The 'keyless' Key Performance Indicators

The Essence of KPIs

Hmm, so what we say KPIs may not be the 'real' KPIs. Contrary to what many people believe, Key Performance Indicators should be truly the "key" and not just one of those numerous measures that are applied across different functions in an organisation.

Many companies set some KPIs to define their performance in certain areas. But too often, they are not true KPIs but simply PIs (performance indicators). Real examples may include timely creation of PO (purchase orders), percentage of POs approved within 24 hrs, timeliness of payments to suppliers, etc. They all are important performance measures but not necessarily KPIs. Read on and you would know why.

Much of the following is taken from 'Decision based reporting' white paper (2007), presented by David Parmenter of Waymark Solutions to CPA Australia.

There are three types of performance measures:
1. KRI (Key Result Indicator) => Tells you how you have done in a perspective.
Eg: Customer satisfaction, EBT, customers profitability, employee satisfaction, ROCE (Return on capital employed).

KRI information is intended to be presented to the Board, not for management, because they only show you if you're going in the right direction, but not tell you the solution to correct the situation if you're going the wrong way! KRIs are ideal tools for the Board (being BOD's role as "governance manager") to communicate the competence of the SMT (Senior Management Team).

2. PI (Performance Indicator) => Tells you what to do.
Eg: Profitability of top 10% of customers, net profit on key product lines, % increase in sales with top 10% of customers, participation of employees in suggestion scheme, duration of cash to cash cycle.

Performance indicators lie between KRI and KPI with varying merits which may be useful in balanced scorecards.

3. KPI (Key Performance Indicator) => Tells you what to do to increase performance dramatically.

Characteristics of the real KPIs:
* NON-financial measures (not expressed in any currency)
* Measured frequently (daily or 24/7)
* Acted upon CEO & Senior management team
* Understood by all staff and what corrective action is required
* Responsibility tied down to individual or team
* Have significant impact. Eg: impacting most of the core CSFs [Critical Success Factor] and more than one balanced scorecard perspective.
* Have positive impact (affecting all other performance measures positively)

One celebrated KPI case is when Lord King of Wartnaby, former chairman of British Airways turned around the company by focusing on one single key measure: delayed departure. He agreed that whenever a BA flight was delayed, he should be notified who would then call the managers to ask why. Very soon all sorts of inventive ways were introduced to catch up time on late planes and it was just 18 months before BA jets had a reputation for flying on time.


Board v. Management
KPI and PI are different from KRI as they are meant for the management, not for the BOD.

The Board get a "governance" dashboard made up of 5 to 8 KRIs. As for SMT, they will get a balanced scorecard comprising up to 20 performance measures (KPIs & PIs).

Next blog: How should we report KPIs?

Musing: The question is whether the so-called "KPI" imposed on you or your team is really KPI? If not, let's call it otherwise and get the fact straight! (EJ)