4 Steps To Building Key Performance Indicators!

Key Performance Indicators (KPI’s) are measures that a business uses to track performance and measure outcomes.

A Key Performance Indicators quantifies how successful an organisation is in achieving its objectives. No two organisations would utilise the exact same set of KPI’s to assess performance, even if they are direct competitors in the same industry.

Factors To Determine Prior To Developing Your KPI’s

Prior to developing a Key Performance Indicators, there are a number of factors that need to be taken into account. These include understanding what is being measured, and ensuring that what is being measured is useful and quantifiable in terms of determining whether an objective has been achieved.

The trouble is that there are thousands of KPI’s to choose from and companies often struggle to select the right ones for their business. The wrong KPI’s bring the danger of pointing people in the wrong direction and even encouraging them to deliver the wrong things.

Four Key Areas In Developing KPI’s Are As Follows

1. Financial

What will deliver profitability to the business? These are outcomes which show that the strategy is being delivered for the business. The KPI needs to be financial in nature or based on financial values. Examples include profit per month, sales revenue per month, return on investment per annum.

2. Customer

How can we tell if our customers are happy with us and we are creating value for them? These are outcomes which will help show that the strategy is being delivered. Does the KPI tell us whether the customer is satisfied? Examples include customer complaints per month, number of repeat customers per month, number of new customers per month, percentage of market share per quarter.

3. Internal Process

What do we need to do well in order to succeed? These are processes that will help to deliver the strategy. Is the KPI linked to something that is important to the customer or is it linked to key aspects of organisational efficiency/waste? Examples include the percentage of on-time deliveries per month, number of new leads converted to customers per month, average time taken to get new products to market per annum.

4. Learning and Growth

Where do we need to develop to succeed? These are inputs which are the essential to the delivery of the strategy. Is the KPI linked to indicators of current/future skills of staff or creating future growth opportunities for the organisation? Examples include training hours per quarter, employee turnover per quarter, new products developed per quarter.

The Three Common Pitfalls In Developing KPI’s Involve

1. Trends or variances

It is wrong to express a Key Performance Indicator as a trend, such as ‘increase in sales revenue per month’. A better measure would be ‘sales revenue per month’ as the information is captured just once but can be used to analyse performance in a number of ways.

2. Percentage changes

While a percentage change might be useful information to have, capturing this as an absolute amount allows a great understanding of the organisations strategic objective.

3. Variances from budgets or other targets

A KPI would normally reflect an actual performance, which would then be compared to a budget in order to calculate the variance.

Understanding Your Business performance Objective is Key!

Effective KPI’s are closely tied to strategic objectives (be it for the entire company, a business unit or an individual). From a strategic perspective, understanding your organisation’s performance objectives is the key to the successful execution of the strategy. It is those critical success factors drilled down from performance objectives that need to be measured by KPI’s.

At AS Partners, we deal with a diverse range of business and get an insight into effective and non-effective strategic objectives in a broad range of industries. Our understanding that each business has a point of difference makes for us to be a leader in assessing the successfulness of the implementation of KPI’s.

By Julian Dobosz, Accountant

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