KEY PERFORMANCE INDICATORS (KPI)
Dr. Adalat Khan
April 21, 2009
How organizations can achieve breakthrough performance through the KPI tools
By Dr. Adalat Khan dradalat@gmail.com
The newly appointed 6th prime minister of Malaysia Dato´ Sri Najib Razak after taking office on 3rd April 2009 said "It must be a government with new approaches for new times – a government that places a priority on performance and result, because the people must come first." Together with this vision of his new government he also introduced a system of Key Performance Indicators or KPI for Ministers in his cabinet that will be required to achieve the KPIs and report to him their performance. The first such reporting is due in November this year.
This is probably the first government in the world which is passionate about a performance management system which has helped many corporate entities achieve enormous goals and results. Many organizations have achieved enormous results through KPI system but there are also many who have miserably failed and wasted tremendous amount of scarce resources on such failures. Many companies are working with the wrong measures, many of which are incorrectly termed key performance indicators (KPIs). "Very few organizations really monitor their true KPIs. The reason is that very few organizations, business leaders, writers, accountants, and consultants have explored what a KPI actually is." (Parmenter 2007)
What are KPIs?
KPIs represent a set of measures focusing on those aspects of organizational performance that are the most critical for the current and future success of the organization. (Parmenter 2007) Wikipedia also defines and explains it as "Key Performance Indicators (KPI) are financial and non-financial measures or metrics used to help an organization define and evaluate how successful it is, typically in terms of making progress towards its long-term organizational goals. KPIs can be specified by answering the question, "What is really important to different stakeholders?". KPIs may be monitored using Business Intelligence techniques to assess the present state of the business and to assist in prescribing a course of action. The act of monitoring KPIs in real-time is known as business activity monitoring (BAM)."
The 10/80/10 Rule
Kaplan and Norton recommend no more than 20 KPIs. Hope and Fraser suggest fewer than 10 KPIs. The 10/80/10 rule is a good guide. That is, there are about 10 KRIs, up to 80 PIs, and 10 KPIs in an organization (see Exhibit below). Very seldom are more measures needed, and in many cases even fewer.
Exhibit: 10/80/10 Rule
Key result indicator (10) Tells you how you have done in a perspective
Performance indicator (80) Tells you what to do
Key performance indicator (10) Tells you what to do to increase performance dramatically
KPI IMPLEMENTATION ROADMAP:
In order to succeed in KPI effort companies need to have a methodology. A methodology will provide a step by step road map guiding the organization in achieving its objectives. Like any other management system KPI projects need clear definitions of what is to be done, how, and by whom. The following step-wise methodology can guide KPI help organizations and government agencies to successfully implement KPI programs. These are:
Decision stage
The first step in KPI takes place when someone in the organisation recognises that the organisation needs to change for the better with the aim of achieving breakthrough business goals and metrics. It may be a Prime Minister, a chief executive, a manager or a clerk, but someone in the organisation must realize and say, "We need KPI achievement". Such need however must be supported by the top management or Senior Management Team (SMT). The SMT must be committed to developing and driving through the organization KPIs and any balanced scorecard (BSC) that includes them. SMT commitment creates a dynamic environment in which projects can thrive. Before the SMT can do this, they need to be "sold" on the concept and fully understand why they should treat monitoring and following up on the KPIs as a daily task. (Parmenter 2007). Like any improvement and quality program the top management commitment is extremely important and it shall be the hallmark in this stage. Without the top management commitment the KPI project would not be able to take off the ground.
Deployment stage
After realising the need to change and deciding on the implementation of KPI system in the organization, the next step which must take place is the deployment stage. During this stage an organisation mobilises resources to start work on the program and its implementation. It is at this stage that a small, well-trained team is formed to steer the project. Kaplan and Norton have commented that KPIs have been successfully designed by an individual, without large consultations, but that this was an exception rather than the rule. A project team of two to four people is recommended depending on the size of the organization. The chosen project team members need to be committed full time and report directly to the CEO. (Parmenter 2007) An alternative to a team could be a steering committee. A steering committee is a high-level body consisting of top and senior management members who provide direction, broader guidelines, support and resources to the effort. Additionally a steering committee identifies core business processes, champions the "change" process, removes barriers, monitors results and provides vision to the KPI teams. Besides the KPI team or a steering committee the board members of the organization or cabinet ministers in the government should be involved so as to ensure proper governance.
