Vous êtes sur la page 1sur 25

Key Performance Indicators (KPI)

How an organization defines and measures progress toward its goals Key Performance Indicators, also known as KPI or Key Success Indicators (KSI), help an organization define and measure progress toward organizational goals. Once an organization has analyzed its mission, identified all its stakeholders, and defined its goals, it needs a way to measure progress toward those goals. Key Performance Indicators are those measurements. What Are Key Performance Indicators (KPI) Key Performance Indicators are quantifiable measurements, agreed to beforehand, that reflect the critical success factors of an organization. They will differ depending on the organization. A business may have as one of its Key Performance Indicators the percentage of its income that comes from return customers. A school may focus its Key Performance Indicators on graduation rates of its students. A Customer Service Department may have as one of its Key Performance Indicators, in line with overall company KPIs, percentage of customer calls answered in the first minute. A Key Performance Indicator for a social service organization might be number of clients assisted during the year. Whatever Key Performance Indicators are selected, they must reflect the organization's goals, they must be key to its success,and they must be quantifiable (measurable). Key Performance Indicators usually are long-term considerations. The definition of what they are and how they are measured do not change often. The goals for a particular Key Performance Indicator may change as the organization's goals change, or as it gets closer to achieving a goal. Key Performance Indicators Reflect The Organizational Goals An organization that has as one of its goals "to be the most profitable company in our industry" will have Key Performance Indicators that measure profit and related fiscal measures. "Pre-tax Profit" and "Shareholder Equity" will be among them. However, "Percent of Profit Contributed to Community Causes" probably will not be one of its Key Performance Indicators. On the other hand, a school is not concerned with making a profit, so its Key Performance Indicators will be different. KPIs like "Graduation Rate" and "Success In Finding Employment After Graduation", though different, accurately reflect the schools mission and goals. Key Performance Indicators Must Be Quantifiable If a Key Performance Indicator is going to be of any value, there must be a way to accurately define and measure it. "Generate More Repeat Customers" is useless as a KPI without some way

1 |Page

to distinguish between new and repeat customers. "Be The Most Popular Company" won't work as a KPI because there is no way to measure the company's popularity or compare it to others. It is also important to define the Key Performance Indicators and stay with the same definition from year to year. For a KPI of "Increase Sales", you need to address considerations like whether to measure by units sold or by dollar value of sales. Will returns be deducted from sales in the month of the sale or the month of the return? Will sales be recorded for the KPI at list price or at the actual sales price? You also need to set targets for each Key Performance Indicator. A company goal to be the employer of choice might include a KPI of "Turnover Rate". After the Key Performance Indicator has been defined as "the number of voluntary resignations and terminations for performance, divided by the total number of employees at the beginning of the period" and a way to measure it has been set up by collecting the information in an HRIS, the target has to be established. "Reduce turnover by five percent per year" is a clear target that everyone will understand and be able to take specific action to accomplish. Key Performance Indicators Must be Key To Organizational Success Many things are measurable. That does not make them key to the organization's success. In selecting Key Performance Indicators, it is critical to limit them to those factors that are essential to the organization reaching its goals. It is also important to keep the number of Key Performance Indicators small just to keep everyone's attention focused on achieving the same KPIs. That is not to say, for instance, that a company will have only three or four total KPIs in total. Rather there will be three or four Key Performance Indicators for the company and all the units within it will have three, four, or five KPIs that support the overall company goals and can be "rolled up" into them. If a company Key Performance Indicator is "Increased Customer Satisfaction", that KPI will be focused differently in different departments. The Manufacturing Department may have a KPI of "Number of Units Rejected by Quality Inspection", while the Sales Department has a KPI of "Minutes A Customer Is On Hold Before A Sales Rep Answers". Success by the Sales and Manufacturing Departments in meeting their respective departmental Key Performance Indicators will help the company meet its overall KPI. Good Key Performance Indicators vs. Bad Bad:

Title of KPI: Increase Sales Defined: Change in Sales volume from month to month Measured: Total of Sales By Region for all region

2 |Page

Target: Increase each month

What's missing? Does this measure increases in sales volume by dollars or units? If by dollars, does it measure list price or sales price? Are returns considered and if so do the appear as an adjustment to the KPI for the month of the sale or are they counted in the month the return happens? How do we make sure each sales office's volume numbers are counted in one region, i.e. that none are skipped or double counted? How much, by percentage or dollars or units, do we want to increase sales volumes each month?(Note: Some of these questions may be answered by standard company procedures.) Good: Title of KPI: Employee Turnover Defined: The total of the number of employees who resign for whatever reason, plus the number of employees terminated for performance reasons, and that total divided by the number of employees at the beginning of the year. Employees lost due to Reductions in Force (RIF) will not be included in this calculation. Measured: The HRIS contains records of each employee. The separation section lists reason and date of separation for each employee. Monthly, or when requested by the SVP, the HRIS group will query the database and provide Department Heads with Turnover Reports. HRIS will post graphs of each report on the Intranet. Target: Reduce Employee Turnover by 5% per year.

