Topics Index

(1) KPIs, KRMs and KPDs – what’s the difference?
(2) KPIs – what’s the purpose?
(3) KPIs – what size of business can benefit?
(4) KPIs – how do they link to business processes?
(5) Decision Support – how do KPIs and BI systems play their part?
(6a) How can BI systems help you drive your business?
(6b) BI Systems - What's important in selection?
(7) KPIs and Management Information:
Are you getting what you need? On a timely basis?
(8) KPIs – A Matter Of Balance
(9) KPIs – What are the 10 Characteristics of Effective KPIs?
(10) KPIs – What are the Potential Pitfalls?
(11) Exception reporting / RAG analysis
(12) KPIs, People and Motivation
(13) KPIs - leading and lagging indicators – why the distinction?

(1) KPIs, KRMs and KPDs – what’s the difference?

The term “Key Performance Indicators” (KPIs) is often used to refer to any key business measures.

However the most useful definition of KPIs is “Measurements that tell you what to do to increase performance dramatically.”

This means thinking about what drives the business – the business “drivers” that you can directly control and action. These can be in commercial, operational or financial areas.

The “drivers” can be financial or non-financial in nature, for example margin%, conversion rate of sales leads to orders, and the % of products/services supplied on time. These reflect activities that you can directly control.

Conversely you cannot directly control measurements like revenue and profit, which result from actions taken in individual aspects of the business. These type of measurements are therefore called “results metrics”.

This means it is useful to think of KPIs in two groups:
KRMs - Key Results Metrics
KPDs – Key Performance Drivers (the true KPIs)

There’s then the significance of the word “key”. There should only be 5-10 KPIs at each level of the organisation, which link into the “Critical Success Factors” (CSFs) – the things that must happen (or not happen) for the organisation, division or department to be successful in pursuit of the strategic objectives.

So having determined the strategic objectives and CSFs of your business, what are the KRMs and KPDs needed at each level of your organisation to increase performance dramatically?

(2) KPIs – what’s the purpose?

You’ve heard the expression “what gets measured gets done”?

The purpose of KPIs is to ensure that what ought to be done gets measured so it gets done, i.e. promote the right behaviour. KPIs also provide a method for managers at every level to monitor performance.

KPIs apply equally to businesses large and small, to the Board down to individual departments.

KPIs therefore need to be “goal congruent” with the business's strategic goals.

Conversely, it is easy to set up KPIs that detract from the business’s goals, either
(a) Directly promoting the wrong behaviour
(b) Taking eyes off the main ball by not setting required KPIs

You have to very carefully consider what behaviour would result from each KPI, and have a set of KPIs that is goal-congruent overall.

If you are already using KPIs or other business measures, are they promoting the right behaviour for your business?

(3) KPIs – what size of business can benefit?

Simply any size of business - large, medium or small.

All businesses have (or should have) strategic goals where it is possible to define the Critical Success Factors (CSFs) that will drive the business forward or avoid disaster.

The KPIs provide measures that focus attention on what’s important, whether the KPIs are KRMs or KPDs - see explanation in posting (1).

In smaller businesses there may be just one set of KPIs for the entire business.

In larger businesses there needs to be a cascade of KPIs, providing management at each level with KPIs of what’s important to them in their specific role.

What’s strategically important to you and your business?

(4) KPIs – How Do They Link To Business Processes?

Imagine you are in charge of a brewery. You are in the control room and have a dashboard showing the various stages in the brewing process. These processes might include

• Receipt of raw materials
  
• Preparation
• Fermentation
• Filtration
• Bottling
• Casing
• Despatch & sale

To maximise profit, what are the key measures you want to see on your dashboard for each stage? The measures will fall into two camps, “results” and “drivers”: (1) Key Performance Drivers (KPDs), such as:

• Cost of materials
• % Raw materials rejected/accepted
• Yield of preparation
• Temperature of fermentation
• Energy cost of fermentation
• Yield of filtration
• Bottles smashed
• etc

(2) Key Results Metrics (KRMs) such as:

• Volume of fermentation mixture
• Volume of beer produced
• Number of bottles filled
• Number of cases stacked
• Number and value of cases despatched
• Profit

By monitoring key measures like these you can keep a close handle on productivity and profit. Now imagine you are looking at the processes in your own business. The exact same principles can be applied, looking at the processes in typically three groups: (1) Sales/Marketing (2) Operational, including HR (3) Financial, including credit control The key is to set out the processes, consider what is important to measure, and then track the KRD and KRM metrics in some form of BI system. How do you monitor your business?

