Performance indicator

A performance indicator or key performance indicator (KPI) is a type of performance measurement.[1] KPIs evaluate the success of an organization or of a particular activity in which it engages. Often success is simply the repeated, periodic achievement of some levels of operational goal (e.g. zero defects, 10/10 customer satisfaction, etc.), and sometimes success is defined in terms of making progress toward strategic goals.[2] Accordingly, choosing the right KPIs relies upon a good understanding of what is important to the organization.[3] 'What is important' often depends on the department measuring the performance - e.g. the KPIs useful to finance will really differ from the KPIs assigned to sales. Since there is a need to understand well what is important, various techniques to assess the present state of the business, and its key activities, are associated with the selection of performance indicators. These assessments often lead to the identification of potential improvements, so performance indicators are routinely associated with 'performance improvement' initiatives. A very common way to choose KPIs is to apply a management framework such as the balanced scorecard.

Categorization of indicators

There are four types of performance measures, which fall into two groups:

KPIs represent a set of measures focusing on those aspects of organizational performance that are the most critical for the current and future success of the organization. KPIs are rarely new to the organization. Either they have not been recognized or they were gathering dust somewhere unknown to the current management team.[5]

KPI Story: How an airline was turned around by one KPI

KPI story is about a senior official, who set about turning around British Airways (BA) in the 1980s, reportedly by concentrating on one KPI. The senior official employed some consultants to investigate and report on the key measures he should concentrate on to turn around the ailing airline. They identified one critical success factor (CSF), the timely arrival and departure of airplanes. (Finding CSFs and narrowing them down to no more than five to eight is a vital step in any KPI exercise, and one seldom performed.) While everybody in the airline industry knows the importance of timely planes, the consultants nevertheless pointed out that this is where the KPIs lay and proposed that he focus on a late plane KPI. The senior official arranged to be notified whenever a BA plane was delayed over a certain time and the BA managers at the relevant airport knew that if a plane was delayed beyond a certain threshold, they would receive a personal call from the senior official based around Blanchard’s one-minute manager reprimand. Whatever the excuse is, quite frankly, was not good enough. The senior BA official would point out that the manager had over six hours of advance notice that the plane was already late and needed to use this window of opportunity to take actions that would bring the plane back on time. Prior to the “personal call policy,” the airport manager (and many other airline employees ) had the “not our fault” syndrome. A late plane created by another BA team was “their problem, not ours.” But after receiving the personal call from the senior official, the airport manager undertook many proactive steps to recapture lost time, no matter who had created the delay. Actions included:

It was not long before BA planes had a reputation for leaving on time. The late planes KPI was linked to many other critical success factors for the airline including the ‘delivery in full and on time’ critical success factor, the ‘timely arrival and departure of airplanes’; the ‘increase repeat business from key customers’ critical success factor, etc. The late planes KPI affected many aspects of the business. Late planes:

  1. Increased costs, including additional airport surcharges and the cost of accommodating passengers overnight as a result of planes being curfewed due to late-night noise restrictions.
  2. Increased customer dissatisfaction and alienated people meeting passengers at their destination (possible future customers).
  3. Increased ozone depletion (environmental impact) because additional fuel was used in order to make up time during the flight.
  4. Hurt staff development as they learned to replicate the bad habits that created late planes.
  5. Adversely affected supplier relationships and servicing schedules, resulting in poor service quality.
  6. Increased employee dissatisfaction, as they were constantly dealing with crises and with frustrated customers.[6][7]

The seven characteristics of effective KPIs

Following extensive analysis and discussions with over 3,000 participants in KPI workshops, covering most organization types in both public and private sectors, facilitator David Parmenter defined seven characteristics of effective KPIs:[8]

Non-Financial They are non-financial measures (not expressed in dollars, yen, pounds, Euro, etc.)
Timely They are measured frequently (e.g., 24/7, daily or weekly)
CEO focus They are acted upon by the CEO and senior management team
Simple All staff understand the measure and what corrective action is required
Team-based Responsibility can be assigned to a team or a cluster of teams who work closely together
Significant impact They affect more than one of the organization’s top Critical Success Factors and more than one balanced scorecard perspective
Limited dark side They encourage appropriate action - i.e., they have been tested to ensure they have a positive impact on performance (whereas poorly thought through measures can lead to dysfunctional behaviour)

Identifying indicators of organization

Performance indicators differ from business drivers and aims (or goals). A school might consider the failure rate of its students as a key performance indicator which might help the school understand its position in the educational community, whereas a business might consider the percentage of income from returning customers as a potential KPI.