What Do I Do With Key Performance Indicators? Once you have good Key Performance Indicators defined, ones that reflect your organization's goals, one that you can measure, what do you do with them? You use Key Performance Indicators as a performance management tool, but also as a carrot. KPIs give everyone in the organization a clear picture of what is important, of what they need to make happen. You use that to manage performance. You make sure that everything the people in your organization do is focused on meeting or exceeding those Key Performance Indicators. You also use the KPIs as a carrot. Post the KPIs everywhere: in the lunch room, on the walls of every conference room, on the company intranet, even on the company web site for some of them. Show what the target for each KPI is and show the progress toward that target for each of them. People will be motivated to reach those KPI targets. How to use Key Performance Indicator in your business Key performance indicators can take your business to the next level by helping you monitor progress towards strategic goals. Companies that sell services to other businesses often track time in order to automate invoicing, but they may be overlooking the other benefits these systems can provide. Real-time access to relevant Key Performance Indicators (KPIs) such as 'percent billable' and 'completed vs. estimated' can give early warnings of project problems and lead your company to faster growth
3 |Page

and more profitability. In fact, there aer several simple ones that can improve your business or rate of project success, and they can be calculated from any time and data labor source. A KPI measures progress toward a strategic goal. If you have 100 KPIs, then you\'re not going to be able to use any of them to drive organizational behavior because your company doesn't have 100 strategic goals. 10 KPIs can be effective, 5 KPIs are better, and 1 KPI is ideal. A Quantifiable Indicator. A KPI must be measurable. "Make customers more successful" is not an effective KPI without some way to measure the success of your customers. It is also important for KPI definitions to remain stable from year to year. For a KPI of "increase utilization rates," you need to address considerations like whether to measure by hours or by dollars. Performance Measurement. KPIs are used to measure performance, frequently through activities such as performance improvement derived from training, labor utilization rates, or customer satisfaction. KPIs are often tied to strategy through techniques such as the Balanced Scorecard, but they don't have to be as complicated as that to be useful and effective. As with most things, simplicity increases efficacy. A KPI is part of a 'SMART' goal-one that is Specific, Measurable, Achievable, Relevant, and Time-based-which is made up of a direction, KPI, target and time frame. An example of this would be to "increase average revenue per sale to $10,000 by January." In this case, 'average revenue per sale' is the KPI. The aforementioned goal wouldn't be SMART if it wasn't achievable, if the word 'January' was left out, or if was not relevant, e.g. if this was a portion of the organization that had nothing to do with sales or marketing, like HR. Simple, Useful KPIs Billability (often termed 'utilization rate') is the percentage of time in a given period during which employees are working in a revenue-producing capacity. You must configure your timesheet system to track whether or not work on a project is considered billable to the customer. Once you have this information, utilization for any period, group or person is found by the formula B divided by T, where: B = billable hours for the employee/group in the period T = all hours worked for the employee/group in the period Most organizations try to keep their utilization rate above 70% or so. The higher, the better, until you've reached a point where administrative tasks that are necessary to the business or specific project (like tracking time) are not getting accomplished. Then you know you've pushed it too far.

4 |Page

Adherence to Estimate. Customers do not like it when you underbid, but you won't win the business if you overbid. Many consultancies do a poor job in this area. The KPI you want to minimize here is defined by the formula [(E-A)/E] where: E = estimated hours to complete project A = actual hours used to complete project Just tracking this KPI is a good start, and you can get the data to calculate it from any timesheet system, even paper ones. Automated systems, however, often have reports to calculate it for you. Improving this number can be difficult for some companies until they understand a simple truththat similar projects often have a strikingly similar ratio of early phase cost to overall project cost. If you find that after carefully tracking time on a batch of similar projects, the first two phases usually take about 10% of the total project time, you can use that data to predict the length of future projects. This project estimation technique has proven itself to be extremely accurate for similar projects in a variety of companies. Percentage of Projects Profitable is a KPI that can really affect your business in a positive way. As an analogy, consider a Journyx customer, British Petroleum (BP), and their experiences in drilling for oil. They created a strategic vision for their company which they termed 'no dry holes'. Drilling for oil and not finding it is expensive. Rather than trying to make up for all the dry holes by finding an occasional gusher, BP decided to try to never have a dry hole in the first place. Changing the attitude that dry holes were an inevitable cost of doing business fundamentally changed their culture in very positive ways. Project management and other consultancies also have dry holes: projects which lose money for the company. Due to an inadequate understanding of costs, many of these go unnoticed. If you set a strategic goal for your company of 'no unprofitable projects,' it will change the nature of discussions in your business. For example, it empowers frontline employees to legitimately push back when a project is being taken on for political reasons. Getting direct per-project cost data from a timesheet system is easy. Correctly applying indirect data (such as sales or accounting time) to the direct costs is a bit more complicated. Connecting all of this to revenue data gives you per-project profitability. Once you have that data, you can work on your KPI of 'percentage of profitable projects' and try to maximize it. The formula for this KPI for a given time period (usually a quarter or a year) is: number of profitable projects number of projects You should seek to maximize this number. Even if you are willing to lose money on a few strategic projects in order to enter a certain market, you should determine how many you're willing to do that on, and keep your losses around that area reasonable.