(5) Decision Support – how do KPIs and BI systems play their part?

You’re making a business decision. What do you need to know?

Obviously it depends on the situation at the time. But typically will include:
1. What will happen?
2. What’s been happening?
3. How it will impact the numbers that get reported?
4. How will it affect your own remuneration or bonus?

You may make a rapid instinctive decision. Or take the time to analyse the situation more carefully.

Either way, given the same applies to other people making decisions throughout your organization:

1. Are the numbers reported the correct KPIs to drive decisions that are right for the business?
2. Do management and sales team bonus and commission schemes tie in with business goals?
3. Do your systems provide suitable historical information on a timely basis? Can you see the big picture? And analyse into detail when you need to?
4. Do you have an overall forecast in mind? And have a model to test out major changes in scenarios?

Relevance of KPIs

Clearly the right KPIs at each level in the business are vital, including remuneration schemes. See earlier posts in this blog for further discussion and ideas.

What about Business Intelligence (BI) systems?

Well-implemented BI systems can provide dashboards of KPIs, analysis into detail, and models to help forecast the future.

You can use Excel, a BI tool that sits behind Excel, or a BI tool with its own user interface. Key considerations are power, ease of use, and reliability.

Excel can be good for simpler situations, but it’s easy to make mistakes. A back-end database or OLAP system is better, provided the business structure is well modeled. Costs can vary dramatically, and value for money even more so. Excel may be cheap, but often not best for value.

Next Step

Feel free to comment against this blog. Or do give me a call to discuss, free of charge on +44(0) 1628 632914.

(6a) How Can BI Systems Help You Drive Your Business?

Business Intelligence (BI) systems can do one or more of the following for you:
(1) Report KPIs and other data, typically in a "dashboard"
(2) Provide analysis of the dashboard figures into greater detail
(3) Provide forecasting facilities to derive forecasts and budgets

These are all things you need to understand, manage, and drive your business.

BI systems will typically support at least a basic form of consolidation, to pull together sub-entities into the whole entity. Conversely you can analyse an entity out to sub-entities. Further analysis out to sub-sub-entities etc is possible in a multi-level cascade. KPIs can be similarly defined in a cascade.

BI systems will also typically allow you to present data and trends in a variety of graphical formats, such as pie charts, trend charts and gauges. The latter is particularly useful to report KPIs against targets.

Types of BI Systems

There are 3 main types of BI systems:
(1) Excel as a powerful tool for simpler situations
(2) Excel as the user interface, with some form of back-end database system
(3) Systems with their own user interface, including a back-end database

Back-end databases are of two fundamental types, with a number of variations:
(a) Multi-dimensional OLAP "cubes", termed MOLAP, which are ideal for many real-life analysis requirements once the dimensions are defined
(b) Relational databases, such as typically used for accounting systems, which are tuned to cater for multi-dimensional analysis, so are often termed ROLAP.

See update (6b) for what's important in selection of a BI system.

(Note: The term "OLAP" stands for "OnLine Analytical Processing". It is a throw back to 1993 when mainframes provided "OnLine Transactional Processing" after the era of purely batch processing. OnLine facilities are now the norm, but the term OLAP has stood the test of time to cover real-time analytical systems.)

(6b) BI Systems - What's Important in Selection?

Selection of a BI tool is a major decision. Key questions include:

(1) Will the reporting, analysis and forecasting capabilities suit the business, now and in the foreseeable future? This assumes that the KPIs, graphical preferences and other aspects have been suitably defined.

(2) Is the tool easy enough to use and administer?

(3) Is the tool suitable for the size of business in terms of its target market, performance for the data volumes envisaged, and cost?

