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The real problem with Key Performance Indicators is not formulating measures; it's making measures which will target where business improvement is needed.
The best way to develop relevant Key Performance Indicators is to catalogue what your company does as a set of inter-connected business processes. This is the process view.
The process view provides greater focus on the customer.
Complete assessment of performance cannot be made unless the nature of the work or task is understood. You need to know.
The Goals or Targets of the Organisation
The Relationship between those goals and the actions and resources required to achieve them - this is the process of adding value
3. What Should Be Measured?
In determining what needs to be measured the first question that should be asked is - what information is crucial to running the business? This would include:-
Leadership and people
Ways of working - corporate image
The Measures include:
Financial Return (Profitability) on net assets
Business process measures such as delivery and accuracy measures
Customer satisfaction levels and retention rates
Employee satisfaction measures, productivity, retention rates
Performance Measurements include:
Efficiency and Productivity
Performance against a Budget
Broad requirements for a Performance Control System include:
Performance measures must be available in the appropriate time frame for each users' purpose
Include those measures which contain information about where and how to respond and if necessary apply any corrective actions
4. Qualities Of Good Measure
To meet the requirements for good performance measurement, there are four qualities which should be included in every measure:
Consistency with Corporate Strategy
Simplicity - easy to understand means easy to respond to and gives the measure credibility in the eyes of its users
Conceptually "close to the process it measures"
Facilitate learning and therefore continuous improvement
5. What's Wrong With Traditional Accounting Based Information?
Traditional accounting based performance information often proves an inadequate tool for the strategic decision making needed to expand a business.
Businesses need to venture beyond costs and profits to a variety of measures including:
while keeping financial soundness as a principal factor.
Financial based reporting systems which are attuned to communicating with regulatory authorities are not sufficient to help managers actually run a business.
Operational managers have difficulty making financial measurements meaningful to the day to day work of employees and mid level managers.
The "Balanced Scorecard" approach focuses the organisation on carefully chosen "actionable" measures - things that business line managers and their reports can influence directly such as reliability and customer satisfaction, units produced etc.
6. Performance Measurement Objectives
(A) Performance Measurement for Top Management.
Timeliness - strategy is a long term commitment. Feedback on progress is not required instantaneously.
The focus is on the future not the past.
(B) Performance Measurement for Middle Management.
Timeliness - requires a mixture of outcome measures which are very prompt.
Operational data should always have the response built in.
(C) Performance Measurement for Operations Personnel.
Timeliness - "real time" feed back is the best option, very prompt is the minimum requirement for performance data at this level.
Pre-programmed response - unless the measure has the response embedded within it, the opportunity to learn and to pursue continuous improvement is lost.
(D) Summarising the different requirements:
At Top Management levels, the indicators of achievement will be more financially orientated, but should be analysed with key non-financial indicators.
At Middle levels - a broader range of indicators (both financial and operational) will tell of progress towards strategic goals.
At Operational Personnel levels - the focus of indicators will be increasingly non-financial, giving direct fast feedback about performance and supporting learning and improvement.
7. Developing An Effective Performance Management System
The steps that would need attention in developing an effective Performance Management System include:
Clearly define the Businesses' Mission Statement - normally this is part of the Business Plan.
Use the Mission Statement of the Business Plan as a guide to identify Strategic Objectives.
Develop an understanding of each function's role in achieving the Strategic Objectives.
For each function - develop a global performance measure that describes the firm's competitive position.
Communicate the strategic objectives to middle and operational levels of the organisation. At each level develop more specific statements of contributions towards the objectives.
Use the performance structure to locate areas of opportunity and improvement. Manage performance through feed back etc.
Periodically re-evaluate the performance control system in light of the current competitive environment.
For further information on Key Performance Indicators refer to:
Paper 06.73 - "Introduction To Key Performance Indicators For SME's"
Paper 06.74 - "Using Key Performance Indicators To Create Value For SME's"
Paper 06.76 - "Check List For KPI's That Might Be Suitable For A SME"
Paper 06.77 - "Sample Of KPI's"