Review of the present situation
Review of the current system is as important as the KPI which needs to be achieved. Many organizations make mistake and jump the gun by implementing and setting indicators without taking into account what is actually happening currently in the organization. The KPI team and steering committee must first review the present situation of the company and provide answers to the most crucial question-"What needs changes?" For example if the answer to this question is-change of processes then a detailed analysis of the processes is carried out where each process is mapped. For each process, detailed data like value-added time, non-value-added time, inter-functional disconnects, error levels, cost of the process etc are collected. This information enables the KPI teams in identifying weaknesses, gaps and their impacts on processes. To carry out detailed mapping of the processes teams can make use of various techniques like cause-and-affect diagrams, flow charts, affinity diagrams, prioritisation matrix and value-added flow analysis. At this stage, opportunities for KPI are identified in terms of critical core processes, impact on breakthrough business goals etc.
KPI Development Stage
This is perhaps the most important and critical step in the KPI program. It is at this phase that clear crystal and quantifiable Key Performance Indicators KPIs are set. As Peter Drucker has rightly stated that "What gets measured gets done" so the KPIs must be as measurable, clear, simple and actionable as possible. Remember the 10/80/10 rule which should be religiously adhered and no more than 10 KRIs, up to 80 PIs, and 10 KPIs be set in an organization which it wishes to achieve. The KPIs so set must have customer focus, financial performance, learning and growth, internal process, employee satisfaction, and care for the environment/ community. It is also at this phase that new vision for the "to be" organization is developed. The new vision must take into account the customer needs and values so as to create processes which meet the customers´ needs. The vision is the ideal goal of the KPI. It describes how the process would operate with all of the external and internal performance measures optimized. It should be noted that at this stage a timeframe for the realisation of the KPI should be established, thus, making it more meaningful. The culmination of this stage results in producing a clearly defined, measurable and tangible KPI which the organization will aim to achieve. The KPI thus set must also be winning which once achieved should give the organizational members a sense of victory. Together with KPI setting it is also extremely important to set up a reward system where those who achieve their KPIs also get rewarded. The KPI is thus tied to the performance appraisal of the employee and all rewards thus tied to performance.
Reporting framework:
The reporting framework must accommodate the requirements of different levels in the organization and the reporting frequency that supports timely decision making and the achievement of the KPIs. Parmenter suggests that most KPIs should be reported each day (electronically) at 9 A.M. or, as in the case of late planes, constantly updated 24 hours a day, 7 days a week. He further states that in most organizations there will be another "top five" KPIs that will need to be reported at least weekly (excluding the daily KPIs already identified). One weekly measure that is important in most organizations is the reporting of late projects and late reports to the SMT. The remaining PIs can be reported monthly along with team, department, divisional, and organization-wide reporting. The board should receive only a one-page governance "dashboard" on the KRIs. These KRIs cover the well-being of the organization and are not PIs or KPIs. They should cover the broad perspectives, and to do this may require tracking up to ten KRIs. In any one month, only those KRIs that are telling the more important stories must be reported. It is desirable not to give the board the management because their role is one of governance, and giving them management information diverts them from their true role. Reporting is an important activity in the over all realization of KPI programs which must be given due importance.
Commitment and implementation stage
KPI doesn´t happen in vacuum. People must buy the idea and commit their support. KPI implementation is always tough due to two major factors. It is tough because it involves fundamental changes and extra work which people by nature will resist. Another factor is its demanding nature, requiring people to work harder and taking on more responsibilities. To over-come these problems the KPI teams and steering committee should extensively communicate to all the stakeholders, particularly employees. Questions like what, why, how and when should be answered in detail so that the anxiety of the change is reduced.
Companies which have successfully undergone change have extensively communicated through meetings, circulars, company magazines, memos etc all the details and the reason why people should support the KPI project. After doing all the things mentioned earlier, now it is time to realise the vision by pushing the button and implementing and realizing the KPIs set by the organization. This is the most crucial and critical step in KPI which can make or break the whole effort. Most KPI efforts fall short in the implementation, which requires even greater effort than the earlier stages mentioned. Many organizations have performed good KPI work only to have it fail or become buried when key staff moves. It is thus important that the use of KPIs becomes widespread in an organization and is incorporated into its very culture. One of approach adopted by some organization is to first conduct a KPI pilot test in limited areas so as to test its applicability. The pilot test also helps in detection and correction of any flaws thus clearing the road to full implementation. The successful pilot test is followed by a full-fledged implementation to achieve the desired breakthrough goals. This should be followed by continuous improvement as the famous saying goes, "Success is a journey, not a destination". In essence the organization must refine its KPIs on a continuous basis so as to retain its relevance to its strategic goals.
