kpi

Key Performance Indicators

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KPI

Background

The term KPI has become one of the most over-used and little understood terms in businessdevelopment and management. In theory it provides a series of measures against which internalmanagers and external investors can judge the business and how it is likely to perform over the mediumand 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 thecore KPI becomes lost.

The KPI when properly developed should be provide all staff with clear goals and objectives, coupledwith an understanding of how they relate to the overall success of the organisation. Published internallyand 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 breakcomponent in the success or failure of the enterprise. For example, the level of labour turnover is animportant operating ratio, but rarely one that is a make or break element in the success and failure of theorganisation. Many are able to operate on well below benchmark levels and still return satisfactory orabove satisfactory results.

Only relating to Performance when it can be clearly measured, quantified and easily influenced by theorganisation. For example, weather influences many tourist related operations – but the organisationcannot influence the weather. Sales growth may be an important performance criteria – but targetsmust be set that can be measured.

Only an Indicator if it provides leading information on future performance. A considerable amount ofdata within the organisation only has value for historical purposes – for example debtor and creditorlength. 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 understandingof what is possible – so we have to be able to set upper and lower limits of the KPI in reference to themarket and how the competition is performing (or in the absence of competition, a comparablemeasurement from a number of similar organisations). This means that an understanding ofbenchmarks is essential to make KPI's useful (and specific to the organisation), as they put the level ofcurrent performance in context – both for start ups and established enterprises – though they are moreimportant for the latter. Benchmarks also help in checking what other successful organisations see ascrucial in building and maintaining competitive advantage, as they are central to any type of competitiveanalysis.

Start with what you need to measure and monitor

Different organisations need to monitor different aspects of their environment. For example, the airlineindustry has a complex set of issues many of which (but not all) are different from the dairy farmer. Ibishas created a number of separate business monitoring modules for medium sized companies which webelieve 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. For the typical mediumenterprise, 80 monitoring elements are part of the standard Ibis “kit” which is initially proposed duringthe introduction of knowledge centers. This “kit” provides a rapid introduction of the key monitoringcomponents. These are the key components of the range of monitoring elements that can beconsidered in the accompanying table below.

Knowledge centre Focus of activity Possible KPI

Administration Leadership, planning and monitoring,balanced scorecard, budgeting,portfolio theory, golden circle, decisionmaking, creativity, SCORE, corporategovernance, territorial imperative,

PEST elements, budgetratio, high impact/ highprobability assumptionsand boundary conditions(strategic risk



impact analysis, standard operatingprocedures, mosaic management,prioritisation, trade offs, MBO,succession planning, quality circles,technology audit, vision statement,SBU decisions, Abacus principle, timekeeping,barriers to entry, criticalsuccess factors, business model,legacy issues, successes failures/lessons learnt, authority/ responsibility,recruitment appraisal, acquisitions,cascade investment, disposals,premises review, stakeholderrelationships, trade associations,synergy, recruitment appraisal, riskmanagement, planning effectiveness,legal, health and safety, SBS, utilities,insurance, security, design foroperating efficiency, time study,complaints, pensions, share options,employee share savings schemes,creativity, fringe benefits, bonussystems,secrecy, meetingmanagement, time management, costcutting, facilities management, stress,forecast grid, trade offs,communication, investment appraisal,health and safety, environmental audit,ISO 9000, ISO 14000, operatingfinancial review (OFR), workingconditions, employee suggestion, teambuilding, training, internal servicesatisfaction

assessment),CGAL, RSM,contractual, portfolio risklevels, % hurdle rate,insurance costs/sales,BEV, capital spread ratio,cost per sqm or cost peremployee for facilitiestotal space, productivehours %, % meeting time,BS index, utility cost,noise, accidents, %outsourcing, complaintresolution speed,complaint resolution cost,average meetings/ month,utility cost/ market costratio, premises cost/market cost ratio, spaceutilisation, whistleblowing,temperature, noise, healthand safety breaches,security breaches,document loss, pensioncost, theft, AER, budgetratio, KFR, projectsuccess, certification,wages ratio, litigation,internal servicesatisfaction levels,effective headcount, %mentoring, risk profile.

