Knowing your Key Performance Indicators (KPI's)

What are your KPIs?

The term key performance indicator (KPI) has become standard jargon for management information which identifies how well an organisation is doing and how it can improve. Do you know what yours are and how to measure them?

Here are some ideas to help with this process. 

Why have key performance indicators?

There needs to be a two-way feedback process between the frontline of the business and the decision-making/management area. It is important to know what is happening and why, and if something can be improved, people need to know what to do about it.

Even more importantly, good KPIs will motivate people in the frontline because they can see, from the figures, the effect they are having on performance, thereby feeling some sense of achievement in their work.   The three functions of KPIs are:

• To show results across the business
• To provide knowledge of how to improve processes
• To motivate and involve people – therefore to make things happen 

These three functions give us a set of rules for implementation. The KPIs must show the results of the process, and indeed of the business. These are known as ‘high level’ KPIs, which tell us whether we have won or lost. However, they may not tell us much about why, and for that we need to have ‘knowledge-bearing’ KPIs, which show waste errors and other opportunities for improvement. These should be such  that they prompt suggestions and actions, plus they have to be more detailed and provide root cause information.

The motivational effect of KPIs comes from the improvement in the indicators, which come from actions agreed by the frontline team. Of course this does call for excellent frontline management and a common and enlightened philosophy towards measurement throughout the business. As a frontline manager, it is important to control the process and improve it. You can do this by remembering to:

• Define the outcome of the process in simple measures. Is it working as it should be?
• Frequently measure whether you are hitting that level
• Raise the target to ensure improvement moves forward
• Agree actions with the people involved in the process, to produce improvement
• Log the actions that are agreed
• Ensure that actions are implemented
• Review the actions frequently

In which ares of our business should we have KPIs?

There are many examples of processes, depending on the different business types. Examples include:

• Promotion for lead generation purposes to get in front of new customers
• The process of winning a new customer; converting leads to new customer or projects
• Developing new products
• Accepting and specifying an order
• Putting an order into operation or into production
• Holding the correct stocks and maintaining appropriate targets for stockholding
• Packing and distribution
• Collecting debts and preventing bad debts
• Existing customer contact management (CRM)
• The management of any form of installation
• Manufacturing the product
• Managing and developing the brand

Mapping or modelling a process should make it clear what it is you need to measure. The mapping doesn’t have to be in great detail; merely enough to show what the processes and responsibilities are, and that you know each process is always working well.

Each business will have different priorities for management focus on certain processes. You need to know what the key areas are, otherwise there is a danger of having too much trivial information that obscures what is really important.

When using KPIs, it is essential to have a picture of what you are aiming for, following the (probable) four to six months of implementation. When action is successfully implemented, next comes ‘full-on’ KPIs. These are reviewed regularly by the people in the process, against improvement targets. They are in a fixed hierarchy of well run action review meetings and are quantified in annual effect financial terms (pounds per unit or percent of output, resource, waste etc.)

Make it easy to collect KPI information 

You should set your targets high for the implementation of KPIs, so that automatic real-time KPIs provide the greatest possible degree of sub-analysis ‘drill-down’ instantly. You should obviously make the production of ongoing information slick, efficient and automatic, so as not to make the maintenance process too costly to support on an ongoing basis. There is always going to be an up-front implementation workload.

There are, of course, many problems that MDs and CEOs have experienced in the past. These include, for example, management focusing too much on operations, doing the job and not having a formal process; ad hoc investigations taking up management time; not making appropriate use of the software available; not fully understanding how beneficial KPIs can be; and, finally, standards for the production of KPIs being set too low, with KPIs coming out at monthly intervals, with no process for review or actions.

Many of these problems will have killed the process and robbed the organisation of the overwhelming benefits that could have been won. Therefore, organisations must ensure that the correct management behaviour is implemented, to make use of good KPIs. They must decide upon the right KPIs, at the right frequency and in the right degree of detail for its given functions, in terms of results, knowledge and motivation. Lastly, they must take specific implementation issues into account, for example presentation, software, data capture and primary recording. 

Based on an article from Accounting Web

For help in deciding appropriate KPIs to measure the performance of your business and key areas for improvement contact Prime Chartered Accountants.