Key Performance Indicators

KPI

Background

The term KPI has become one of the most over-used and little understood terms
in business development and management. In theory it provides a series of
measures against which internal managers and external investors can judge the
business and how it is likely to perform over the medium and long term.
Regrettably it has become confused with metrics – if we can measure it, it is a
KPI. Against the growing background of noise created by a welter of such KPI
concepts, the true value of the core KPI becomes lost.

The KPI when properly developed should be provide all staff with clear goals and
objectives, coupled with an understanding of how they relate to the overall
success of the organisation. Published internally and continually referred to, they
will also strengthen shared values and create common goals.

What are the key components of a KPI?

The KPI should be seen as:

Only Key when it is of fundamental importance in gaining competitive advantage

and is a make or break component in the success or failure of the enterprise. For
example, the level of labour turnover is an important operating ratio, but rarely
one that is a make or break element in the success and failure of the
organisation. Many are able to operate on well below benchmark levels and still
return satisfactory or above satisfactory results.

Only relating to Performance when it can be clearly measured, quantified and

easily influenced by the organisation. For example, weather influences many
tourist related operations – but the organisation cannot influence the weather.
Sales growth may be an important performance criteria – but targets must be set
that can be measured.

Only an Indicator if it provides leading information on future performance. A

considerable amount of data within the organisation only has value for historical
purposes – for example debtor and creditor length. By contrast rates of new
product development provide excellent leading edge information.

Obviously KPI's cannot operate in a vacuum. One cannot establish a KPI without
a clear understanding of what is possible – so we have to be able to set upper
and lower limits of the KPI in reference to the market and how the competition is
performing (or in the absence of competition, a comparable measurement from a
number of similar organisations). This means that an understanding of
 benchmarks is essential to make KPI's useful (and specific to the organisation),
as they put the level of current performance in context – both for start ups and
established enterprises – though they are more important for the latter.
Benchmarks also help in checking what other successful organisations 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.