Performance Evaluation Stage
Though being a last stage in the KPI it is a critical stage. It may be mentioned here that in KPI we do not wait till the end of the month or a year to wait for evaluation. But this is the macro evaluation of people and macro KPIs achieved by the organization. "Performance management is forward looking. It focuses on planning for the future rather than dwelling on the past. But it necessarily includes some form of assessment of what has been achieved to provide the basis for performance agreements and development plans, forecasts of potential and career plans. In addition, a performance management process commonly, but not inevitably, incorporates a rating or other means of summing up performance to encapsulate views about the level of performance reached and, if required, inform performance- or contribution-related pay decisions." (Armstrong 2006) It must be not forgotten that proper reward and celebration should take place if the organization has achieved its KPIs and in case of non-achievement causes are explored and a new strategy is developed towards the achievement of the KPIs.
KPI is a revolutionary performance management system which has helped many organizations breakthrough performance. The strength of this system lies in its tangibility and measurability where organizational members see both what needs achievement and what has been achieved. It also makes the job of managers easier as they are able to efficiently monitor the tangible performance benchmarks selected for achievement. However achievement of KPI does not automatically take place, rather it requires deliberate steps and proper methodology. The methodology and systematic road-map proposed in this article could serve as a guide for the successful implementation and achievement of KPIs in your organization.
References:
Parmenter, David. "Chapter 1 - Introduction". Key Performance Indicators (KPI): Developing, Implementing, and Using Winning KPIs. John Wiley & Sons. © 2007.
Wikipedia http://en.wikipedia.org/wiki/Key_performance_indicators retrieved on April 17, 2009.
Jeremy Hope and Robin Fraser, Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap. Boston: Harvard Business School Press, 2003
Robert S. Kaplan and David P. Norton, The Balanced Scorecard: Translating Strategy into Action. Boston: Harvard Business School Press, 1996.
Armstrong, Michael. "Chapter 7 - Assessing Performance".Performance Management: Key Strategies and Practical Guidelines, 3rd Edition. Kogan Page. © 2006.
Dr Adalat Khan is the president of Mina Resources Sdn Bhd www.mina.edu.my a leading Malaysian Training and consulting organization specializing in KPI and Performance Management System implementation. He can be contacted via email. dradalat@gmail.com
By Dr. Adalat Khan dradalat@gmail.com
The newly appointed 6th prime minister of Malaysia Dato´ Sri Najib Razak after taking office on 3rd April 2009 said "It must be a government with new approaches for new times – a government that places a priority on performance and result, because the people must come first." Together with this vision of his new government he also introduced a system of Key Performance Indicators or KPI for Ministers in his cabinet that will be required to achieve the KPIs and report to him their performance. The first such reporting is due in November this year.
This is probably the first government in the world which is passionate about a performance management system which has helped many corporate entities achieve enormous goals and results. Many organizations have achieved enormous results through KPI system but there are also many who have miserably failed and wasted tremendous amount of scarce resources on such failures. Many companies are working with the wrong measures, many of which are incorrectly termed key performance indicators (KPIs). "Very few organizations really monitor their true KPIs. The reason is that very few organizations, business leaders, writers, accountants, and consultants have explored what a KPI actually is." (Parmenter 2007)
What are KPIs?
KPIs represent a set of measures focusing on those aspects of organizational performance that are the most critical for the current and future success of the organization. (Parmenter 2007) Wikipedia also defines and explains it as "Key Performance Indicators (KPI) are financial and non-financial measures or metrics used to help an organization define and evaluate how successful it is, typically in terms of making progress towards its long-term organizational goals. KPIs can be specified by answering the question, "What is really important to different stakeholders?". KPIs may be monitored using Business Intelligence techniques to assess the present state of the business and to assist in prescribing a course of action. The act of monitoring KPIs in real-time is known as business activity monitoring (BAM)."
The 10/80/10 Rule
Kaplan and Norton recommend no more than 20 KPIs. Hope and Fraser suggest fewer than 10 KPIs. The 10/80/10 rule is a good guide. That is, there are about 10 KRIs, up to 80 PIs, and 10 KPIs in an organization (see Exhibit below). Very seldom are more measures needed, and in many cases even fewer.
