The following BPM tool guide is one of a series produced for ICAEW by Professor Mike Bourne of Cranfield University.
KPI stand for “Key Performance Indicator”. Some people call KPIs “performance measures” or “performance metrics” although the latter term usually combines the performance measure and the target level of performance to be achieved. KPIs can refer to financial measures, but they usually refer to the key non-financial measures that the organisation is striving to achieve.
KPIs are used to track the performance of an organisation and are widely used in the UK and USA. They are supposed to reflect “Key” indicators that are important to the company or organisation being measured. In reality, many organisations have a significant number of KPIs, so there is some debate about how “key” they are.
The “I” refers to “indicator”. I stress this point because KPIs are an indicator of performance and not real performance itself. This may seem an academic point, but it is a really important issue. People respond to KPIs.
Research and experience shows that people focus on improving the indicator not real performance. This is because the KPI is the number that everyone sees, reports and talks about. The result is that the indicator increases whilst the performance of the organisation does not.
To put KPIs in context, they need to fall into the following structure (See figure 1).
- Organisations have a set of goals or objectives. These are developed from the mission, vision and purpose of the organisation (see success mapping) and should reflect the strategy – what the organisation is trying to achieve.
- These goals and objectives are often presented in frameworks, such as the Balanced Scorecard or a Success Map, but many organisations manage without having an organising framework for their KPIs.
- Goals and Objectives are often quantified. This is done by creating a KPI for each goal or objective.
- It is common for each KPI to have a target. The target is the level of performance to be achieved by a point of time in the future. Both the level of performance and time frame should be specified.
- Measuring a goal or objective focuses attention, but it doesn’t ensure that the goal or objective will be achieved. The whole strategy, objectives, KPIs and targets should be underpinned by a set of improvement initiatives. These are the projects that are designed to change how the organisation operates and to improve performance.
Background to KPIs
Most people are aware that GE (General Electric) used non-financial measures as early as the 1950s but in France, the Tableau de Bord (which captures the strategy of an enterprise in a set of performance indicators) has been around from the early years of the last century.
More recently, KPIs have been developed in an attempt to move away from purely financial measures of performance. Financial measures are supposed to be the outcome of everything else that happens in managing the business, so it has become important to measure non-financial activity and hence our fixation with KPIs.
The performance measure record sheet (see figure 2) is a useful framework to help you create appropriate KPIs. The framework asks a series of questions to help guide your KPI development.
The Performance Measurement Record Sheet
|Title?||What is this KPI called? A title should be selected so that it captures the essence of what is being measured|
||What is the purpose of measuring this aspect of performance? If there isn’t a good reason, then the need for the KPI should be questioned.
||To which top-level business objective does this KPI relate? KPIs should be designed to support the achievement of the top-level objectives. Completing this box on the record sheet ensures this link is made. This may seem obvious, but many organisations have floating KPIs which are not linked to objectives and this causes confusion.
||What performance should be achieved and by when? This communicates precisely what you are trying to do.
||How is the KPI calculated? The formula must include precisely what is being measured. The formula will also influence behaviour, so this is often where KPIs fall down.
||Decide how often this KPI is to be measured and how often the KPI is to be reviewed
||Identify who is responsible for producing this KPI.
|Source of data?
||Specify the source of the data so that the KPI is reported consistently. In this way, performance between periods can be accurately compared.
|Who takes action?
||This identifies who has been allocated the responsibility for taking action on this KPI.
|What do they do?
||Specify in outline the types of action people should take to improve the performance of this KPI. You should be able to give guidance here rather than simply leaving this for others to interpret.
Figure 2. The Performance Measurement Record Sheet. (Questions adapted from Neely et al, 1996)
Benefits of having KPIs
There are a number of benefits that can arise from having a set of KPIs:
- KPIs can be used to communicate direction. They are more precise than goals and objectives as they tell you how success will be measured.
- KPIs are quantifiable, so progress can be objectively measured against a target.
- KPIs can make objectives visible.
- Simple reporting can be done by using RAG (red amber green) status or by presenting performance graphically.
- KPIs can be used as a trigger for action if the target isn’t being achieved.
- If used properly, KPIs can give you real insights into how your organisation is performing and you can learn a lot about your organisation from your KPIs.
Issues and pitfalls to be avoided
There are a number of issues to be aware of when developing and using KPIs:
- KPIs are often confused with real performance. The KPI is simply an indicator of that performance.
- Financial KPIs are considered more reliable than non-financial KPIs. This is predominantly because the financial measures are scrutinised more carefully by the accounting function and auditors. However, financial KPIs are backward looking. They report what has been achieved in the last period and they don’t always predict the future. Financial KPIs may be more reliable, but they may be less useful for managing the business.
- Your KPIs must reflect what you are trying to achieve. If they don’t, the organisation will follow the KPIs and not the strategy.
- Financial KPIs state the goal to be achieved, but don’t communicate strategy. This is because they only capture the target financial outcome without telling us how this outcome is to be achieved.
- KPIs will influence the behaviour of your employees, so take care in designing your KPIs. People in your organisation will not try to interpret what you mean; they will take your KPIs at face value. So if you find that groups of people are behaving irrationally, it will probably be because of poorly defined KPIs.
- KPIs are often “gamed” by people to make it appear that they are performing better than they actually are. This can be made worse by introducing bonus payments based on KPIs.
- KPIs only give good information and feedback when they are managed correctly. If management use KPIs as a stick to force better performance, then people will find ways of working round the KPIs and all the feedback information is lost.
- Using a KPI for paying a bonus will significantly reduce its value in providing performance information.
- Mike Bourne & Pippa Bourne (2011), Handbook of Managing Organisational Performance, John Wiley & Sons, London.
- Andy Neely, John Mills, Michael Gregory, Hugh Richards, Ken Platts, & Mike Bourne, M.C.S., (1996), Getting the measure of your business, Findlay, London.
- Bernard Marr, (2012), Key Performance Indicators (KPI): The 75 Measures Every Manager Needs to Know, Pearson Education ltd, Harlow, UK.