Knowledge centre Focus of activity Possible KPI

Administration 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
PEST elements, budget
ratio, high impact/ high
probability assumptions
and boundary conditions
(strategic risk assessment),
CGAL, contractual,
portfolio risk levels, %
hurdle rate, insurance
costs/sales, BEV, capital
spread ratio, cost per sqm
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 meetings/ 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
 management, time management, cost ratio, KFR, project
cutting, facilities management, stress, success, certification,
forecast grid, trade offs, wages ratio, litigation,
communication, investment appraisal, internal service satisfaction
health and safety, environmental audit, levels, effective headcount,
ISO 9000, ISO 14000, operating % mentoring
financial review (OFR), working
conditions, employee suggestion, team
building, training, internal service
satisfaction
Finance Planning and monitoring, balanced Financial ratios, budget
scorecard, budgeting, cash flow, profit ratio, % outsourcing, FER,
and loss, balance sheet, successes BEV, BEV/EBITDA, debt
failures/ lessons learnt, trade offs, age, cost of finance, capital
MBO, mosaic management, allocation ratio, capex, EFT
prioritisation, IFRS, GAAP, succession %, CER, tax charge, SPT
planning, accounting assumptions, %, gross yield, P/E,PEG,
technology audit, SCORE, decision EPS, project success, DER
making, creativity, quality circles, asset %, BDR, FCF, overdue
register, invoicing,profitability, activity, accounts, productive hours
and liquidity ratios, revaluation %, market dynamics capital
accounting, fraud, capital allocation allocation, EBITDA
profile, James' rule, contingent currency/ debt currency
liabilities, deferred consideration, cost ratio, sales tax rate %,
capitalisation, brand accounting, cost cash interest rate%,
cutting, payment systems, trade offs, depreciation %, internal
documentary credits, time keeping, service satisfaction levels,
dividend policy, cash management, effective headcount, %
currency management, sales tax, mentoring
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
Marketing/ sales Planning and monitoring, balanced CLV, budget ratio, market
scorecard , budgeting, portfolio share by segment, trial
analysis, trade offs, MBO, successes rate, competitive score,
failures/ lessons learnt, succession sales by channel, % repeat
planning, recruitment appraisal, mosaic purchase, average sales
management, prioritisation, technology value, sales productivity,
 audit, SCORE, decision making, market share, advertising
creativity, market drivers, marketing productivity by channel,
mix, branding, Single Block Theory, cost per lead, cost per
entrants, substitutes, market research, converted lead, bid
customer panel, sales channels, success rates, range sale
distribution channels, sales %, average discount,
management,investment appraisal, call service call out times,
centres, marginal profitability, quality productive hours %,
circles, customer loss, enquiry response time,
products/services (width/depth), cross seasonality ratio, price
selling, value chain, expectation index, customer
fulfillment gap, market size, customer satisfaction, advertising
transition, seasonality, networking, awareness, % branding %,
price elasticity,cascade investment, customer investment
pricing terms and conditions, review, customer transition
quantitative analysis, customer rate, value chain, %
satisfaction, reference sale, time outsourcing, MER, budget
keeping, synergy, pricing power, cost ratio, EGMG ratio,
cutting, market spread, customer customer investment
investment review (CIR), marketing return, customer churn,
myopia, product age spread, complaints, warranty
organisational buyer behaviour, claims, project success,
reference sale, customer spread, channel members, product
product age, competitive advantage, positioning variance, SER,
competitive bidding, trade offs, AER, pricing, price
negotiation, recruitment appraisal, elasticity, country spread,
game theory, channel management, seasonality ratio, customer
customer care, complaints, warranties, spread, product spread,
mystery shopper, time management, product age spread ratios,
branding, team building, training, segmental leadership,
internal service satisfaction TDA's, project success,
CIR%, competitive bidding
success %, internal service
satisfaction levels, effective
headcount, % mentoring
Production/logistics/ Planning and monitoring, balanced Cost variances, budget
service delivery scorecard, budgeting, successes ratio,order processing
failures/ lessons learnt, standard cycle, production cycle
costing, activity based costing, trade times, downtime, %
offs, MBO, succession planning, outsourcing, PLER, budget
mosaic management, prioritisation, ratio, STR, capacity
investment appraisal, design for utilisation, logistics cost,
operating efficiency, JIT, SPC, load utilisation,
FMS,technology audit, SCORE failure rates, return on
including cost cutting, decision making, plant, space utilisation, set
creativity,production efficiencies, PLM, up time, waste rates,
 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
Personnel 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
IT Planning and monitoring, balanced
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 %, E-enablement,
vendor rating, project
success, internal service
satisfaction levels, effective
headcount, % mentoring
Productivity, budget
ratio,turnover,
absenteeism, %
outsourcing (temporary
staff ratio), PER, budget
ratio, labour cost%, wages
ratio, CNCER, employee
satisfaction levels, CH/WH
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,
effective headcount, %
mentoring
Management information
 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 Planning and monitoring,
development 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 age 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
Contingency planning Authority and responsibility, planning
and monitoring, budgeting, successes
failures/ lessons learnt, creativity,
system
functionality,productivity,
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
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
Risk score, response
times, budget ratio, KFR,
% outsourcing, % SOP, %
 SCORE, investment appraisal, training, % above/below
assumptions, high risk/high probability, barrier conditions, success
Black Swan theory, failure points, rates, % budget
reducing potential for failure, setting
trigger points, action plan, risk profile,
stage gate, team building,
communication, training, TEWT,
simulations, role play, impact analysis

Establish current performance, benchmark and target levels

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 and/or 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.

Financial knowledge centre monitoring components

Factor Current Benchmark Target

Gross profit % 68 52 72
ROCE % 13 10 20
FCF 12 n/a 10
BEV/EBITDA 0.2 n/a 0.2
Gearing (DER) 15 38 15
Debt age (years) 8.5 6.3 10
Interest cover X 8.3 3.7 10
AER % 8 12 6
SER % 10 12 6
Debtor length (days) 102 95 60
Creditor length (days) 60 63 60
Stock turn/year 5 4 8
Current ratio 4 3 4
Budget ratio 95 n/a n/a
Capex ratio 8 4 7
WCR 1.7 3.2 1.7
Z score 3 7 3
Tax charge % 12 19 10
Depreciation % 15 12 n/a
Cost of finance % 3 8 3
EFT 82 n/a 88
Overdue accounts % 2 n/a 1
STP% 92 n/a 95
FER% 3 n/a 2.6
Project success ratio 90 n/a 90
Internal satisfaction level % 67 n/a 90
Effective headcount % 64 n/a 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 analysis is combined with a review of individual projects –

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

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

Project Due date On time On budget On spec Stage gate

Debt August Yes Yes Yes None
refinancing
Tax review September Yes Yes Yes None
Sales August Yes Yes Yes None
insurance

How do I use such a format to develop 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?

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 measures – can we quantify them and influence them?

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 KPI's are factors such as the levels of gearing (debt/ 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.

The balanced scorecard and KPI's

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
KPI'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.

KPI'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 KPI'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?

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.

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