Exhibit: 10/80/10 Rule
Key result indicator (10) Tells you how you have done in a perspective
Performance indicator (80) Tells you what to do
Key performance indicator (10) Tells you what to do to increase performance dramatically
KPI IMPLEMENTATION ROADMAP:
In order to succeed in KPI effort companies need to have a methodology. A methodology will provide a step by step road map guiding the organization in achieving its objectives. Like any other management system KPI projects need clear definitions of what is to be done, how, and by whom. The following step-wise methodology can guide KPI help organizations and government agencies to successfully implement KPI programs. These are:
Decision stage
The first step in KPI takes place when someone in the organisation recognises that the organisation needs to change for the better with the aim of achieving breakthrough business goals and metrics. It may be a Prime Minister, a chief executive, a manager or a clerk, but someone in the organisation must realize and say, "We need KPI achievement". Such need however must be supported by the top management or Senior Management Team (SMT). The SMT must be committed to developing and driving through the organization KPIs and any balanced scorecard (BSC) that includes them. SMT commitment creates a dynamic environment in which projects can thrive. Before the SMT can do this, they need to be "sold" on the concept and fully understand why they should treat monitoring and following up on the KPIs as a daily task. (Parmenter 2007). Like any improvement and quality program the top management commitment is extremely important and it shall be the hallmark in this stage. Without the top management commitment the KPI project would not be able to take off the ground.
Deployment stage
After realising the need to change and deciding on the implementation of KPI system in the organization, the next step which must take place is the deployment stage. During this stage an organisation mobilises resources to start work on the program and its implementation. It is at this stage that a small, well-trained team is formed to steer the project. Kaplan and Norton have commented that KPIs have been successfully designed by an individual, without large consultations, but that this was an exception rather than the rule. A project team of two to four people is recommended depending on the size of the organization. The chosen project team members need to be committed full time and report directly to the CEO. (Parmenter 2007) An alternative to a team could be a steering committee. A steering committee is a high-level body consisting of top and senior management members who provide direction, broader guidelines, support and resources to the effort. Additionally a steering committee identifies core business processes, champions the "change" process, removes barriers, monitors results and provides vision to the KPI teams. Besides the KPI team or a steering committee the board members of the organization or cabinet ministers in the government should be involved so as to ensure proper governance.
Review of the present situation
Review of the current system is as important as the KPI which needs to be achieved. Many organizations make mistake and jump the gun by implementing and setting indicators without taking into account what is actually happening currently in the organization. The KPI team and steering committee must first review the present situation of the company and provide answers to the most crucial question-"What needs changes?" For example if the answer to this question is-change of processes then a detailed analysis of the processes is carried out where each process is mapped. For each process, detailed data like value-added time, non-value-added time, inter-functional disconnects, error levels, cost of the process etc are collected. This information enables the KPI teams in identifying weaknesses, gaps and their impacts on processes. To carry out detailed mapping of the processes teams can make use of various techniques like cause-and-affect diagrams, flow charts, affinity diagrams, prioritisation matrix and value-added flow analysis. At this stage, opportunities for KPI are identified in terms of critical core processes, impact on breakthrough business goals etc.
KPI Development Stage
This is perhaps the most important and critical step in the KPI program. It is at this phase that clear crystal and quantifiable Key Performance Indicators KPIs are set. As Peter Drucker has rightly stated that "What gets measured gets done" so the KPIs must be as measurable, clear, simple and actionable as possible. Remember the 10/80/10 rule which should be religiously adhered and no more than 10 KRIs, up to 80 PIs, and 10 KPIs be set in an organization which it wishes to achieve. The KPIs so set must have customer focus, financial performance, learning and growth, internal process, employee satisfaction, and care for the environment/ community. It is also at this phase that new vision for the "to be" organization is developed. The new vision must take into account the customer needs and values so as to create processes which meet the customers´ needs. The vision is the ideal goal of the KPI. It describes how the process would operate with all of the external and internal performance measures optimized. It should be noted that at this stage a timeframe for the realisation of the KPI should be established, thus, making it more meaningful. The culmination of this stage results in producing a clearly defined, measurable and tangible KPI which the organization will aim to achieve. The KPI thus set must also be winning which once achieved should give the organizational members a sense of victory. Together with KPI setting it is also extremely important to set up a reward system where those who achieve their KPIs also get rewarded. The KPI is thus tied to the performance appraisal of the employee and all rewards thus tied to performance.
