within the team and the strategic business unit which drives competitive advantage.

More details of the way in which key performance indicators can be made to work is available from Ibis 

 

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.