(4) Is it designed to be developed and modified by a systems accountant in a user department? Or does it need formal programming skills, to be developed by the IT department?

(5) Given the fast pace of acquisitions in the BI market, what is a tool's likely strategic future? Is it likely to thrive or suffocate?

(6) A variety of other aspects, such as implementation and support arrangements

If you would like help in clearly defining KPIs and reporting requirements across the business, or in selecting a suitable BI tool, please contact me - details in my profile.

(7) KPIs and Management Information: Are you getting what you need? On a timely basis?

Let’s think of your business as a money-making machine. What aspects of the machine do you need to be monitoring for the business to thrive?

There are 3 key aspects, all of which support your decision-making:
1. KPIs – frequent reports of key indicators across the business, both “results” and “drivers”
2. FORECASTING – model including cashflow to assess scenarios, spot upcoming problems, and derive forecasts and budgets
3. MANAGEMENT ACCOUNTS – monthly and/or weekly picture, with comparison of performance against forecasts, and analysis down to the detail

Many businesses do not have a full set of this information available on a timely basis. As a result forthcoming problems are not identified, or decisions are made without appropriate knowledge. Running a business like this can be very uncomfortable.

Indeed people who deal with failing businesses despair at how often basic information is missing. So good information can be a matter of survival as much as helping the business to thrive.

Are you comfortable that you are getting the key information you need, when you want it?

IF YOU WANT TO IMPROVE YOUR MANAGEMENT INFORMATION:

There are three key steps:

(1) Defining information needs

The first step is to define what KPIs and management information you and your senior colleagues need, when and in what format. Responsibility needs to be clear for each level of management in each area.

As “what gets measured gets done”, it’s best to define what is reported in the context of your strategic goals and critical success factors (CSFs) if these have been defined.

(2) How should information be provided?

These days a variety of software exists to collect, report and model the information you need. Often referred to as “Business Intelligence” (BI) tools, these range from Excel for simpler situations to mid-range systems, to sophisticated corporate systems.

Can your current tools be used? Or would it be more cost-effective to use a new tool? What’s available that’s suitable for your size and type of business? Would an in-house or an internet-based SAAS solution be more appropriate?

(3) Implement the solution

Turning ideas into reality is an art that needs to cover technical and people aspects. In-house staff need to be closely involved. But help and guidance from outside can be a great help in achieving a worthy result in short timescales.

HOW CAN CAMWELLS HELP?

Camwells has many years’ experience of helping companies with these actions and questions. Clients have appreciated the independent viewpoint and commercially-minded experience. This helps to define appropriate metrics, identify suitable systems, and implement a working solution quickly.

Working with CEOs, MDs an FDs, “Timely, thorough, helped enormously” and “Couldn’t have done it without you!” are typical comments.

NEXT STEP

If you would like to improve your management information, do give me a call to discuss without obligation.

(8) KPIs – A Matter Of Balance

When putting together a set of KPIs, it makes sense to look at the business in its entirety.

To do this, the KPIs need to provide a balance between:
• Financial and non-financial measures
• Short term and long term objectives
• Lagging and leading indicators (“results” and “drivers”)
• External and internal performance perspectives

This is a referred to as a “Balanced Scorecard”. The concept was originally developed by Kaplan and Norton. The idea is that management should not only be presented with financial information, but metrics and commentary on other aspects important to the health of the business.

Kaplan and Norton originally suggested these should be assessed for four aspects. But it is more useful to consider six aspects that help to drive business performance:

• FINANCIAL RESULTS
o Meeting or exceeding targets and budgets

• CUSTOMER
o Customer satisfaction
o Other aspects relevant to specific industry

• ENVIRONMENT/COMMUNITY (Corporate Social Responsibility)
o Improving relationships with customers to drive sales
o Improving attractiveness of the business to future and current staff
o To cut staff turnover, improve recruitment quality and reduce costs

• INTERNAL PROCESSES
o Efficient and effective
o Leveraging technology

• EMPLOYEE SATISFACTION
o Helps to improve productivity
o Avoids detrimental affects on relationships with the outside world

• LEARNING AND GROWTH
o Increasing expertise and empowerment

Whilst formal customer satisfaction and employee satisfaction surveys may only be carried out every 6 or 12 months, it is possible to monitor performance indicators more frequently. Examples include customer churn rates, customer complaints, employee turnover, and absenteeism.

