Key Performance Indicators

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Key Performance KPI

Indicators

term KPI has become one of the most over-used and little understood terms in iness development and management. In theory it provides a series of measures ainst which internal managers and external investors can judge the business and how it likely to perform over the medium and long term. Regrettably it has become confused metrics - if we can measure it, it is a KPI. Against the growing background of noise I"r.o<>.""n by a welter of such KPI concepts, the true value of the core KPI becomes lost. KPI when properly developed should be provide all staff with clear goals and bjectives, coupled with an understanding of how they relate to the overall success of the rgSlnisation. Published internally and continually referred to, they will also strengthen red values and create common goals.

Key when it is of fundamental importance in gaining competitive advantaqeand is a ke or break component in the success or failure of the enterprise. For example, the I of labour turnover is an important operating ratio, but rarely one that is a make or k element in the success and failure of the organisation. Many are able to 'operate on II below benchmark levels and still return satisfactory or above satisfactory results. relating to Performance when it can be clearly measured, quantified and easily fluenced by the organisation. For example, weather influences many tourist related perations - but the organisation cannot influence the weather. Sales growth may be an lI."r,nn<=lnT performance criteria - but targets must. be set that can be measured.
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Iyan Indicator if it provides leading information on future performance. A considerable of data within the organisation only has value for historical purposes - for example and creditor length. By contrast rates of new product development provide excellent eading edge information. bviously KPI's cannot operate in a vacuum. One cannot establish a KPI without a clear mderstandinq of what is possible - so we have to be able to set upper and lower limits of KPI in reference to the market and how the competition is performing (or in the nce of competition, a comparable measurement from a number of similar nisations). This means that an understanding of benchmarks is essential to make I's useful (and specific to the organisation), as they put the level of current performance context - both for start ups and established enterprises - though they are more for the latter. Benchmarks also help in checking what other successful nisations see as crucial in building and maintaining competitive advantage, as they are central to any type of competitive analysis. Start with what you need to measure and monitor

Different organisations need to monitor different aspects of their environment. For example, the airline industry has a complex set of issues many of which (but not all) are different from the dairy farmer. Ibis has created a number of separate business monitoring modules for medium sized companies which we believe cover the majority of requirements for the development and maintenance of their organisation, that are part of a bottom up planning system based around knowledge centres. For the typical medium enterprise, 80

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Key Performance Indicators

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monitoring elements are part of the standard Ibis "kit" which is initially proposed during the introduction of knowledge centers. This "kit" provides a rapid introduction of the key monitoring components. These are the key components of the range of monitoring elements that can be considered in the accompanying table below. IKnowledge centre IIFocus of activity Leadership, planning and monitoring, balanced scorecard, budgeting, portfolio theory, golden circle, decision making, creativity, SCORE, corporate governance, territorial imperative, impact analysis, standard operating procedures, mosaic management, prioritisation, trade offs, MBO, succession planning, quality circles, technology audit, vision statement, SBU decisions, Abacus principle, time keeping, barriers to entry, critical success factors, business model, legacy issues, successes failures/ lessons learnt, authority! responsibility, recruitment appraisal, acquisitions, cascade investment, disposals, premises review, stakeholder relationships, trade associations, synergy, recruitment appraisal, risk management, planning effectiveness, legal, health and safety, SBS, utilities, insurance, security, design for operating efficiency, time study, complaints, pensions, share options, employee share savings schemes, creativity, fringe benefits, bonus systems,secrecy, meeting management, time management, cost cutting, facilities management, stress, forecast grid, trade offs, communication, investment appraisal, health and safety, environmental audit, ISO 9000, ISO 14000, operating financial review (OFR), working conditions, employee suggestion, team building, training, internal service satisfaction Planning and monitoring, balanced scorecard, budgeting, cash flow, profit and loss, balance sheet, successes failures/lessons learnt, trade offs, MBO, mosaic management, prioritisation, IFRS, GAAP, succession planning, accounting assumptions, technology audit, SCORE, decision making, creativity, quality circles, asset register, invoicing,profitability, activity, and liquidity ratios, revaluation accounting, fraud, capital allocation profile, James' rule, contingent liabilities, deferred consideration, cost Ilpossible KPI I