Finance Planning and monitoring, balancedscorecard, budgeting, cash flow, profitand loss, balance sheet, successesfailures/ lessons learnt, trade offs,MBO, mosaic management,prioritisation, IFRS, GAAP, successionplanning, accounting assumptions,technology audit, SCORE, decisionmaking, creativity, quality circles, assetregister, invoicing,profitability, activity,and liquidity ratios, revaluationaccounting, fraud, capital allocationprofile, James' rule, contingentliabilities, deferred consideration, costcapitalisation, brand accounting, costcutting, payment systems, trade offs,documentary credits, time keeping,dividend policy, cash management,currency management, sales tax,depreciation, synergy, recruitmentappraisal, funding options, financialreporting, audit, cascade investment,recruitment appraisal, source andapplication of funds, sensitivityanalysis, investment appraisal,convertibles, tax management, creditmanagement, hedging, team building,time management,training, internalservice satisfaction

Financial ratios, budgetratio, % outsourcing, FER,BEV, BEV/EBITDA, debtage, cost of finance,capital allocation ratio,capex, EFT%, CER, taxcharge, SPT %, grossyield, P/E,PEG, EPS,project success, DER%,BDR, FCF, overdueaccounts, productivehours %, market dynamicscapital allocation, EBITDAcurrency/ debt currencyratio, sales tax rate %,cash interest rate%,depreciation %, internalservice satisfaction levels,effective headcount, %mentoring, forecast error,risk profile, averageproject IRR return

Marketing/ sales Planning and monitoring, balancedscorecard , budgeting, portfolioanalysis, trade offs, MBO, successes

CLV, budget ratio, marketshare by segment, trialrate, competitive score,



failures/ lessons learnt, successionplanning, recruitment appraisal,mosaic management, prioritisation,technology audit, SCORE, decisionmaking, creativity, market drivers,marketing mix, branding, Single BlockTheory, entrants, substitutes, marketresearch, customer panel, saleschannels, distribution channels, salesmanagement,investment appraisal,call centres, marginal profitability,quality circles, customer loss, products/services (width/depth), cross selling,value chain, expectation fulfillmentgap, market size, customer transition,seasonality, networking, priceelasticity,cascade investment, pricingterms and conditions, quantitativeanalysis, customer satisfaction,reference sale, time keeping, synergy,pricing power, cost cutting, marketspread, customer investment review(CIR), marketing myopia, product agespread, organisational buyerbehaviour, reference sale, customerspread, product age, competitiveadvantage, competitive bidding, tradeoffs, negotiation, recruitment appraisal,game theory, channel management,customer care, complaints, warranties,mystery shopper, time management,branding, team building, training,internal service satisfaction

sales by channel, %repeat purchase, averagesales value, salesproductivity, market share,advertising productivity bychannel, cost per lead,cost per converted lead,bid success rates, rangesale%, average discount,service call out times,productive hours %,enquiry response time,seasonality ratio, priceindex, customersatisfaction, advertisingawareness, % branding %, customer investmentreview, customertransition rate, valuechain, % outsourcing,MER, budget ratio, EGMGratio, customer investmentreturn, customer churn,complaints, warrantyclaims, project success,channel members,product positioningvariance, SER, AER,pricing, price elasticity,country spread,seasonality ratio,customer spread, productspread, product agespread ratios, segmentalleadership, TDA's, projectsuccess, CIR%,competitive biddingsuccess %, internalservice satisfaction levels,effective headcount, %mentoring, forecast error,risk profile, project IRRreturn.

Production/logistics/service delivery

Planning and monitoring, balancedscorecard, budgeting, successesfailures/ lessons learnt, standardcosting, activity based costing, tradeoffs, MBO, succession planning,mosaic management, prioritisation,investment appraisal, design foroperating efficiency, JIT,FMS,technology audit, SCOREincluding cost cutting, decision making,creativity,production efficiencies, PLM,aggregate demand policy, synergy,management accounting, OR,suppliers, supply chain management,MRP, backorder, time keeping,inventory levels, production equipmentage, quantitative analysis, design,sophistication, capacity, TQM, TPM,waste management, conditionmonitoring, recycling, complaints,technical support, recruitmentappraisal, distant data capture,distribution structure (warehousing,

Cost variances, budgetratio,order processingcycle, production cycletimes, downtime, %outsourcing, PLER,budget ratio, STR,capacity utilisation,logistics cost, SPC, loadutilisation, failure rates,return on plant, spaceutilisation, set up time,waste rates, pollutionlevels, emergencydelivery, out of stock %,obsolescent stock %,recycling%, back order %,JIT% energy efficiencyratio, peak capacity %,supplier ratio, partnering,obsolescent stock, EOQ,number of suppliers,supplier spread ratio,number of components,



outlet location) and physicaldistribution management, obsolescentstock, cascade investment, time basedcompetition, time management, qualitycircles, order processing, trade offs,scheduling, purchasing, recruitmentappraisal, vendor ranking, networking,postponement, standardization,product/ service design, team building,training,internal service satisfaction

emergency call out,delivery failures,productive hours %, E-enablement, vendorrating, project success,internal servicesatisfaction levels,effective headcount, %mentoring, forecast error,risk profile, joint planningratio, project IRR return.