5 |Page

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 organization. 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 organization. For example, weather influences many tourist related operations but the organization 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 organizations). This means that an understanding of benchmarks is essential to make KPI's useful (and specific to the organization), 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 organizations 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 organizations 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 organization, that are part of a bottom up planning system based around knowledge centres.

Knowledge centre
6 |Page

Focus of activity

Possible KPI

Administration

Finance

Leadership, planning and monitoring, PEST elements, budget ratio, balanced scorecard, budgeting, portfolio high impact/ high probability theory, golden circle, decision making, assumptions and boundary creativity, SCORE, corporate governance, conditions (strategic risk territorial imperative, impact analysis, assessment), CGAL, standard operating procedures, mosaic contractual, portfolio risk management, prioritization, trade offs, levels, % hurdle rate, MBO, succession planning, quality circles, insurance costs/sales, BEV, technology audit, vision statement, SBU capital spread ratio, cost per decisions, Abacus principle, time keeping, sqm or cost per employee for barriers to entry, critical success factors, facilities total space, business model, legacy issues, successes productive hours %, % failures/ lessons learnt, authority/ meeting time, BS index, responsibility, recruitment appraisal, utility cost, noise, accidents, acquisitions, cascade investment, % outsourcing, complaint disposals, premises review, stakeholder resolution speed, complaint relationships, trade associations, synergy, resolution cost, average recruitment appraisal, risk management, meetings/ month, utility cost/ planning effectiveness, legal, health and market cost ratio, premises safety, SBS, utilities, insurance, security, cost/ market cost ratio, space design for operating efficiency, time study, utilization, whistle blowing, complaints, pensions, share options, temperature, noise, health and employee share savings schemes, safety breaches, security creativity, fringe benefits, bonus systems, breaches, document loss, secrecy, meeting management, time pension cost, theft, AER, management, cost cutting, facilities budget ratio, KFR, project management, stress, forecast grid, trade success, certification, wages offs, communication, investment appraisal, ratio, litigation, internal health and safety, environmental audit, ISO service satisfaction levels, 9000, ISO 14000, operating financial effective headcount, % review (OFR), working conditions, mentoring employee suggestion, team building, training, internal service satisfaction Planning and monitoring, balanced Financial ratios, budget ratio, scorecard, budgeting, cash flow, profit and % outsourcing, FER, BEV, loss, balance sheet, successes failures/ BEV/EBITDA, debt age, cost lessons learnt, trade offs, MBO, mosaic of finance, capital allocation management, prioritization, IFRS, GAAP, ratio, capex, EFT%, CER, tax succession planning, accounting charge, SPT %, gross yield, assumptions, technology audit, SCORE, P/E,PEG, EPS, project decision making, creativity, quality circles, success, DER%, BDR, FCF, asset register, invoicing,profitability, overdue accounts, productive activity, and liquidity ratios, revaluation hours %, market dynamics accounting, fraud, capital allocation capital allocation, EBITDA profile, James' rule, contingent liabilities, currency/ debt currency ratio, deferred consideration, cost capitalization, sales tax rate %, cash interest