Ad min istration

PEST elements, budget ratio, high impact! high probability assumptions and boundary conditions (strategic risk assessment), CGAL, RSM, contractual, portfolio risk levels, % hurdle rate, insurance costs/sales, BEV, capital spread ratio, cost per sq m or cost per employee for facilities total space, productive hours %, % meeting time, BS index, utility cost, noise, accidents, % outsourcing, complaint resolution speed, complaint resolution cost, average meetingsl month, utility cost! market cost ratio, premises cost! market cost ratio, space utilisation, whistleblowing, temperature, noise, health and safety breaches, security breaches, document loss, pension cost, theft, AER, budget ratio, KFR, project success, certification, wages ratio, litigation, internal service satisfaction levels, effective head count, % mentoring Financial ratios, budget ratio, % outsourcing, FER, BEV, BEV/EBITDA, debt age, cost of finance, capital allocation ratio, capex, EFT%, CER, tax charge, SPT %, gross yield, P/E,PEG, EPS, project success, DER%, BDR, FCF, overdue accounts, productive hours %, market dynamics capital allocation, EBITDA

Finance

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Key Performance Indicators

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Marketing/ sales

capitalisation, brand accounting, cost cutting, payment systems, trade offs, documentary credits, time keeping, dividend policy, cash management, currency management, sales tax, depreciation, synergy, recruitment appraisal, funding options, financial reporting, audit, cascade investment, recruitment appraisal, source and application of funds, sensitivity analysis, investment appraisal, convertibles, tax management, credit management, hedging, team building, time management, training, internal service satisfaction Planning and monitoring, balanced scorecard, budgeting, portfolio analysis, trade offs, MBa, successes failures/lessons learnt, succession planning, recruitment appraisal, mosaic management, prioritisation, technology audit, SCORE, decision making, creativity, market drivers, marketing mix, branding, Single Block Theory, entrants, substitutes, market research, customer panel, sales channels, distribution channels, sales management,investment appraisal, call centres, marginal profitability, quality circles, customer loss, products/services (width/depth), cross selling, value chain, expectation fulfillment gap, market size, customer transition, seasonality, networking, price elastlclty.cascadelnvestrnent, pricing terms and conditions, quantitative analysis, customer satisfaction, reference sale, time keeping, synergy, pricing power, cost cutting, market spread, customer investment review (CIR), marketing myopia, product age spread, organisational buyer behaviour, reference sale, customer spread, product age, competitive advantage, competitive bidding, trade offs, negotiation, recruitment appraisal, game theory, channel management, customer care, complaints, warranties, mystery shopper, time management, branding, team building, training, internal service satisfaction

currency/ debt currency ratio, sales tax rate %, cash interest rate%, depreciation %, internal service satisfaction levels, effective headcount, % mentoring

CLV, budget ratio, market share by segment, trial rate, competitive score, sales by channel, % repeat purchase, average sales value, sales productivity, market share, advertising productivity by channel, cost per lead, cost per converted lead, bid' success rates, range sale%, average discount, service call out times, productive hours %, enquiry response time, seasonality ratio, price index, customer satisfaction, advertising awareness, % branding %, customer investment review, customer transition rate, value chain, % outsourcing, MER, budget ratio, EGMG ratio, customer investment return, customer churn, complaints, warranty claims, project success, channel members, product positioning variance, SER, AER, pricing, price elasticity, country spread, seasonality ratio, customer spread, product spread, product age spread ratios, segmental leadership, TDA's, project success, CIR%, competitive bidding success %, internal service satisfaction levels,

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Key Performance Indicators

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I
Prod uctio n/logistics! service delivery

effective headcount, % mentoring Cost variances, budget ratio,order processing cycle, production cycle times, downtime, % outsourcing, PLER, budget ratio, STR, capacity utilisation, logistics cost, SPC, load utilisation, failure rates, return on plant, space utilisation, set up time, waste rates, pollution levels, emergency delivery, out of stock %, obsolescent stock %, recycling%, back order %, JIT% energy efficiency ratio, peak capacity %, supplier ratio, partnering, obsolescent stock, EOQ, number of suppliers, supplier spread ratio, number of components, emergency call out, delivery failures, productive hours %, Eenablement, vendor rating, project success, internal service satisfaction levels, effective headcount, % mentoring