Personnel Planning and monitoring, balancedscorecard, budgeting, successesfailures/ lessons learnt, trade offs,MBO, succession planning, mosaicmanagement, prioritisation, qualitycircles, Noah principle, decisionmaking, creativity, technology audit,SCORE, eight "S", absenteeism,timekeeping, trade offs, overtime,industrial relations, stress, bonussystems, training needs analysis, timekeeping, recruitment appraisal, timemanagement, team building, costcutting, cascade investment,wages,employee record keeping, synergy,vacation planning, training, internalservice satisfaction

Productivity, budgetratio,turnover,absenteeism, %outsourcing (temporarystaff ratio), PER, budgetratio, labour cost%, wagesratio, CNCER, employeesatisfaction levels, CH/WH ratio, overtime%,skills, training, discipline,disputes, appeals,timekeeping ratio,apprenticeship,recruitment costs, trainingdays,productive hours %,whistleblowing, span ofcontrol, appraisals, wagesratio, diversity index, PDP,project success, internalservice satisfaction levels,effective headcount, %mentoring, risk profile.

IT Planning and monitoring, balancedscorecard , budgeting,successesfailures/ lessons learnt, trade offs,MBO, investment appraisal,succession planning, mosaicmanagement, prioritisation, datamining, 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, timemanagement, synergy, recruitmentappraisal, SEO, information flow map,security,mystery shopper, teleworking,cascade investment,quantitativeanalysis, cost cutting, time keeping,systems analysis, team building,training, artificial intelligence,quantitative analysis, modeling,encryption, recruitment appraisal,internal service satisfaction, softwarealignment, E-enablement.

Management informationsystemfunctionality,productivity,budget ratio,stability, webhits, access speed, sitedowntime, site clickthrough, productive hours%, Intranet, Extranet, %outsourcing, ITER, budgetratio, security breaches,data storage, EDI, webposition, quality of data,information overload,project success, internalservice satisfaction levels,effective headcount, %mentoring, softwarealigment ratio, E-enablement ratio, riskprofile

Product/ servicedevelopment

Planning and monitoring,budgeting,innovation matrix, balancedscorecard, mosaic management,prioritisation, successes failures/lessons learnt, trade offs, MBO,succession planning,investmentappraisal, TBC, technology audit,SCORE, quality circles, decision

Product age spread, R&D%,ideas, strategic fit,budget ratio, protocolscore, total cycle time,project review, teamcreation, testing, %outsourcing, NPDER,budget ratio, license fees,



making, recruitment appraisal,creativity, product age profile, period ofgrace, trade offs, halo effect,identification of new product/ serviceconcepts, synergy, cannabilisation,protocol, IPLC, certification, cascadeinvestment, technology transfer, firstmover advantage, timemanagement,recruitment appraisal,IPR, successful development/commercialisation, team building,training,internal service satisfaction

IPR%, IPR infringements,IPR maintenance costs,royalty rate %, time,productive hours %,budget, specification,project success, internalservice satisfaction levels,effective headcount, %mentoring, forecast error,% NPD sales over threeyears, risk profile, projectIRR return, reverseengineering

Contingency planning Authority and responsibility, planningand monitoring, budgeting, successesfailures/ lessons learnt, creativity,SCORE, investment appraisal,assumptions, high risk/high probability,Black Swan theory, failure points,reducing potential for failure, settingtrigger points, action plan, risk profile,stage gate, team building,communication, training, TEWT,simulations, role play, impact analysis

Risk score, responsetimes, budget ratio, KFR,% outsourcing, % SOP, %training, % above/belowbarrier conditions,success rates, % budget