Depending on the business, specific indicators may be KPIs at Board level. In other businesses, they may be at divisional or departmental level. The art is to develop a balanced set of measures at each level that focus on what is important for that business, bearing in mind the business’s size, objectives and critical success factors (CSFs).

A BI tool tends to be used to provide information on a monthly or more frequent basis, albeit with quarterly and annual totals. BI dashboards are therefore typically restricted to the information which can be collected and presented regularly. Less frequent information can be presented to management outside the BI system.

The overall result is to ensure management at each level see a balanced set of information on a timely basis.

(9) KPIs – What are the 10 Characteristics of Effective KPIs?

For a set of KPIs to help drive business performance, they must have a variety of characteristics. Some are more obvious than others:

1. RELEVANT – in support of business objectives

2. COMPREHENSIVE – covers all key aspects of the business

3. MEASURABLE – objective measures

4. TARGETED – compare measure to budget or target

5. DEFINED – clear and easily understood

6. COMPARABLE – trends over time, and comparable to other businesses

7. RELIABLE - sufficiently accurate to be trusted

8. TIMELY – appropriate frequency and timeliness

9. COST-EFFECTIVE – worth the costs of collection

10. SUSTAINABLE – can be compiled and reported regularly on an ongoing basis

(10) KPIs – What are the Potential Pitfalls?

As mentioned in an earlier article, “What gets measured gets done”. When designing a set of KPIs, you need to carefully consider whether they will be goal-congruent in two additional respects:

1. Will the KPIs encourage any unwelcome behaviour or decisions?

2. How could each KPI be manipulated to give a better result than expected?

Only once these issues have been considered should the KPIs be adopted, calculated and reported. Experienced thought and judgement is required. Two specific issues to highlight are:

KPIs in the form of a fraction or percentage

Particular care needs to be given to KPIs that are in the form of a fraction or percentage, N/D, where the numerator N is divided by the denominator D. Examples include revenue per employee, and ROCE (% return on capital employed, being profit divided by capital).

Whilst in these cases the principle performance measures are revenue and profit, the ratios can be improved more easily by reducing the denominator D. As an example:

Let’s imagine revenue of a business unit is £10m, with some 50 people. Revenue per employee is some £200,000. If staff can be reduced to 40, this produces an immediate improvement to £250,000 per employee, but with no improvement in revenue.

How can headcount be reduced? Two possible ways are out-sourcing and automation. If these actions are good for profits and the business generally, then that is fine. But costs could increase or control be reduced. If chasing a revenue per employee target is likely to drive decisions that would not have been made for usual business reasons, that metric may not be appropriate as a KPI. Such disadvantages need to be considered against any advantages of using that KPI, in the light of any other KPIs that would tend to drive good decisions.

How KPIs are reported

The way a KPI is reported can also have an affect on behaviour. For example a league table is good for the competitiveness of those near the top. But it can be very demoralising for those near the bottom, especially if there are particular reasons for the situation. If and how any league tables are published needs careful thought.

Similar care should be given to how other KPIs are reported.

In Conclusion

So before collecting and reporting a set of KPIs, it is vital to consider whether they will actually be goal congruent overall. How will they affect the decisions, morale and behaviour of the people in the business? And how could each KPI be manipulated? On balance will those KPIs drive improved business performance as intended?

(11) Exception reporting / RAG analysis

KPIs allow you to focus on what's important in your business. For each KPI you'll set a target, so you can monitor performance against it. For example a gross margin (GM) target of 28%.

To help you quickly identify any problems that need attention, it's useful to adopt "exception reporting". This is where shortfalls from target are highlighted, typically in red. Conversely KPIs that are better than target can be marked in green.

You may also want to set a "stretched target" which is that bit better than the basic target. For example if you aim for a GM of at least 30%, you are more likely to achieve at least 28%. A GM between 28% and 30% would then be regarded as acceptable, but of some concern. This can be marked in amber.