Reporting framework:
The reporting framework must accommodate the requirements of different levels in the organization and the reporting frequency that supports timely decision making and the achievement of the KPIs. Parmenter suggests that most KPIs should be reported each day (electronically) at 9 A.M. or, as in the case of late planes, constantly updated 24 hours a day, 7 days a week. He further states that in most organizations there will be another "top five" KPIs that will need to be reported at least weekly (excluding the daily KPIs already identified). One weekly measure that is important in most organizations is the reporting of late projects and late reports to the SMT. The remaining PIs can be reported monthly along with team, department, divisional, and organization-wide reporting. The board should receive only a one-page governance "dashboard" on the KRIs. These KRIs cover the well-being of the organization and are not PIs or KPIs. They should cover the broad perspectives, and to do this may require tracking up to ten KRIs. In any one month, only those KRIs that are telling the more important stories must be reported. It is desirable not to give the board the management because their role is one of governance, and giving them management information diverts them from their true role. Reporting is an important activity in the over all realization of KPI programs which must be given due importance.
Commitment and implementation stage
KPI doesn´t happen in vacuum. People must buy the idea and commit their support. KPI implementation is always tough due to two major factors. It is tough because it involves fundamental changes and extra work which people by nature will resist. Another factor is its demanding nature, requiring people to work harder and taking on more responsibilities. To over-come these problems the KPI teams and steering committee should extensively communicate to all the stakeholders, particularly employees. Questions like what, why, how and when should be answered in detail so that the anxiety of the change is reduced.
Companies which have successfully undergone change have extensively communicated through meetings, circulars, company magazines, memos etc all the details and the reason why people should support the KPI project. After doing all the things mentioned earlier, now it is time to realise the vision by pushing the button and implementing and realizing the KPIs set by the organization. This is the most crucial and critical step in KPI which can make or break the whole effort. Most KPI efforts fall short in the implementation, which requires even greater effort than the earlier stages mentioned. Many organizations have performed good KPI work only to have it fail or become buried when key staff moves. It is thus important that the use of KPIs becomes widespread in an organization and is incorporated into its very culture. One of approach adopted by some organization is to first conduct a KPI pilot test in limited areas so as to test its applicability. The pilot test also helps in detection and correction of any flaws thus clearing the road to full implementation. The successful pilot test is followed by a full-fledged implementation to achieve the desired breakthrough goals. This should be followed by continuous improvement as the famous saying goes, "Success is a journey, not a destination". In essence the organization must refine its KPIs on a continuous basis so as to retain its relevance to its strategic goals.
Performance Evaluation Stage
Though being a last stage in the KPI it is a critical stage. It may be mentioned here that in KPI we do not wait till the end of the month or a year to wait for evaluation. But this is the macro evaluation of people and macro KPIs achieved by the organization. "Performance management is forward looking. It focuses on planning for the future rather than dwelling on the past. But it necessarily includes some form of assessment of what has been achieved to provide the basis for performance agreements and development plans, forecasts of potential and career plans. In addition, a performance management process commonly, but not inevitably, incorporates a rating or other means of summing up performance to encapsulate views about the level of performance reached and, if required, inform performance- or contribution-related pay decisions." (Armstrong 2006) It must be not forgotten that proper reward and celebration should take place if the organization has achieved its KPIs and in case of non-achievement causes are explored and a new strategy is developed towards the achievement of the KPIs.
KPI is a revolutionary performance management system which has helped many organizations breakthrough performance. The strength of this system lies in its tangibility and measurability where organizational members see both what needs achievement and what has been achieved. It also makes the job of managers easier as they are able to efficiently monitor the tangible performance benchmarks selected for achievement. However achievement of KPI does not automatically take place, rather it requires deliberate steps and proper methodology. The methodology and systematic road-map proposed in this article could serve as a guide for the successful implementation and achievement of KPIs in your organization.
References:
Parmenter, David. "Chapter 1 - Introduction". Key Performance Indicators (KPI): Developing, Implementing, and Using Winning KPIs. John Wiley & Sons. © 2007.
Wikipedia http://en.wikipedia.org/wiki/Key_performance_indicators retrieved on April 17, 2009.
Jeremy Hope and Robin Fraser, Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap. Boston: Harvard Business School Press, 2003
Robert S. Kaplan and David P. Norton, The Balanced Scorecard: Translating Strategy into Action. Boston: Harvard Business School Press, 1996.
Armstrong, Michael. "Chapter 7 - Assessing Performance".Performance Management: Key Strategies and Practical Guidelines, 3rd Edition. Kogan Page. © 2006.
Dr Adalat Khan is the president of Mina Resources Sdn Bhd www.mina.edu.my a leading Malaysian Training and consulting organization specializing in KPI and Performance Management System implementation. He can be contacted via email. dradalat@gmail.com
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