Planning and monitoring, balanced scorecard, budgeting, successes failures! lessons learnt, standard costing, activity based costing, trade offs, MBO, succession planning, mosaic management, priorittsation, investment appraisal, design for operating efficiency, J1T, FMS,technology audit, SCORE including cost cutting; decision making, creativity,production efficiencies, PLM, aggregate demand policy, synergy, management accounting, OR, suppliers, supply chain management, MRP, backorder, time keeping, inventory_levels,. production equipment age, quantitative analysis, design, sophistication, capacity, TQM, TPM, waste management, condition monitoring, recycling, complaints, technical support, recruitment appraisal, distant data capture, distribution structure (warehousing, outlet location) and physical distribution management, obsolescent stock, cascade investment, time based competition, time management, quality circles, order processing, trade offs, scheduling, purchasing, recruitment appraisal, vendor ranking, networking, postponement, standardization, product/ service design, team building, training,internal service satisfaction Planning and monitoring, balanced scorecard, budgeting, successes failures! lessons learnt, trade offs, MBO, succession planning, mosaic management, prioritisation, quality Circles, Noah principle, decision making, creativity, technology audit, SCORE, eight "S", absenteeism, timekeeping, trade offs, overtime, industrial relations, stress, bonus systems, training needs analysis, time keeping, recruitment appraisal, time management, team building, cost cutting, cascade investment,wages, employee record keeping, synergy, vacation planning, training, internal service satisfaction

Personnel

Productivity, budget ratio,turnover, absenteeism, % outsourcing (temporary staff ratio), PER, budget ratio, labour cost%, wages ratio, CNCER, employee satisfaction levels, CHIWH ratio, overtime%, skills, training, discipline, disputes, appeals, timekeeping ratio, apprenticeship, recruitment costs, training days,productive hours %, whistleblowing, span of control, appraisals, wages ratio, diversity index, PDP, project success, internal service satisfaction levels,

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Indicators

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IT :
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effective headcount, % mentoring Management information system fu nctionality, prod uctivity, budget ratio,stability, web hits, access speed, site downtime, site click through, productive hours %, Intranet, Extranet, % outsourcing, ITER, budget ratio, security breaches, data storage, EDI, web position, quality of data, information overload, project success, internal service satisfaction levels, effective headcount, % mentoring

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......-

Planning and monitoring, balanced scorecard, budgeting,successes failures/ lessons learnt, trade offs, MBO, investment appraisal, succession planning, mosaic management, prioritisation, data mining, technology audit, SCORE, decision making, creativity, Intranet, Extranet, trade offs, telecommunications and IT platform, management information systems (MIS), web design and management, cloud computing, systems, time management, synergy, recruitment appraisal, SEO, information flow map, security, mystery shopper, teleworking, cascade investment,quantitative analysis, cost cutting, time keeping, systems analysis, team building, training, artificial intelligence, quantitative analysis, modeling, encryption, recruitment appraisal, internal service satisfaction

Product! service development

Planning and monitoring, budgeting,innovation matrix, balanced scorecard, mosaic management, prioritisation, successes failures/ lessons learnt, trade offs, MBO, succession planning,investment appraisal, TBC, technology audit, SCORE, quality circles, decision making, recruitment appraisal, creativity, product aqe' profile, period of grace, trade offs, halo effect, identification of new product! service concepts, synergy, cannabilisation, protocol, IPLC, certification, cascade investment, technology transfer, first mover advantage, time management, recruitment appraisal, IPR, successful development! commercialisation, team building, training,internal service satisfaction Authority and responsibility, planning and monitoring, budgeting, successes failures/lessons learnt, creativity, SCORE, investment appraisal, assumptions, high risk/high probability, Black Swan theory, failure points, reducing potential for failure, setting trigger points, action plan, risk profile, stage gate, team building, communication, training, TEWT, sirnulations, role play, impact analysis

Product age spread, R&D%,ideas, strategic fit, budget ratio, protocol score, total cycle time, project review, team creation, testing, % outsourcing, NPDER, budget ratio, license fees, IPR%, IPR infringements, IPR maintenance costs, royalty rate %, time, productive hours %, budget, specification, project success, internal service satisfaction levels, effective headcount, % mentoring

