ACKNOWLEDGEMENT
This article was published in the New Straits Times on July 28, 2007
as a CIMA Business Talk article.
Reproduced here with permission from
The Chartered Institute of Management Accountants (CIMA Malaysia).
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Many firms are using wrong performance measures, many of which they incorrectly term as key performance indicators (KPIs). In my experience, few firms monitor their KPIs because they haven't explored what a KPI actually is.
Let me explain what a KPI is by telling a story about former British Airways chairman, Lord King, who hired a group of consultants in the 1980s to deterrnine the key measures that he should focus on to turn around his ailing company. They told him that there was one critical success factor: the timely arrival and departure of aircraft. I imagine that he was’t impressed since everyone in the industry knew this fact. But the consultants pointed out that this was where the firm's KPIs lay and proposed that he should concentrate on late flights. So, King agreed to be notified whenever a BA service was delayed by more than a couple of hours. It wasn't long before BA jets had a reputation for leaving on time.
The importance of the “timely arrival and departure of aircraft” critical success factor can be seen by the impact of delayed flights on all six perspectives of the following balanced scorecard:
- Financial – Increased outgoings, including airport surcharges and costs of overnight accommodation for seriously delayed passengers
- Customer – Dissatisfaction among delayed passengers and those people meeting them at their destination – they’re potential customers
- Environment / community – Increased carbon emisions from aircraft using extra fuel to circle airports after missing their landing slots
- Learning and growth – A negative impact on staff development, as employees would tend to replicate the behaviour that had caused the delays
- Internal processes – An adverse effect on aircraft servicing schedules
- Employee satisfaction – Increased stress for staff who have to deal with unhappy passengers
KPIs represent a set of measures focusing on those aspects of performance that are most crucial for the continued success of an organisation. There are only a few in any one firm and as the BA story shows, have a profound impact if they are monitored constantly at the top.
A few KPIs can be measured weekly, but most should be measured daily or even hourly. Measuring them monthly is closing the stable door well after the horse has bolted. Most organisational measures are very much indicators of what happened in the past month or quarter. These are not KPIs. That's why a half-yearly customer satisfaction survey can never be a KPI. Some firms conduct customer surveys daily. In their case, there could be a couple of KPIs within the satisfaction measures.
All good KPIs that I’ve come across have commanded the attention of the chief executive, who would contact the people responsible for them daily. And a KPI is deep enough in the organisation that it can be tied down to an individual. Return on capital employed has never been a KPI since it cannot be attributed to one manager.
A good KPI will affect most of the critical success factors and more than one aspect of an organisation's balanced scorecard. When the boss focuses on the KPI and everyone follows suit, the firm wins on several fronts.
My research in this area has led me to conclude that there are three types of performance measures:
- Key result indicators (KRIs) that tell the board how managers have performed in terms of a critical success factor or perspective of the balanced scorecard
- Performance indicators (PIs) that tell staff and managers what to; and
- KPIs that tell staff and managers what to do to increase performance dramatically
Robert Kaplan and David Norton recommend that forms should have no more than 20 KPIs. Jeremy Hope and Robin Fraser suggest fewer than 10. I think that there should be about 10 KRIs, up to 80 PIs and about 10 KPIs.
The common feature of KRIs is that they are the result of many actions. They give a clear picture of whether a firm is moving in the right direction and the progress it is making towards planned goals – that’s the role of PIs and KPIs. KRIs that have often been mistaken for KPIs include customer satisfaction or profitability, employee satisfaction, net profit before tax, and return on capital employed.
An organisation should have a governance report comprising up to 10 measures providing KRIs for the board, plus a balanced scorecard comprising up to 20 measures – a mix of PIs and KPIs – for the management team.
While they are, by definition, not key to the business, PIs are crucial for teams to align their daily activities with the organisation's strategic aims. They complement KPIs and are shown with them on the balanced scorecards of the organisation and its divisions, departments and teams.
PIs can include profitability of the top 10 per cent of customers, net profit on key product lines, and number of employees participating in the staff suggestion scheme.
KRIs replaces outcome measures, which typically consider activity over months or quarters. PIs and KPIs are now characterised as past, current or future measures. An example of a past measure would be the number of flights last week that were delayed. A current measure would be the continually updated tally of delayed flights. A future measure would be the number of initiatives to be started in the next month to target problems causing delays to flights. You will find that true KPIs in your organisation are either current or future measures.
Written by David Parmenter. For more information, please contact The Chartered Institute of Management Accountants (CIMA) Malaysia at Tel: +603 – 7723 0230 or e-mail: kualalumpur@cimaglobal.com Website: http://www.cimaglobal.com
Chen Ming-fa's note - Recommended readings:
Parmenter, David. (2007). Key Performance Indicators: Developing, Implementing, and Using Winning KPIs. Hoboken, NJ: John Wiley & Sons
Alexander, Jack. (2007). Performance Dashboards and Analysis for Value Creation. Hoboken, NJ: John Wiley & Sons
Paladino, Bob. (2007). Five Key Principles of Corporate Performance Management. Hoboken, NJ: John Wiley & Sons
Eckerson, Wayne W. (2006). Performance Dashboards: Measuring, Monitoring, and Managing Your Business. Hoboken, NJ: John Wiley & Sons