Establish current performance, benchmark and target levels

For each monitoring module, one can then establish what the current level of performance is in ameasurable and understandable way. This is the current performance. From industry sources, thebenchmark level can normally be introduced (getting to benchmarks is often a difficult process and onerequiring a mixture of low cunning and/or sophisticated analysis). Then a target level of achievementcan be entered. Let us take an example of a financial management module for an establishedmanufacturing 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 allcomponents will meet the criteria of being a KPI – otherwise we are back into the problem of measuringeverything 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 thethree key performance criteria, whether the project is on time, on budget and on specification. Forprojects involving significant expenditure the measurement of stage gate components will alsosignificantly 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

Debtrefinancing

August Yes Yes Yes None

Tax review September Yes Yes Yes None

Sales insurance August Yes Yes Yes None

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 adefinitive list of what is and what is not a KPI will depend on individual decisions, and will varyconsiderably according to the stage of company development. Start up enterprises need to place theiremphasis 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 ofmonitoring 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 ratesare linked to levels of gross profit; gross profit margins above that of the competition provide clearevidence of competitive advantage.

Return on capital employed is another key measure of the success of the organisation. The ability touse 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 valuableitems of information but are not make or break aspects of company management (unless they aregrotesquely 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 grossprofit, 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 Ibispropose 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 factorssuch as the levels of gearing (debt/ equity ratio – DER), project success rates, bad debt rates, and freecash flow (FCF). Including time, budget and specification to project reporting would also be a naturaladdition.

The balanced scorecard and KPI's

In addition to the creation of the enterprise balanced scorecard, in which gross profit, return on capitaland Z scores are standard elements, the identification of KPI's in each of the operational areas orknowledge 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 theiroperational activities.

The KPI and the information system

KPI’s significantly assist in the creation of an effective information system. Five different tranches ofinformation with different times requirements should be considered within the well run enterprise toensure that the all too common problem of information overload is reduced. They are:

Ad hoc information requirements (for dealing with unforeseen changes in the environment – an examplewould be recruitment appraisal);

Weekly information requirements (for immediate control purposes – an example would be cash flow);

Monthly information requirements (for monitoring purposes – an example would be budget and costvariances);

Quarterly information requirements (for purposes of redirecting the enterprise within the overall plan –an example would be the ideas day);

Annual information requirements (for planning purposes – an example would be econometricforecasting)

KPI’s when introduced into a monthly knowledge center based monitoring system become central to theunderstanding of organizational performance.

KPI’s when central to the monitoring system also drive software choices within each of the knowledgecenters. Effective software alignment with knowledge centers and key performance indicators has beenshown to have numerous benefits:

Improving the quality of monitoring within the enterprise;

Simplifying bottom up planning systems;

Enhancing skills;

Improving overall productivity;

Improving team integration;

Increasing the potential for management by objectives (MBO);

Providing valuable structure for induction, maintenance and development training

Where else are KPI's valuable?

The KPI is central to a number of other elements in the planning platform which provides the basis foranswering 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 playin:

Action planning and implementation with an emphasis on management by objectives which will includea standardised rate of return and detailed project control;

Training as part of a company-wide approach to focusing staff and management on essentialoperational 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 recoveryplanning;

They set priorities for investment appraisal, and the choice of emphasis that should be given to the mainstrategies within the golden circle, consolidation (including cost cutting), market penetration, ,marketdevelopment and product development.

Training on key performance indicators, the creation of a business plan and standard operatingprocedures is available from Ibis.

How can I get more information about how the KPI fits into the development of the businessplan?

Ibis has a number of "model" plans available. The plan for an established company, Castellan, isavailable in a summarized form as a download. Note that the KPI’s chosen are not the complete listpresent in the full plan.

More information on the way in which Ibis can contribute to your business plan development isprovided at Advantage Ibis

E-mail Ibis now.

More information on the Ibis approach is also available on the FAQ page..

If you are an established business you can find an on-line quiz to analyse your businessplanning and control development HERE

If you are a start up business you can find an on-line quiz to analyse your business planning andcontrol development HERE

If you are planning for high growth click HERE

Business Plan SOP

A comprehensive, easy to use 188 page manual containing scores ofworksheets and notes. The contents follow the business plan outline,and have been rigorously tested during years of training throughout theworld. The Ibis business plan manual is delivered in Word format, sothat users can complete the worksheets and transfer them into thebody of their own business plan.

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14 November 2012 18:51:53

Ibis Associates

European office La Vieille Loge, La Milliere, 86700, Romagne, Poitiers, France

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