Design aspects of KPIs – The basic building block for managing business performance.

This quick read spells out numerous design aspects of KPIs- Key Performance Indicators that are to be identified, incorporated and measured as a part of Enterprise Performance Management.

Whenever we come across the word - Business Performance- many of us have our own perspective of looking at it. For finance and accounting experts, it depends on the financial performance. It is also true from the point of view of the Economic Models that today’s world is practicing. Hence the performance of business is mostly managed by the CFOs in terms of working out the P&L and Balance Sheets with certain objectives in mind. Having said this, we have moved away from the conventional brick and mortar business models, and therefore, one should understand to look at the financial performance as an "outcome" of the business performance. This statement will definitely make us think about those non-financial aspects of business that have to be managed well for better financial outcomes. Hence, (financial) performance is the outcome (or the effects or the final result) of the performance of pre-identified and well managed business drivers (or causes) configured as a part of a given business strategy. This model is termed as Cause-and-Effect model.

Referring to the Balanced Scorecard method coined by Dr. Robert Kaplan and Dr. David Norton (original version in 1993), the business objectives contribute in the Cause-and-Effect model. Identified set of Key Performance Indicators (KPIs) contribute to a given business objective; whereas each of the business drivers is considered as a KPI / Business Goal.

In this article, I have tried setting up the tone right; while considering design aspects of KPIs (and not focusing on the Balanced Scorecard method)

Typically, KPI is derived from metric(s), since metric is the smallest measurable quark in the system. In general, KPIs come handy for measuring and managing the performance in tangible way. For the sake of simplicity, we will make these two words interchangeable within this article. Based on the above discussion, it is quite clear that KPIs have significant impact on the way business strategy (in particular strategy map) is configured and managed. KPIs can also help in linking operational outcomes with business strategy.

Identifying or articulating KPIs is an art and science. The earlier is true because one has to dive deep to figure out what can be measured and how that will impact the business strategy. As Albert Einstein said, “Not everything that counts can be counted and not everything that can be counted counts”. The latter is true because one must know the reason (and context) for why it is being articulated. As Peter Drucker said, “If you can’t measure it, you can’t manage it”. The way I look at it, is that earlier relates more to the qualitative aspects while the latter relates more to the quantitative aspects of the system.

Most of us know that KPI should be SMART (Small, Measurable, Achievable, Realistic and Time bound). But if we merely keep on measuring function specific KPIs in a compartmentalized way then it will become a famous story of four friends – Nobody, Somebody, Anybody and Everybody!

Majority of today’s large organizations are operating in silos, meaning there is hardly any synergy among business functions. They are not (in a true sense) well aligned with their business strategy. So there is a need to go one step further in identifying the KPIs (as an example) that would indicate the collaborative aspects of various functions and the extent to which their teams are engaged. Business performance is a perfect blend of People, Process and Technology. So, just by measuring KRAs of employees and normalization for deciding their incentives will make no sense. A given KPI can be of performance type or of monitoring type. Monitoring type of KPIs help in understanding the ‘baseline’ (over a period of time) and get the ball rolling for Performance type KPIs towards deciding their target values. KPIs can also be of qualitative and quantitative type. Performance has to do with effectiveness (quality) and productivity (efficiency). One has to strike the right balance of the total number of KPIs for optimum manageability of the strategy. [It is worth noting that there can be two types of KPIs (i.e. qualitative and quantitative) weighed appropriately for measuring the effectiveness (quality).]

Furthermore, Strategic KPIs are “forward looking” type and often set with ‘benchmarked’ targets. It is important to make sure that the periodic targets set for Operational KPIs help in achieving the YoY (typically) ‘benchmarked’ targets set with Strategic KPIs.

KPIs can also be used to qualitatively measure and reflect maturity of business processes. They can, in turn, be used for computing performance scores and can provide insights to the areas where attention is required for improvements or process reengineering. Their scores can also assist in prioritizing actions towards improvising process performance.

Key Risk Indicator- KRI- is yet another flavor of performance indicator and must not be missed out. Broadly, they are of three types: Enterprise, Strategic and Operational. Heat charts are used to graphically depict the risk scores .Probability and Impact are considered while computing their risk scores. The design aspects of KRIs are not discussed in this article.

It is critical to derive action items and assign them to the executives responsible on operational floor in order to meet and beat set targets. (RACI model i.e. people responsible, people accountable, people to be communicated and people to be informed) This serious element is missing in majority of the business analytical tools available in today’s market place. Executing action items on the operational floor will ultimately help in improving and optimizing business performance!

Many think tankers of the world have coined various methods/ frameworks for the purpose. To my experience, none of those methods have single handedly helped in managing business performance Simple reason is because every business is unique and the context within which they are measured / audited for their performance is different.

KPIs measured and configured as a part of these methods/ frameworks, will not only provide insights but will also provide better manageability and support for informed decision making. Needless to say, that just by keeping an eye on KPIs would make the strategy execution management lame if not blind.