7 |Page

Marketing/ sales

brand accounting, cost cutting, payment rate%, depreciation %, systems, trade offs, documentary credits, internal service satisfaction time keeping, dividend policy, cash levels, effective headcount, % management, currency management, sales mentoring 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 Planning and monitoring, balanced CLV, budget ratio, market scorecard , budgeting, portfolio analysis, share by segment, trial rate, trade offs, MBO, successes failures/ competitive score, sales by lessons learnt, succession planning, channel, % repeat purchase, recruitment appraisal, mosaic management, average sales value, sales prioritization, technology audit, SCORE, productivity, market share, decision making, creativity, market drivers, advertising productivity by marketing mix, branding, Single Block channel, cost per lead, cost Theory, entrants, substitutes, market per converted lead, bid research, customer panel, sales channels, success rates, range sale%, distribution channels, sales management, average discount, service call investment appraisal, call centres, marginal out times, productive hours profitability, quality circles, customer loss, %, enquiry response time, products/services (width/depth), cross seasonality ratio, price index, selling, value chain, expectation fulfillment customer satisfaction, gap, market size, customer transition, advertising awareness, % seasonality, networking, price elasticity, branding %, customer cascade investment, pricing terms and investment review, customer conditions, quantitative analysis, customer transition rate, value chain, % satisfaction, reference sale, time keeping, outsourcing, MER, budget synergy, pricing power, cost cutting, ratio, EGMG ratio, customer market spread, customer investment review investment return, customer (CIR), marketing myopia, product age churn, complaints, warranty spread, organizational buyer behaviour, claims, project success, reference sale, customer spread, product channel members, product age, competitive advantage, competitive positioning variance, SER, bidding, trade offs, negotiation, AER, pricing, price elasticity, recruitment appraisal, game theory, country spread, seasonality channel management, customer care, ratio, customer spread, complaints, warranties, mystery shopper, product spread, product age time management, branding, team spread ratios, segmental building, training, internal service leadership, TDA's, project satisfaction success, CIR%, competitive

8 |Page

Production/logistics/ service delivery

Personnel

bidding success %, internal service satisfaction levels, effective headcount, % mentoring Planning and monitoring, balanced Cost variances, budget ratio, scorecard, budgeting, successes failures/ order processing cycle, lessons learnt, standard costing, activity production cycle times, based costing, trade offs, MBO, succession downtime, % outsourcing, planning, mosaic management, PLER, budget ratio, STR, prioritization, investment appraisal, design capacity utilization, logistics for operating efficiency, JIT, cost, SPC, load utilization, FMS,technology audit, SCORE including failure rates, return on plant, cost cutting, decision making, creativity, space utilization, set up time, production efficiencies, PLM, aggregate waste rates, pollution levels, demand policy, synergy, management emergency delivery, out of accounting, OR, suppliers, supply chain stock %, obsolescent stock %, management, MRP, backorder, time recycling%, back order %, keeping, inventory levels, production JIT% energy efficiency ratio, equipment age, quantitative analysis, peak capacity %, supplier design, sophistication, capacity, TQM, ratio, partnering, obsolescent TPM, waste management, condition stock, EOQ, number of monitoring, recycling, complaints, suppliers, supplier spread technical support, recruitment appraisal, ratio, number of components, distant data capture, distribution structure emergency call out, delivery (warehousing, outlet location) and physical failures, productive hours %, distribution management, obsolescent E-enablement, vendor rating, stock, cascade investment, time based project success, internal competition, time management, quality service satisfaction levels, circles, order processing, trade offs, effective headcount, % scheduling, purchasing, recruitment mentoring appraisal, vendor ranking, networking, postponement, standardization, product/ service design, team building, training, internal service satisfaction Planning and monitoring, balanced Productivity, budget ratio, scorecard, budgeting, successes failures/ turnover, absenteeism, % lessons learnt, trade offs, MBO, succession outsourcing (temporary staff planning, mosaic management, ratio), PER, budget ratio, prioritization, quality circles, Noah labour cost%, wages ratio, principle, decision making, creativity, CNCER, employee technology audit, SCORE, eight "S", satisfaction levels, CH/WH absenteeism, timekeeping, trade offs, ratio, overtime%, skills, overtime, industrial relations, stress, bonus training, discipline, disputes, systems, training needs analysis, time appeals, timekeeping ratio, keeping, recruitment appraisal, time apprenticeship, recruitment

9 |Page

management, team building, cost cutting, cascade investment, wages, employee record keeping, synergy, vacation planning, training, internal service satisfaction