We therefore have a simple example of RAG analysis:
Red - GM under 28%
Amber - 28-30%
Green - over 30%

Looking at the three stages of the bid to revenue process (assuming a business where the target at each stage can be the same):

Furthermore, a good BI system will allow you to drill down to see the numbers with the relevant RAG flag:
(1) At the next level, which might be region or branch
(2) Or drill down to product group or product
(3) Or drill down to salesman

The drill down facility typically requires multi-dimensional analysis, so a form of OLAP tool is required (see posting 6a).

(12) KPIs, People and Motivation

Businesses are about people. Motivating them in the right direction is key. How can KPIs help? How should KPIs be determined?

In article 2, it was clear that KPIs need to be “goal congruent” with the business's strategic goals. This is to ensure decisions and actions that affect a KPI contribute towards those strategic goals.

This means that for individual directors and managers, their KPIs should tie in closely with their personal goals, which tie into the strategic goals. Their personal goals and associated KPIs can be part of the appraisal system.

Assuming the personal goals have been established:
    • What are each person’s goals?
    • What are the KPIs that measure their results (the Key
       Results Metrics, KRMs)?
    • In addition, what are the KPIs that monitor what is driving those
       results (the Key Performance Drivers, KPDs)?

There is then the matter of motivation. Experience shows that this is always stronger if the director or manager has been actively involved in determining the KPIs that will be used to monitor their performance. They also know what they need to drive and run their area of the business successfully.

To determine a set of KPIs, the process is therefore broadly:
1. Understand the business, its strategic objectives and overall
     business process
2. Establish what’s important to achieve these objectives (Critical
     Success Factors)
3. Discuss with the Chief Executive, directors and relevant managers:
    • Their goals
    • The KRMs that measure those goals
    • The KRDs that measure activity in pursuit of those goals
    • Other key management information required
4. Review, amend and agree the KPI set from organisational and
     individual perspectives
5. Establish how KPIs and other information will be presented to
     these people, typically using a Business Intelligence tool
6. Configure and implement the system

The process is best done by someone independent of the organisation
    • to collate information from a neutral perspective
    • to use their experience to identify omissions and
       challenge what’s really important
    • to provide a suitable system with the right information on a
       timely basis

As the business and the people within it change, it is useful to periodically repeat the exercise to ensure all the right KPIs are in place, and the current management team is suitably motivated.

The overall result is then the provision of a set of KPIs that monitors and drives all that is important within the organisation to achieve strategic goals.

(13) KPIs - leading and lagging indicators – why the distinction?

What information do you need to control your business?

You have objectives in terms of financial and other targets. Firstly you’ll track “results” against those targets.

But what are the root causes that drive these results? How can you control these?

Results such as revenues and profits inevitably arise as “outputs” from business processes and activities. The “inputs” that drive those processes determine the outputs. It’s actually only these input “drivers” you can directly control.

Therefore it’s important to monitor the inputs to the processes and activities. For example: How many qualified sales calls are being made? What’s the value of customer quotes submitted?

Indicators like these, across all areas of the business, can be monitored over time. Trends will provide early warning of whether you are on track to achieve your results objectives.

As outputs tend to lag behind inputs, measures of inputs are called “leading indicators”, and measures of outputs are “lagging indicators”.

The vital distinction is that it is the “drivers”, measured by leading indicators, that you can actually control. So it is appropriate to monitor both results and drivers, and focus on what’s most important:
• “Key Results Metrics” (KRMs) – the important lagging indicators
• “Key Performance Drivers” (KPDs) – the important leading indicators

In practice, a mix of 5-10 KRMs and KPDs are worth providing regularly to each director and manager, so they can take timely action on what’s important to their area of the business.

To determine the KRMs and KPDs for each person, the first step is to determine for each business process the appropriate leading and lagging indicators. What drives each stage of each process? Of these which are the most important? What’s practical to measure? How can these be provided on a frequent and timely basis?

This is best done with the help of an experienced independent outsider, who can challenge ideas, make suggestions, and help ensure all key areas of the business are adequately covered.

If you would like to discuss these ideas further, please contact Chris Challis on +44(0)1628 632914