MANAGEMENT & ACCOUNTING

MANAGING PERFORMANCE

with KPIs
By Patrick PC Ow

Accountants play key roles in the design and maintenance of performance

reports, with a greater recognition now to include strategy and
forward-looking decision-making information.

U
nfortunately, accountants are
trained in measuring financial
Key Performance Indicators
(KPIs), not in strategy. The
challenge accountants face is to understand
the organisation’s business through non-fi-
nancial KPIs that measure and drive positive
outcomes and behaviours towards achieving
business goals and strategic objectives.
The challenge for accountants is there-
fore to find meaningful KPIs amongst the
many possibilities.

Defining Performance and KPIs

The right business questions accoun-
tants need answers to:
䡲 Where are we heading?
䡲 Have we achieved our targets?
䡲 How best do we get there?
䡲 Are we progressing toward our target?
䡲 Are there any unintended consequences
of our actions?
䡲 Why are we getting the results we are
getting?
䡲 What is likely to happen in the future?
Designing excellent information about
business performance is not rocket sci-
ence. But it does require some effort to
clearly articulate each business question
that needs to be answered in order to un-
derstand and make the decisions.
In measuring and managing organ-
isational performance, we also need an-

June 2006 • ACCOUNTANTS TODAY 29

Managing Performance with KPIs
swers to the following questions:
䡲 What Key Result Areas (KRAs) and Criti-
cal Success Factors (CSFs) define our
performance?
䡲 What prioritised goals or objectives are
needed to achieve our KRAs and CSFs?
䡲 What KPIs measure progress towards
the goals and objectives?
䡲 Who is responsible for reporting on and
answering queries about the performance
of each KPI, how often and in what forum
should such reviews be conducted?
Generally, the weightings for financial
and non-financial KPIs for best-in-class
organisations are as follows:
䡲 Financial (20 per cent).
䡲 Non-financial (80 per cent), comprising:
• Customer — 25 per cent.
• Internal Processes — 35 per cent.
• People/Learning/Growth — 20 per cent.
To generate the required profitability,
organisations must have the right and tal-
ented people who will deliver superior cus-
tomer service/products through efficient
and effective internal processes that meet
customer requirements.
Performance measures and KPIs refer
to the same concept. The words ‘metric’,
‘measure’ and ‘KPI’ are used interchange-
ably. They are quantitative or qualitative
measures that reveal the past, current or
likely future financial and non-financial
health of an organisation.
KPIs are classified as follows:
䡲 Performance Results (short and long-
term); e.g. percentage return on capital.
䡲 Performance Drivers (80-20 rule):
• Short-term operational drivers: Main-
tain or enhance “business as usual”;
e.g. teamwork, procedures and tech-
nique on the job.
• Long-term strategic drivers: Commu-
nicate priorities for change in line with
the organisational strategy; e.g. lead-
ership and investments in training and
infrastructure.
KPIs that measure performance results and
strategic drivers are like steering measures.
We need to set a course, monitor deviation,
get the right infrastructure, hire right and
talented people, and proactively engage them
to buy-into the goals and objectives.
Operational drivers are rowing mea-
30
sures. Even if the boat is moving in the
right direction, we must continuously im-
prove rowing performance.
Generally, senior manager’s reports
cover 80 per cent strategic and 20 per cent
operational drivers, whereas reports for op-
erating managers and team leaders should
cover 20 per cent strategic and 80 per cent
operational drivers.
KPIs can be either lead or lag indicators.
The word ‘lead’ suggests predictive of fu-
ture performance (e.g. customer satisfac-
tion), whereas ‘lag’ tends to measure per-
formance after the fact (e.g. gross margins).
Lead and lag indicators are like cause
and effect. Lead indicators generally pro-
vide early warning that results will or will
not live up to expectations. For example,
lengthening customer-waiting times, cap-
tured daily, is likely to be a good predictor
of monthly customer churn rates.
Developing Effective KPIs
There seems to be a lot of fuss and ef-
fort put into over-complicating something
that is quite straightforward. Use these five
simple steps:
1 Write down the goal, objective or result
you want to achieve (and thus measure).
2 Describe this result in more detail.
3 Check if there are any unintended con-
sequences of achieving this result, ei-
ther positive or negative. Make sure
it is the result you want to create be-
fore measuring it.
4 Go back to the list you created at Step
2 and list the potential things you could
count or measure that would give you
evidence of how much each of those
descriptions was actually occurring.
For each potential measure you iden-
tify, give it a high, medium or low rat-
ing for how relevant it is to your result
and a high, medium or low rating for
how feasible it would be to measure it.
Answer the following five questions:
a. Quantity — What measures tell us the
number of occasions of service, outputs
or production volume?
b. Quality — What measures indicate how
good is the provision of the service or
product in terms of:
i. External quality or customer accep-
tance (e.g. flexibility, speed or response)?
ii. Internal quality or efficient process
(e.g. cost, rework)?
c. Revenue — What measures how much
money the product or service gener-
ates (if applicable)?
d. Cost — What measures the unit cost
of the product or service, including the
activities and resources involved?
e. Speed — What measures indicate how
long it takes to perform an occasion of
service or to design, manufacture and
deliver a product?
5 Use the high, medium and low ratings
for your potential measures to shortlist
to between 1 and 3 measures for this
result.
What is Measured?
Measuring quantity, quality, revenue, cost
and speed around activities is a good place
to start. But a higher order of classification
is needed to help decide exactly what from
a performance management point of view
is being measured, as shown below:
䡲 Activity — How busy we are (doing
things)? These Activity KPIs measure
processes or how hard we work, but not
what we achieve (e.g. how much train-
ing customer service staff receive).
䡲 Efficiency — How productively we are
performing in our activities (doing things
right by reducing inputs for the same level
of output)? (e.g. cost per unit of output).
䡲 Effectiveness — What results are we
achieving upon performing our activities
(doing the right things)? (e.g. surplus
generated).
For example, customer satisfaction index
is an ideal metric (or Exact KPI) for measur-
ing how satisfied your customers are with the
current goods and services. If an Exact KPI
cannot be practically measured frequently
enough for regular decision-making, then a
Proxy KPI (or ‘next best’ metrics to Exact
KPI) is developed. Support a customer satis-
faction survey measured once a year by proxy
measures such as customer complaints, con-
tract cancellations or customer churn.
KPIs can be expressed in the following
forms:
䡲 Numbers
䡲 Index
䡲 Percentages
ACCOUNTANTS TODAY • June 2006

