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(The much loved) key performance indicators

Managers love to quote their company or departmental KPIs. I think they feel in control when reeling out KPI statistics. I know accountants love quoting ROCE, WACC or CCC (return on capital employed, weighted average cost of capital and the cash conversion cycle).

It is as if KPIs are magical in the business world:keep track of your KPIs and you won’t fail, I can hear some managers say. Yet, in the words of John Naisbitt, author of the book Megatrends published in 1982: “We are drowning in information but starved for knowledge”. Or to quote Bernard Marr, a British management consultant and best selling author (writing about the 75 KPIs every manager should know “…managers end up drowning in data while thirsting for insights”.

A KPI is useless if (a) it isn’t insightful and (b) if it isn’t relevant to your business reality. Period.

Given my line of work, I tend to battle with quite a lot of KPIs when working with clients but the truth is that I rarely see a KPI which is insightful and relevant.

I expect a KPI, for instance, to reveal whether a business is gaining or losing the best customers or attracting and keeping the best employees. I don’t necessarily care what the company’s Ebitda is, since all that tells me is the score. I need to know much more than the score; I need to know how best to play and win the game, so I can advise my clients appropriately.

I, therefore, tend to discourage managers and business leaders from having a long list of KPIs. I also strongly advise them to think long and hard about which KPIs make sense for their business.

I normally segment KPIs according to four pillars: financial performance; employee satisfaction; customer satisfaction; and service (or product) quality. This segmentation helps makes sense of a company’s KPIs I think.

You will notice that the four pillars sound very much like Kaplan and Norton’s balance score card (customer, financials, internal business process, and learning and growth).

In fact – and young managers don’t always appreciate this – the very concept of a KPI was popularised with the balance score card way back in 1992 and this performance management tool remains till today one of the most popular in the business world.

I don’t think one can come up with a ‘best of...’ list of KPIs since it really does depend on the reality of the business you are looking at. This said, clients always press me to reveal which KPIs I like and if truth be told I tend, on average, to have a soft spot for the following:

When it comes to financial performance I have found the following to be very useful: economic value added; revenue and profit growth rates; and OPEX ratios.

KPIs are only valuable as a performance management tool if people use them to continuously learn and improve

When it comes to employee satisfaction, I have found the following to be very useful: employee satisfaction index; employee churn rate; and employee promoter scores.

When it comes to customer satisfaction, I have found the following to be very useful: customer complaints feedback; customer profitability scores; and net promoter scores.

When it comes to service quality, I have found the following to be very useful: customer satisfaction scores, service system audits and Rater.

Obviously, there are thousands of KPIs and it really does depend on your business, so the above quoted are admittedly a generalisation or a sweeping statement with limited value to your own business. In the case of a manufacturing business one would choose a different list of KPIs.

Yet my experience leads me to vote for the above quoted as some of the most popular and successful KPIs. I think the whole point is that you are best off segmenting your KPIs according to the four pillars and that you need more than one KPI so as to triangulate or cross check your KPIs.

It is therefore fair to say that the practice of using KPIs is still valuable to business. However, KPIs are only valuable as a performance management tool if people use them to continuously learn and improve, to take corrective action, and to ensure that there is internal congruence or alignment with the company’s strategy. If KPIs do not do this you are obviously doing something wrong.

Also be wary of common mistakes: KPIs are not fixed targets; they are only indicators and they do come with an expiry date. So revise them frequently, ensuring that they are always relevant to your business reality.

In conclusion: I think KPIs as inspired by Kaplan and Norton’s balance score card have much value to managers and business leaders but we need to make sure that people know the why and how, otherwise one ends up with something that doesn’t add value or even worse, misdirects management and the business in general.

My advice in short is: Keep using them but stop to think if you have the right KPIs for your business.

www.fenci.eu

Kevin-James Fenech is a director consultant at Fenci Consulting Ltd.

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