Key performance indicators (‘KPI’s’) – which ones and why ?

A powerful tool if used properly and arguably a time waster if not. KPI’s need to link your integral business processes to your strategic goals. Their purpose is to assess past performance and also provide a guide to future performance. Their value is in the measurement of the effectiveness of your processes to achieve your strategic goals. These should be a combination of internally and externally focused goals – i.e. bench-marking within your competitive set. Some may argue that a good job cost framework can provide all the information you’ll ever need. The problem with this view is that many don’t possess an accountant’s eye for this analysis. In this regard they are an extremely useful business tool to allow the detailed scrutiny required and also provide a basis for comparison consistency, which makes opportunity and problem trend identification easier.

The question is what KPI? Most businesses use KPI’s but many businesses don’t use them as well as they could or should. A common trap is to use ‘template’ or ‘standard’ KPI’s without any great thought as to the relevance to the strategy. Careful thought needs to be applied here, your KPI’s need to be industry specific and as complete in their purpose (data capture) as possible. A simple example of a useful KPI for say a strategy of improving customer service would be the number of customer complaints. Note that the performance indicator does not have to be complicated and in this case is easy to measure, resonates strongly providing the user with a clear picture if improvement is taking place.

Another trap of KPI’s is to set a plethora of performance measures and then confuse management judgment due to an excessive amount of numbers. For best results (and less complicated debate) try to stick to between five – eight indicators and no more than ten. They should not be limited to financial measures either. Selecting your KPI’s around a balanced scoreboard in my opinion is the most effective method of linking performance measurement to strategy.

Whilst providing an effective measure of strategy performance another aspect primarily at an operational level is the value they provide from a human resources perspective. This is particularly relevant in a service business where your key ‘moving part’ is your staff. KPI’s in this regard can play a significant motivational and accountability role to achieve the best from your employees. Care too needs to be applied at this point to ensure the KPI’s selected are realistic and achievable. The ‘SMART’ principle is an essential guide in this regard.

In short KPI’s if applied correctly can very effectively summarise what I describe as the ‘personality of business performance’. Note that they only provide a ‘measure’, they don’t ‘do’ …how you use them is then up to you..if this article sparks your interest and are keen to know more you should check out our finance demystified and finance essentials courses where KPI’s are explored and explained in further detail.