Contingency

planning

Risk score, response times, budget ratio, KFR, % outsourcing, % SOP, % training, % above/below barrier conditions, success rates, % budget

Establish current performance. benchmark and target levels

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Key Performance Indicators

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For each monitoring module, one can then establish what the current level of performance is in a measurable and understandable way. This is the current performance. From industry sources, the benchmark level can normally be introduced (getting to benchmarks is often a difficult process and one requiring a mixture of low cunning andlor sophisticated analysis). Then a target level of achievement can be entered. Let us take an example of a : financial management module for an established manufacturing company and what it will .' tell us,
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Financial knowledge centre monitoring components Factor

Gross profit % ROCE% FCF BEVfEBITDA Gearing (DER) Debt age (years) Interest cover X AER% SER% Debtor length (days) Creditor length (days) Stock turn/year Current ratio Budget ratio Capex ratio WCR Z score Tax charge % Depreciation EFT Overdue accounts % STP% FER% Project success ratio Internal satisfaction level %. Effective headcount % % Cost of finance %

Current

Benchmark

Target

68 13 12 0.2 15 8.5 8,3 8 10 102 60 5

4

52 10
n/a n/a

72

38 3,7 12 12 95 63
4 3
nfa
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20 10 0.2 15 10 10 6 6 60
I

8
4 nfa

95 8 1.7 3 12 15
3

3.2 7 19 12
8
nfa n/a nfa nfa nfa

7 1.7 3 10
nfa

82 2 92
3

90 67 64

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3 88 1 95 2.6 90 90 75

We can gain an enormous amount of information and control from such a chart, but obviously not all components will meet the criteria of being a KPI - otherwise we are back into the problem of measuring everything and not concentrating on a limited number of core criteria.

Add KPI project control elements

This ratio based around the three on specification, gate components level. analysis is combined with a review of individual projects - normally based key performance criteria, whether the project is on time, on budget and For projects involving significant expenditure the measurement of stage will also significantly add to the level of control at a knowledge center

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An example from the same knowledge centre would look like this:

Due date Project Debt refinancing ITax review II eptember S ISales insurance IIAugust
,

=
...........

On time IIYes IIYes IIYes

to develop

On budget

Stage gate

Yes Yes IYes

IYes II es Y

None

INone INone

How do I use such a format

and understanding

of what is a KPI?

As different individuals and organisations will put a different emphasis on each item of information a definitive list of what is and what is not a KPI will depend on individual decisions, and will vary considerably according to the stage of company development. Start up enterprises need to place their emphasis on structural factors; established companies on operational performance . However, one can set some guidelines. The most rapid way to establish the KPI within any set of monitoring information is to work through the three criteria in sequence. Is the control information key to the success of the organisation? Can we measure it and influence it? Does it provide leading edge indications of future developments?
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Which measures in the above chart are key? Gross profit is one key measure to the success of the organisation. Research shows that survival rates are linked to levels of gross profit; gross profit margins above that of the competition provide clear evidence of competitive advantage. Return on capital employed is another key measure of the success of the organisation. The ability to use investment effectively is central to effective long term development. Z score is a measure of the liquidity of the enterprise and clearly defines positive or negative trends. . . It would be the Ibis argument that the other components of the chart are not key - they are valuable items of information but are not make or break aspects of company management (unless they are grotesquely different from benchmark values). Are these performance Yes Do these provide leading edge indications of future performance? Yes The conclusion from this analysis is that in financial reporting the company should concentrate on gross profit, return on capital employed and Z scores as their key performance indicators. Both gross profit and return on capital employed are part of the "model" balanced scorecard for overall objectives that Ibis propose for the majority of enterprises as part of their planning platform. Other components within the financial reporting module that might be considered as KPl's are factors such as the levels of gearing (debV equity ratio - DER), project success rates, bad debt rates, and free cash flow (FCF). Including time, budget and specification to project reporting would also be a natural addition. measures - can we quantify them and influence them?