IT

Product/ service development

costs, training days, productive hours %, whistle blowing, span of control, appraisals, wages ratio, diversity index, PDP, project success, internal service satisfaction levels, effective headcount, % mentoring Planning and monitoring, balanced Management information scorecard , budgeting, successes failures/ system functionality, lessons learnt, trade offs, MBO, investment productivity, budget ratio, appraisal, succession planning, mosaic stability, web hits, access management, prioritization, data mining, speed, site downtime, site technology audit, SCORE, decision click through, productive making, creativity, Intranet, Extranet, trade hours %, Intranet, Extranet, % offs, telecommunications and IT platform, outsourcing, ITER, budget management information systems (MIS), ratio, security breaches, data web design and management, cloud storage, EDI, web position, computing, systems, time management, quality of data, information synergy, recruitment appraisal, SEO, overload, project success, information flow map, security, mystery internal service satisfaction shopper, teleworking, cascade investment, levels, effective headcount, % quantitative analysis, cost cutting, time mentoring keeping, systems analysis, team building, training, artificial intelligence, quantitative analysis, modeling, encryption, recruitment appraisal, internal service satisfaction Planning and monitoring, budgeting, Product age spread, R&D innovation matrix, balanced scorecard, %,ideas, strategic fit, budget mosaic management, prioritization, ratio, protocol score, total successes failures/ lessons learnt, trade cycle time, project review, offs, MBO, succession planning, team creation, testing, % investment appraisal, TBC, technology outsourcing, NPDER, budget audit, SCORE, quality circles, decision ratio, license fees, IPR%, IPR making, recruitment appraisal, creativity, infringements, IPR product age profile, period of grace, maintenance costs, royalty tradeoffs, halo effect, identification of new rate %, time, productive hours product/ service concepts, synergy, %, budget, specification, cannibalization, protocol, IPLC, project success, internal certification, cascade investment, service satisfaction levels, technology transfer, first mover advantage, effective headcount, % time management, recruitment appraisal, mentoring IPR, successful development/ commercialization, team building, training, internal service satisfaction

10 | P a g e

Contingency planning

Authority and responsibility, planning and monitoring, budgeting, successes failures/ lessons learnt, creativity, 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 Gross profit % ROCE % FCF BEV/EBITDA Gearing (DER) Debt age (years) Interest cover X AER % SER % Debtor length (days) Creditor length (days) Stock turn/year Current ratio Budget ratio Capex ratio WCR Z score
11 | P a g e

Current 68 13 12 0.2 15 8.5 8.3 8 10 102 60 5 4 95 8 1.7 3

Benchmark 52 10 n/a n/a 38 6.3 3.7 12 12 95 63 4 3 n/a 4 3.2 7

Target 72 20 10 0.2 15 10 10 6 6 60 60 8 4 n/a 7 1.7 3

Tax charge % Depreciation % Cost of finance % EFT Overdue accounts % STP% FER% Project success ratio Internal satisfaction level % Effective headcount %

12 15 3 82 2 92 3 90 67 64

19 12 8 n/a n/a n/a n/a n/a n/a n/a

10 n/a 3 88 1 95 2.6 90 90 75

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 Debt refinancing Tax review Sales insurance Due date August September August On time Yes Yes Yes On budget Yes Yes Yes On spec Yes Yes Yes Stage gate None None 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?
12 | P a g e

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.

13 | P a g e

KPI's and the management information system In a decentralised planning system focused around knowledge centers the choice of key performance indicators is the first stage in the re-evaluation of the information system to make it more valuable and relevant to the operating unit rather than one that is centrally provided. Thus the choices of KPI determine what will drive that part of the enterprise and what information must be collected to analyse and manage it. Such information gathering or software choices create information networks that are relevant and provide data which is used specifically for operational purposes, reducing information overload and information for information sake. 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; 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.

What is a Critical Success Factor? Critical Success Factors (CSFs) are the critical factors or activities required for ensuring
14 | P a g e

the success your business. The term was initially used in the world of data analysis, and business analysis. Most smaller and more pragmatic businesses can still use CSFs but we need to take a different, more pragmatic approach. Critical Success Factors have been used significantly to present or identify a few key factors that organizations should focus on to be successful. As a definition, critical success factors refer to the limited number of areas in which satisfactory results will ensure successful competitive performance for the individual, department,organization. Being Practical As you read this and many other resources on the internet you will discover that there are potentially a confusing variety of definitions and uses of Critical Success Factors. Before you start the journey looking at CSFs it is important to realise that the specific factors relevant for you will vary from business to business and industry to industry. The key to using CSFs effectively is to ensure that your definition of a factor of your organizations activity which is central to its future will always apply. Therefore success in determining the CSFs for your organization is to determine what is central to its future and achievement of that future. This page is primarily written for students of management and business, to keep things simple for application in smaller organizations remember to only have 5-7 critical factors for YOUR organization, and I am sure one of those will be cashflow! How are they important to your business? Identifying CSFs is important as it allows firms to focus their efforts on building their capabilities to meet the CSFs, or even allow firms to decide if they have the capability to build the requirements necessary to meet Critical Success Factors (CSFs). Academic Background/ History The principle of identifying critical success factors as a basis for determining the information needs of managers was proposed by RH Daniel (1961 Harvard Business Review HBR) as an interdisciplinary approach with a potential usefulness in the practice of evaluation within library and information units but popularized by F Rockart (1979 Harvard Business Review HBR). In time many academics have applied the methodology increasingly outside the educational establishment.