The key stages in identifying KPIs are:

Key performance indicators (KPIs) are ways to periodically assess the performances of organizations, business units, and their division, departments and employees. Accordingly, KPIs are most commonly defined in a way that is understandable, meaningful, and measurable. They are rarely defined in such a way such that their fulfillment would be hampered by factors seen as non-controllable by the organizations or individuals responsible. Such KPIs are usually ignored by organizations.

A KPI can follow the SMART criteria. This means the measure has a Specific purpose for the business, it is Measurable to really get a value of the KPI, the defined norms have to be Achievable, the improvement of a KPI has to be Relevant to the success of the organization, and finally it must be Time phased, which means the value or outcomes are shown for a predefined and relevant period.

In order to be evaluated, KPIs are linked to target values, so that the value of the measure can be assessed as meeting expectations or not.

Unintended consequences – the dark side of performance measures

Every performance measure has a dark side, an unintended negative consequence. The importance of understanding this dark side and the careful selection of measures should never be underestimated. David Parmenter has stated that well over half the measures in an organization may be encouraging unintended behavior. The frequency with which measures are set to fail by at best naïve or at worst corrupt management is breathtaking.[9]

As Dean Spitzer says “People will do what management inspects, not necessarily what management expects”

How performance measures can go wrong can be illustrated by two examples:

1. Late train measure backfires

A classic example is provided by a city train service that had an on-time measure with some draconian penalties targeted at the train drivers. The drivers who were behind schedule learned simply to stop at the top end of each station, triggering the green light at the other end of the platform, and then continue the journey without the delay of letting passengers on or off. After a few stations, a driver was back on time, but the customers, both on the train and on the platform, were not so happy. Management needed to realize that late trains are not caused by train drivers, just as late planes are not caused by pilots. Lesson: Management should have been focusing on controllable events that led to late trains, such as the timeliness of investigating signal faults reported by drivers or preventative maintenance on critical equipment that is running behind schedule.[10]

2. Timeliness of treatment measure fails in accident and emergency department

Managers at a hospital in the United Kingdom were concerned about the time it was taking to treat patients in the accident and emergency department. They decided to measure the time from patient registration to being seen by a house doctor. Staff realized that they could not stop patients registering with minor sports injuries but they could delay the registration of patients in ambulances as they were receiving good care from the paramedics. The nursing staff thus began asking the paramedics to leave their patients in the ambulance until a house doctor was ready to see them, thus improving the "average” time it took to treat patients. Each day there would be a parking lot full of ambulances and some even circling the hospital awaiting a parking spot. Lesson: Management should have been focusing on the timeliness of treatment of critical patients. Thus, they only needed to measure the time from registration to consultation of these critical patients. Nurses would have treated patients in ambulances as a priority, the very thing they were doing before the measures came into being.[11]

There needs to be a new approach to measurement — one that is done by trained staff, an approach that is consultative, promotes partnership between staff and management, and finally achieves alignment with the organization’s critical success factors and strategic direction.

Dean Spitzer, an expert on performance measurement, has suggested the appointment of a chief measurement officer who would be part psychologist, part teacher, part salesman and part project manager. The chief measurement officer would be responsible for setting all performance measures, assessing of the potential ‘dark side’ of a given measure, abandoning broken measures and leading all balanced scorecard initiatives.[12][13]

KPI examples

Marketing & Sales

Some examples are:

  1. New customers acquisition.
  2. Demographic analysis of individuals (potential customers) applying to become customers, and the levels of approval, rejections, and pending numbers
  3. Status of existing customers
  4. Customer attrition
  5. Turnover (i.e., revenue) generated by segments of the customer population
  6. Outstanding balances held by segments of customers and terms of payment
  7. Collection of bad debts within customer relationships
  8. Profitability of customers by demographic segments and segmentation of customers by profitability

Many of these customer KPIs are developed and managed with customer relationship management software.

Faster availability of data is a competitive issue for most organizations. For example, businesses which have higher operational/credit risk (involving for example credit cards or wealth management) may want weekly or even daily availability of KPI analysis, facilitated by appropriate IT systems and tools.

Manufacturing

Overall equipment effectiveness, is a set of broadly accepted non-financial metrics which reflect manufacturing success.