䡲 Ratings
䡲 Ratios
䡲 Rankings
Well-designed performance measures
answer two fundamental questions:
䡲 Are things getting better, worse, or stay-
ing the same?
䡲 Why?
Properties of Good KPIs
Here are some rules to help us decide
what makes a good KPI.
䡲 Actionable/achievable — Measures
must be realistically achievable or hu-
manly attainable.
䡲 Agreed to — Open two-way communi-
cation will secure buy-in, commitment
and full understanding, making
weighted measures and targets more
relevant and valid.
䡲 Aligned/prioritised — Prioritise, align
and integrate individual KPI to goals and
objectives, vertically and horizontally.
䡲 Controllable — Employees must have a
significant degree of control, authority,
and influence over the achievement of
the measures or performance.
䡲 Linked to a recognition/reward system
— Celebrate good performance with
monetary or non-monetary reward or rec-
ognition. Turn around poor performance.
䡲 Measurable — Job-related and quantifi-
able. Use ongoing, formal and informal,
performance feedback and open two-way
communication.
䡲 Relevance — Logical and clear relation-
ship to an objective.
䡲 Specific — Specific to the individual,
who is responsible and held accountable
for the job’s performance (or non-perfor-
mance). Use Organisational Chart as a
guide or starting point.
䡲 Timely — KPIs are time-framed.
䡲 Verifiable — Independently verifiable by
3rd party or experts.
䡲 Workload realities — As jobs are
‘clogged’ to varying extents by routine
administrative tasks, allocate KPIs in the
context with other job assignments,
bounded by limited working hours.
Three Criteria Test
All KPIs must pass the following criteria
June 2006 • ACCOUNTANTS TODAY
test:
䡲 Strategic Criteria
• KPIs enable strategic planning and
drive the deployment of actions required
to achieve objectives and strategies.
• KPIs align behaviour and initiatives
with corporate strategy, and focus the
organisation on its priorities.
䡲 Quantitative Criteria
• KPIs provide a clear understanding of
progress toward objectives and strategy,
as well as current status, rate of improve-
ment, and probability of achievement.
• KPIs identify performance gaps be-
tween current status and performance
aspirations, thereby highlighting im-
provement opportunities.
䡲 Qualitative Criteria
• KPIs perceived as valuable by the
organisation and people involved.
Targets
KPIs are often associated with targets
(e.g. within five per cent of budget). There
are four types of targets, each requiring a
different level of effort to achieve:
䡲 Incremental — A small-step improve-
ment that is comfortable to achieve (e.g.
10 per cent above last year).
䡲 Stretch — Requires “outside-the-square”
or re-engineered thinking. But must be
realistic. (e.g. 50 per cent+ improvement
over pervious year)
䡲 Entitlement — Usually associated with
Six-Sigma process improvement (e.g.
Error rates — 3.4 parts per million op-
portunities).
䡲 Impossible — Used to motivate staff to
reach for the sky or lead to frustration
because resources are insufficient and
beyond staff capability within the period
expected.
The best targets are those that are time-
specific, e.g. 50 per cent of market share
in a product category by 2007.
Reward objectively based on targets
achieved. Eliminate ‘bell-curve’ manipula-
tion.
Performance Evaluation
Performance evaluation is the process
of assessing actual performance against
target, asking, “Is the KPI the right one?”
Managing Performance with KPIs
and “Is the target appropriate?”
Evaluation encourages learning and de-
velopment until there is sufficient experi-
ence both with the indicator and target.
When there is sufficient experience and
the target is realistic and achievable, hold
people accountable for unsatisfactory per-
formance. Consistently poor performance
should be case managed.
Data Collection
Once we decide what KPI we want to
measure, decide what data we want to col-
lect. For example, if KPI is sales, do we
collect data on total sales or sales by re-
gion, by product, by salesperson?
Two basic uses of data:
䡲 Monitoring
䡲 Improvement of performance
If we are interested in monitoring per-
formance, we aggregate (i.e. combine) the
KPI data over customers, operations, ma-
chines, time, etc. It tells us at what level
and within what limits the measure is cur-
rently operating, and to indicate when
something has changed.
If we are interested in improving perfor-
mance, we disaggregate the KPIs. We iden-
tify why an individual customer might be
dissatisfied, or which machine is perform-
ing differently from the rest.
Remember to normalise performance
data or convert them to a common mea-
surement scale to enable like-to-like com-
parisons. Percentages are a common way
for achieving normalisation.
Summary
Managing with KPIs requires accoun-
tants to appreciate that some measures/
metrics are less than perfect. We need to
manage around these imperfections.
Managing with metrics is also about tak-
ing appropriate but timely corrective ac-
tions, shaping positive changes to the way
we work and perform. Right measures
therefore drive the desired behaviour to
achieve the required performance level
and targets. AT
Qualified as an accountant and lawyer, Patrick
PC Ow has keen interest in performance mea-
surement and the cascading of top-level
scorecards into personal scorecards. For ex-
change of ideas, he can be contacted via e-mail
at patrickow@gmail.com
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