15 | P a g e

The idea is very simple: in any organization certain factors will be critical to the success of that organization, in the sense that, if objectives associated with the factors are not achieved, the organization will fail perhaps catastrophically so. The following as an example of generic CSFs:

New product development, Good distribution, and Effective advertising

Factors that remain relevant today for many organizations. The actual development or history of the approach With a phrase like Critical Success Factors having common usage within technical environments it is difficult to identify its true history in the context of business, management and human resources. One test for originality is the use of the TLA (Three Letter Acronym) of CSF. And one of the earliest uses of this is by Ronald does not use the term CSF or even the phrase Critical Success factors, but does discuss critical elements and non critical elements of a business leading to controlling competitive success Daniel also uses the term success factors in the context that we would understand today. Predating these pieces is a short entry: THE CASE STUDY METHOD AND THE ESTABLISHMENT OF STANDARDS OF EFFICIENCY.By: Lebreton, Preston P.. Academy of Management Proceedings, 1957. In which students looking into the efficiency of businesses for case studies are recommended to look at the factors which seem to be paramount in determining success in this industry this is bay far the earliest mention of what we today know as Critical Success factors To our mind the first published work of this approach is by Rockart. This pages reproduced from RapidBI.com Other sources of research: Management Control Systems: Text, Cases and Readings By Robert Newton Anthony, John Dearden, Richard F. Vancil Published by R. D. Irwin. This publication seems to be one of the earliest and widest cited books in the early days of CSFs. 10 problems that worry presidents. By: Spencer, Lyle M.. Harvard Business Review, Nov/Dec55, Vol. 33 Issue 6.
16 | P a g e

In this article Spencer asks the question: What are the essential factors that produce success in my company? which for 1955 is getting close to the beginnings of CSFs so for those interested in the early beginings worth a look. Types of Critical Success Factor There are four basic types of CSFs They are:
1. 2. 3. 4.

Industry CSFs resulting from specific industry characteristics; Strategy CSFs resulting from the chosen competitive strategy of the business; Environmental CSFs resulting from economic or technological changes; and Temporal CSFs resulting from internal organizational needs and changes.

Things that are measured get done more often than things that are not measured. Each CSF should be measurable and associated with a target goal. You dont need exact measures to manage. Primary measures that should be listed include critical success levels (such as number of transactions per month) or, in cases where specific measurements are more difficult, general goals should be specified (such as moving up in an industry customer service survey). Definitions Critical Success Factor an element of organizational activity which is central to its future success. Critical success factors may change over time, and may include items such as product quality, employee attitudes, manufacturing flexibility, and brand awareness. This can enable analysis. Critical Success Factor any of the aspects of a business that are identified as vital for successful targets to be reached and maintained. Critical success factors are normally identified in such areas as production processes, employee and organization skills, functions, techniques, and technologies. The identification and strengthening of such factors may be similar. .. Critical Success Factor (CSF) or Critical Success Factors is a business term for an element which is necessary for an organization or project to achieve its mission. For example, a CSF for a successful Information Technology (IT) project is user involvement.

17 | P a g e

Using the term The term Critical Success Factor is used differently, due to ambiguity of the word critical, back and forth translations into other languages and interpretation when analyzed in portfolios: 1. 1. Definition 1: critical = important, key, determining, vital, strategic, etc. 2. Definition 2: critical = alarming, anxious, etc. (as shown within the diagram = top left):

Which ever definition you use. make sure that all managers understand the definition. Five key sources of Critical Success Factors MAIN ASPECTS OF Critical Success Factors and their use in analysis CSFs are tailored to a firms or managers particular situation as different situations (e.g. industry, division, individual) lead to different critical success factors. Rockart and Bullen presented five key sources of CSFs: 1. 2. 3. 4. 5. The industry, Competitive strategy and industry position, Environmental factors, Temporal factors, and Managerial position (if considered from an individuals point of view). Each of these factors is explained in greater detail below. Industry: There are some CSFs common to all companies operating within the same industry. Different industries will have unique, industry-specific CSFs An industrys set of characteristics define its own CSFs Different industries will thus have different CSFs, for example research into the CSFs for the Call centre, manufacturing, retail, business services, health care and education sectors showed each to be different after starting with a hypothesis of all sectors having their CSFs as market orientation, learning orientation, entrepreneurial management style and organizational flexibility. In reality each organization has its own unique goals so while thee may be some industry standard not all firms in one industry will have identical