By Definition: Percentage of the actual amount of production time the machine is running to the production time the machine is available.

By Definition: Percentage of total parts produced on the machine to the production rate of machine.

By Definition: Percentage of good parts out of the total parts produced on the machine.

IT Operations

IT Project Execution

Supply chain management

Businesses can utilize KPIs to establish and monitor progress toward a variety of goals, including lean manufacturing objectives, minority business enterprise and diversity spending, environmental "green" initiatives, cost avoidance programs and low-cost country sourcing targets.

Any business, regardless of size, can better manage supplier performance with the help of KPIs robust capabilities, which include:

Main SCM KPIs will detail the following processes:

Suppliers can implement KPIs to gain an advantage over the competition. Suppliers have instant access to a user-friendly portal for submitting standardized cost savings templates. Suppliers and their customers exchange vital supply chain performance data while gaining visibility to the exact status of cost improvement projects and cost savings documentation.

Government

The provincial government of Ontario, Canada has been using KPIs since 1998 to measure the performance of higher education institutions in the province. All post secondary schools collect and report performance data in five areas – graduate satisfaction, student satisfaction, employer satisfaction, employment rate, and graduation rate.[14]

Human Resource Management

Further performance indicators

Problems

In practice, overseeing key performance indicators can prove expensive or difficult for organizations. Some indicators such as staff morale may be impossible to quantify. As such dubious KPIs can be adopted that can be used as a rough guide rather than a precise benchmark.

Key performance indicators can also lead to perverse incentives and unintended consequences as a result of employees working to the specific measurements at the expense of the actual quality or value of their work.[15][16] For example, measuring the productivity of a software development team in terms of source lines of code encourages copy and paste code and over-engineered design, leading to bloated code bases that are particularly difficult to maintain, understand and modify.

Oftentimes where there is a lack of understanding of how to develop good measures companies will resort to using percentages to quantify their measure. This is wrong and shows that the company did not do enough research on the measure.

See also

References

  1. ↑ Carol Taylor Fitz-Gibbon (1990), "Performance indicators", BERA Dialogues (2), ISBN 978-1-85359-092-4
  2. ↑ Key Performance Indicators – What Are Key Performance Indicators or KPI
  3. ↑ Developing Meaningful Key Performance Indicators
  4. ↑ Parmenter, D. (2010). Key performance indicators: Developing, implementing, and using winning KPIs, second edition (2nd ed.). Hoboken: John Wiley & Sons.
  5. ↑ http://davidparmenter.com/files/how-to-implement-winning-kpis-in-16-weeks-article.pdf
  6. ↑ http://pipfa.org.pk/Downloads/Journal/PIPFA%20Journal%20%28Oct-Dec%202010%29.pdf
  7. ↑ http://issuu.com/ringgaariesuryadi/docs/key_performance_indicators__kpi__de
  8. ↑ Parmenter, D. (2010). Key performance indicators: Developing, implementing, and using winning KPIs, second edition (2nd ed.). Hoboken: John Wiley & Sons.
  9. ↑ Spitzer, Dean. Transforming Performance Measurement: Rethinking the Way We Measure and Drive Organizational Success (Illustrated ed.). AMACOM Div American Mgmt Assn, 2007. p. 288. ISBN 9780814408919.
  10. ↑ Parmenter, D. (2010). Key performance indicators: Developing, implementing, and using winning KPIs, second edition (2nd ed.). Hoboken: John Wiley & Sons.
  11. ↑ Parmenter, D. (2010). Key performance indicators: Developing, implementing, and using winning KPIs, second edition (2nd ed.). Hoboken: John Wiley & Sons.
  12. ↑ Spitzer, Dean. Transforming Performance Measurement: Rethinking the Way We Measure and Drive Organizational Success (Illustrated ed.). AMACOM Div American Mgmt Assn, 2007. p. 288. ISBN 9780814408919.
  13. ↑ http://blog.davidparmenter.com/2013/chief-measurement-officer-working-draft-job-description/
  14. ↑ "Key Performance Indicators" (PDF). Colleges Ontario. Retrieved 2013-05-25.
  15. ↑ Robert D Austin, "Measuring and Managing Performance in Organizations"
  16. ↑ Martin Fowler (2003-08-29). "CannotMeasureProductivity". Martinfowler.com. Retrieved 2013-05-25.

Further reading

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