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Key Performance Indicators

The balanced scorecard and KPl's

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In addition to the creation of the enterprise balanced scorecard, in which gross profit, return on capital and Z scores are standard elements, the identification of KPl's in each of the operational areas or knowledge centres also assists the enterprise in plan development. These KPI's will change over time, but their creation as part of the initial creation of each knowledge centre will focus and direct their operational activities.

KPl's and benchmarks

, One of the most valuable contributions that KPI analysis can deliver is an understanding of the true nature of the competitive environment. The Ibis analysis looks at the enterprise on the basis of knowledge centers as a starting point. From that one can establish the KPI's and the sensible reference points for measurement. These will vary from knowledge center to knowledge center with a mixture of global non-sector specific, global sector specific, naational market non-sector specific and local sector specific. A typical structure would comprise the following emphasis on benchmark creation for each knowledge center:

- Adrhlnistration - an emphasis on global non- sector specific; IT - an emphasis on global non-sector specific; Finance - a mixture of national market specific and global sector specific; Production! service delivery - global sector specific; Personnel - national market non-sector specific; Marketing - a mixture of global sector specific and local sector specific; New product development - global sector specific When this approach is introduced, there is a rapid re-assessment position of the enterprise or organisation. of the true competitive

KPI's, benchmarks and prioritisation

Once the organisation has identified the relevant KPl's and benchmarks, priorities for change and potential returns on investment become clearer. A forthcoming article on the development of Greece before and since joining the euro zone which will be available on the controversial cases page demonstrates quite clearly where Greece failed in its economic, fiscal and political development andwhere the emphasis for change should have been placed.

KPl's and the management information system

In a decentralised planning system focused around knowledge centers the choice of key performance indicators is the first stage in the re-evaluation of the information system to make it more valuable and relevant to the operating unit rather than one that is centrally provided. Thus the choices of KPI determine what will drive that part of the enterprise and what information must be collected to analyse and manage it. Such information gathering or software choices create information networks that are relevant and provide data which is used specifically for operational purposes, reducing information overload and information for information sake.

Where else are KPl's valuable?

The KPI is central to a number of other elements in the planning platform which provides the basis for answering the three crucial planning questions: Where are we? Where do we want to be (and when)? How are we going to get there cost effectively?

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Key Performance Indicators

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In addition to the creation of knowledge centres and business monitoring, KPI's have a vital role to play in: Action planning and implementation with an emphasis on management by objectives which will include a standardised rate of return and detailed project control; Training as part of a company wide approach to focusing staff and management on essential operational requirements; Central to business planning as a core part of the business plan outline; Identification of necessary actions in change management. exit planning and survival and recovery planning; They set priorities for investment appraisal, and the choice of emphasis that should be given to the main strategies within the golden circle, consolidation (including cost cutting), market penetration, ,market development and product development.
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Training on key performance indicators, the creation of a business plan and standard operating procedures is available from Ibis. More information on the way in which Ibis can contribute to your business plan development is provided at Advantage Ibis E-mail Ibis now. /

More information on the Ibis approach is also available on the FAQ page .. If you are an established business you can find an on-line quiz to analyse your business planning and control development HERE If you are a start up business you can find an on-line quiz to analyse your business planning and control development HERE If you are planning for high growth click HERE

Business Plan SOP

A comprehensive, easy to use 188 page manual containing scores of worksheets and notes. The contents follow the business plan outline, and have been rigorously tested during years of training throughout the world. The Ibis business plan manual is delivered in Word format, so that users can complete the worksheets and transfer them into the body of their own business plan.

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[Advantage Ibis I[Tell-Best-Inveslments I[U_Q I[Business Plan Outline I[Start Up Quiz I[~ I[ Business Plan Training I I Business Plan Game I [ Entrepreneyr's Qyiz I[ Business Concept Quiz I [ Investment Case I[ Start·yp Analvsis II Established Business Quiz I [ Effective Planning I [ High Growth Plan I[ Business Monitorina I [Virtual Office I[ Operating Procedures I(K P"I I[ Contingency Planning I [ Change Management I [Survival & Recovery I[ Planningnmplementation I[ Corporate Governance I[ Risk Management I [ Business Health Check I[ Knowledge Centres I [Articles I( Exit Planning I[ Cost Culling I [ Compe@veAnalyslsJ [ Controverslat Case I [~l [OlherUseful Sites I [~l

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