Key Performance Indicators

KPI

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 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.
 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 Planning and monitoring, budgeting,
SCORE, corporate governance,
impact analysis, standard operating
procedures, trade offs, MBO,
succession planning, quality circles,
technology audit, vision statement,
SBU decisions, legacy issues,
authority/ responsibility, premised
review, stakeholder relationships, risk
management, planning effectiveness,
legal, health and safety, utilities,
insurance, security, secrecy, meeting
management, facilities management,
stress, communication, investment
appraisal, health and safety,
environmental audit, operating
financial review (OFR), working
conditions, internal service satisfaction
Finance Planning and monitoring,
budgeting,trade offs, MBO, succession
planning, accounting assumptions,
technology audit, SCORE, cash
flow,quality circles, profitability,
activity, and liquidity ratios, fraud,
finance profile, funding options,
financial reporting, audit, investment
appraisal, tax management, credit
management, hedging, internal
service satisfaction
Marketing/ sales Planning and monitoring,
budgeting,trade offs, MBO, succession
planning, technology audit, SCORE,
marketing mix, branding, sales
management,investment appraisal,
quality circles, products/services,
PEST elements, high
impact/ high probability
assumptions and
boundary
conditions,CGAL,
contractual, portfolio risk
levels, % hurdle rate,
BEV, capital spread ratio,
cost per sqm or cost per
employee for facilities, %
meeting time,utility cost,
noise, accidents, %
outsourcing,
whistleblowing,
temperature, health and
safety breaches, security
breaches, theft, AER,
KFR, project success,
certification, litigation,
internal service
satisfaction levels
Financial ratios, %
outsourcing, FER, cost of
finance, capex, EFT,
CER, tax charge, project
success, internal service
satisfaction levels
CLV, market share by
segment, sales by
channel, average sales
value, sales productivity,
advertising productivity by
channel, cost per lead,
 expectation fulfillment gap, customer
satisfaction, market spread, product
age spread, market research,
customer spread, product age,
competitive advantage, competitive
bidding, negotiation, game theory,
channel management, customer care,
warranties, mystery shopper,
branding, internal service satisfaction
Production/logistics/ Planning and monitoring,
service delivery budgeting,trade offs, MBO, succession
planning,investment appraisal,
technology audit, SCORE including
cost cutting,production efficiencies,
management accounting, OR,
suppliers, supply chain management,
MRP, inventory levels, production
equipment age, sophistication,
capacity, TQM, TPM, waste
management, recycling, distribution
structure (warehousing, outlet
location) and physical distribution
management, time based competition,
quality circles, order processing,
purchasing, vendor ranking,
postponement, standardization,
design, internal service satisfaction
Personnel Planning and monitoring, budgeting,
trade offs, MBO, succession planning,
quality circles, technology
audit,,SCORE, eight "S", industrial
relations, stress, bonus systems,
internal service satisfaction
cost per converted lead,
bid success rates,
customer satisfaction, %
branding %, customer
investment review, value
chain, % outsourcing,
MER, complaints,
warranty claims, project
success, channel
members, product
positioning variance,
SER, AER, pricing,
country spread,
seasonality, customer
spread, product spread,
product age spread ratios,
TDA's, project success,
competitive bidding
success %, internal
service satisfaction levels
Cost variances, order
processing cycle,
production cycle times,
downtime, % outsourcing,
PLER, STR, capacity
utilisation, logistics cost,
SPC, load utilisation,
failure rates, waste rates,
pollution levels,
emergency delivery, out
of stock %, recycling%,
peak capacity %, supplier
ratio, partnering,
obsolescent stock, EOQ,
number of suppliers,
number of components,
delivery failures, E-
enablement, project
success, internal service
satisfaction levels
Productivity, turnover,
absenteeism, %
outsourcing, PER,
CNCER, employee
satisfaction, skills,
training, discipline,
disputes, appeals,
apprenticeship,
recruitment costs,

IT Planning and monitoring,
budgeting,trade offs, MBO, investment
appraisal, succession planning,
technology audit, SCORE,
telecommunications and IT platform,
management information, web design
and management, systems, SEO,
information flow map, security,
teleworking, systems analysis, internal
service satisfaction
Product/ service Planning and monitoring,
development budgeting,trade offs, MBO, succession
planning,investment appraisal,
technology audit, SCORE, quality
circles, product age profile,
identification of new product/ service
concepts, synergy, cannabilisation,
certification, technology transfer, IPR,
successful development/
commercialisation, internal service
satisfaction
Contingency planning Planning and monitoring,
budgeting,SCORE, investment
appraisal,failure points, reducing
potential for failure, setting trigger
points, action plan, TEWT,
simulations, role play
whistleblowing, span of
control, appraisals, wages
ratio, diversity index,
PDP, project success,
internal service
satisfaction levels
Productivity, stability, web
hits, access speed, site
downtime, site click
through, Intranet,
Extranet, % outsourcing,
ITER, security, data
storage, EDI, web
position, quality of data,
information overload,
project success, internal
service satisfaction levels
Product age spread,
ideas, strategic fit,
protocol score, project
review, team creation,
testing, % outsourcing,
NPDER, license fees,
IPR%, time, budget,
specification, project
success, internal service
satisfaction levels
% outsourcing, % SOP, %
training, 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.

Factor Current Benchmark Target

Gross profit % 68 52 72
ROCE % 13 10 20
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
Capex ratio 8 4 7
WCR 1.7 3.2 1.7
Z score 3 7 3
Tax charge % 12 19 10
Cost of finance % 3 8 3

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.

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.

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;

Training as part of a company wide approach to focusing staff and management on

essential operational requirements;

Central to business planning as a core part of the business plan outline;

Identification of necessary actions in change management, exit planning and survival

and recovery planning;

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.

Ibis also offers a no-obligation review of your current planning platform.

E-mail Ibis now.