The Industry Critical success factor

18 | P a g e

CSFs. Some trade associations offer benchmarking across possible common CSFs. Competitive strategy Competitive position or strategy: The nature of position in the marketplace and industry position or the adopted strategy to gain market share gives rise to CSFs Differing strategies and positions have different CSFs Critical success Not all firms in an industry will have the same CSFs in a particular factor industry. A firms current position in the industry (where it is relative to other competitors in the industry and also the market leader), its strategy, and its resources and capabilities will define its CSFs The values of an organization, its target market etc will all impact the CSFs that are appropriate for it at a given point in time. Environmental Factors Critical success factor Environmental changes: Economic, regulatory, political, and demographic changes create CSFs for an organization. These relate to environmental factors that are not in the control of the organization but which an organization must consider in developing CSFs Examples for these are the industry regulation, political development and economic performance of a country, and population trends. An example of environmental factors affecting an organization could be a de-merger. Temporal Factors Critical success factor Critical success factor Critical success factor Temporal factors: These relate to short-term situations, often crises. These CSFs may be important, but are usually short-lived. Temporal factors are temporary or one-off CSFs resulting from a specific event necessitating their inclusion. Theoretically these would include a firm which lost executives as a result of a plane crash requiring a critical success factor of rebuilding the executive group. Practically, with the evolution and integration of markets globally, one could argue that temporal factors are not temporal anymore as they could exist regularly in organizations. For example, a firm aggressively building its business internationally would have a need for a core group of executives in its new markets. Thus, it would have the CSF of building the executive group in a specific market
19 | P a g e

and it could have this every year for different markets. Managerial Position Critical success factor Critical success factor Managerial role: An individual role may generate CSFs as performance in a specific managers area of responsibility may be deemed critical to the success of an organization. Managerial position. This is important if CSFs are considered from an individuals point of view. For example, manufacturing managers who would typically have the following CSFs: product quality, inventory control and cash control. In organizations with departments focused on customer relationships, a CSF for managers in these departments may be customer relationship management. How to write a good Critical Success Factor CSFs In an attempt to write good CSFs, a number of principles could help to guide writers. These principles are:

Ensure a good understanding of the environment, the industry and the company It has been shown that CSFs have five primary sources, and it is important to have a good understanding of the environment, the industry and the company in order to be able to write them well. These factors are customized for companies and individuals and the customization results from the uniqueness of the organization. Build knowledge of competitors in the industry While this principle can be encompassed in the previous one, it is worth highlighting separately as it is critical to have a good understanding of competitors as well in identifying an organizations CSFs Knowing where competitors are positioned, what their resources and capabilities are, and what strategies they will pursue can have an impact on an organizations strategy and also resulting CSFs Develop CSFs which result in observable differences A key impetus for the development of CSFs was the notion that factors which get measured are more likely to be achieved versus factors which are not measured. Thus, it is important to write CSFs which are observable or possibly measurable in certain respects such that it would be easier to focus on these factors. These dont have to be factors that are measured quantitatively as this would mimic key performance indicators; however, writing CSFs in observable terms would be helpful.

Develop CSFs that have a large impact on an organizations performance By definition, CSFs are the most critical factors for organizations or individuals. However, due care should be
20 | P a g e

exercised in identifying them due to the largely qualitative approach to identification, leaving many possible options for the factors and potentially results in discussions and debate. In order to truly have the impact as envisioned when CSFs were developed, it is important to thus identify the actual CSFs, i.e. the ones which would have the largest impact on an organizations (or individuals) performance.

Finding information for writing Critical Success Factors (CSFs) For the organization following the CSF method, the foundation for writing good CSFs is a good understanding of the environment, the industry and the organization In order to do so, this requires the use of information that is readily available in the public domain. Externally, industry information can be sourced from industry associations, news articles, trade associations, prospectuses of competitors, and equity/analyst reports to name some sources. These would all be helpful in building knowledge of the environment, the industry and competitors. Internally, there should be enough sources available to management from which to build on their knowledge of the organization. In most cases, these wont even have to be anything published as managers are expected to have a good understanding of their organization Together, the external and internal information already provides the basis from which discussion on CSFs could begin. The information mentioned above can largely be accessed through the internet. Other sources which would be helpful, and not necessarily accessible through the internet, are interviews with buyers and suppliers, industry experts and independent observers. CSF as an activity statement: A good CSF begins with an action verb and clearly and concisely conveys what is important and should attended to. Verbs that characterize actions: attract, perform, expand, monitor, manage, deploy, etc. (poor CSFs start with: enhance, correct, up-grade, ) Examples: monitor customer needs and future trends CSF as a requirement: After having developed a hierarchy of goals and their success factors, further analysis will lead to concrete requirements at the lowest level of detail CSF as a key influence factor: Some CSFs might influence other CSFs or factors such as markets, technologies, etc. Such CSFs could be rephrased into key influence factors For example: physical size or trained staff Key Performance Indicators (KPIs) and Critical Success factors

