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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:
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 14 separate monitoring modules for medium sized companies which we believe cover the majority of requirements for the development and maintenance of their organisation. This general list is then tailored for specific purposes.
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.
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 an 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.
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 How should these KPI's be emphasised in company reporting? It is sensible to always start any monitoring module with the KPI's – this concentrates discussion onto the most important elements. It is useful to publish the KPI information – ideally on a company Intranet and make it part of any induction and maintenance training programme. This focuses the individuals into an understanding of what the most important success drivers are and that their actions should be to concentrate on these core company measures. What other effects will the introduction of KPI's have? The most obvious effect of the introduction of a KPI system into an organisation is the re-evaluation of standard operating procedures (SOP). Ibis clearly sees such a relationship rapidly developing – with the need to improve efficiencies in core areas to lift key performance indicators. The analysis of KPI's is useful as a starting point for business re-engineering. If it is not broken, don't fix it – but where there are clear gaps between benchmarks and enterprise organisation – specific types of business reorganisation may be necessary. KPI's are also very useful in the planning for either fund raising or exit/ succession. They enable management to focus on those aspects of the business that will raise value, and create an action plan that enables such changes to be managed. Linking KPI's – a simple approach to enterprise resource planning (ERP) The use of a standard set of KPI's can be linked together with existing company information to provide an overview of what impact key strategic options will have on operational performance. Ibis has created a straightforward spreadsheet system which uses key assumptions and existing company data to explore the potential linkages within strategic implementation. This ERP system looks at returns on investment based on the cost of capital and how they affect the balanced scorecard set of objectives. The typical set of KPI's used are included in this table, though circumstances will lead to different choices in different sectors
The impact of this model in those companies that use it is generally to focus the operation towards an emphasis on golden circle investment, with substantial increases in operating efficiencies.
19 March 2007 15:27:18 |
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