21 | P a g e

A critical success factor is not a key Performance Indicator (KPI). Critical success factors are elements that are vital for a strategy to be successful. KPIs are measures that quantify objectives and enable the measurement of strategic performance. For example:

KPI = number of new customers/ response time CSF = installation of a call centre for providing quotations

A Critical Success Factor Method Start with a vision:


Mission statement Develop 5-6 high level goals Develop hierarchy of goals and their success factors Lists of requirements, problems, and assumptions Leads to concrete requirements at the lowest level of decomposition (a single, implementable idea) Along the way, identify the problems being solved and the assumptions being made Cross-reference usage scenarios and problems with requirements Analysis matrices Problems vs. Requirements matrix Usage scenarios vs. Requirements matrix Solid usage scenarios Relationship to Usage Scenarios Usage scenarios or use cases; provide a means of determining: o Are the requirements aligned and self-consistent? o Are the needs of the user being met as well as those of the enterprise? o Are the requirements complete Results of the Analysis

Using Critical Success Factors for Strategic and Business Planning For other strategic business planning models please see our management models page Examples of Critical Success factors Statistical research into CSFs on organizations has shown there to be seven key areas. These CSFs are: 1. 2. 3. 4. Training and education Quality data and reporting Management commitment, customer satisfaction Staff Orientation

22 | P a g e

5. Role of the quality department 6. Communication to improve quality, and 7. Continuous improvement These were identified when Total Quality was at its peak, so as you can see have a bias towards quality matters. You may or may not feel that these are right or indeed critical for your organization. The Critical Success Factors we have identified and us in the BIR process are captured in the mnemonic PRIMO-F 1. 2. 3. 4. 5. 6. People availability, skills and attitude Resources People, equipment, etc Innovation ideas and development Marketing supplier relation, customer satisfaction, etc Operations continuous improvement, quality, Finance- cash flow, available investment etc

Following is a sample list of the more common success factors. This list should serve only as a guide to get you started. Some of these factors will be irrelevant in a particular industry or competitive situation; others may need to be added, as appropriate. The factors are grouped into three categories of organizational competency, you will use your own differentiators. Examples of Success Factors: Understanding of Market:

Sensitivity to changing market needs Understanding of how and why customers buy Innovative response to customer needs Consumer loyalty Linkage of technology to market demand Link marketing to production Investment in growth markets Knowing when to shift resources from old to new products Long-term view of market-development and resources Ability to target and reach segments of market Identify and exploit global market Product-line coverage Short time to market for new products Lack of product-line overlap Identification and positioning to fulfill customer needs Unique positioning advantage

23 | P a g e

Strong brand image and awareness Understanding of competitors capabilities and decision rules Sensitivity to cues for co-operation Prevention of price wars Aggressive commitment when required Willingness to form inter company coalitions Maximizing payback from marketing response to resources

Marketing Variables:

Distribution coverage, delivery speed, and prominence Co-operative trade relations Advertising budget and copy effectiveness Promotion magnitude and impact Sales force size and productivity Customer service and feedback High product quality Patent protection Low product cost Ability to deliver high value to user Large marketing resource budget

Decision making:

Marketing research quality Information system power Analytic support capability Develop human resources Attract the best personnel Managerial ability and experience Quick decision and action capability Organizational effectiveness Learning systematically from past strategies

Critical Success Factor & their analysis in projects Research has shown that to complete a project successfully the following critical success factors apply: 1. 2. 3. 4. 5. Match Changes to Vision Define Crisp Deliverables Business Need Linked to Vision Have a Formal Process to Define Vision Organizational Culture Supports Project Management

24 | P a g e

You can have all of the above elements, but if you lack an engaged and involved business sponsor, your chances for success are greatly lessened. According to a recent Gartner Institute study, 50% of all projects were delivered above schedule and/or budget. Many projects were delivered with significant functionality missing, often cancelled after requirements definition. In 2001, the Gartner group updated their research to include lack of executive sponsorship as a major contributor to project failures. According to a 2000 Standish Group Report, the top success factors for projects were as follows. The list is in decreasing order of percentage factors responsible for success. % Success Factors

18% Executive support 16% User involvement 14% Experienced project manager 12% Clear business objectives 10% Minimized scope 8% Standard software infrastructure 6% Firm basic requirements 6% Formal methodology 5% Reliable estimates 5% Other criteria

conclusion
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 organization. Published internally and continually referred to, they will also strengthen shared values and create common goals.

25 | P a g e