Determining the right key performances indicators is crucial for any business to set itself on the path to success. Gary Cokins, CEO of Analytics-Based Performance Management LLC, shares his views on the importance of tailoring KPIs for specific purposes. KPI

There seems to be one major question that organisations really are determined to answer – ‘What should our key performance indicators (KPIs) be?’ At the heart of selecting KPIs should be their linkage to the executive team’s strategy. However, there are different stakeholders in an organisation, such as internal managers and investor governance boards. Each stakeholder has different needs. Hence there should be different types of KPIs for different purposes.

Performance measures reported in scorecards and dashboards are one of the core components of integrated enterprise and corporate performance management (EPM/CPM) rivalling other improvement methods such as customer relationship management and managerial accounting in their importance. Regardless of the type of KPI, analytics (such as segmentation, correlation, regression, forecasting, and clustering) should ideally be embedded in each method, and they are critical for employees to achieve and exceed KPI targets.

Author Brett Knowles, founder of the consulting firm PM2 and a veteran of the balanced scorecard thought leader community, has given much thought to the topic of different KPIs for different purposes. In Volume 4, Number 6 of his firm’s Performance Measurement & Management newsletter, Brett describes different types of KPIs in an article titled ‘Five distinct views of scorecards – and their implications.” With Mr. Knowles’ permission, here they are, abbreviated with minor edits:

Financial valuation – A scorecard view is needed to describe what the organisation does in a way that the financial world can understand: monetary currency. All activities need to be financially valued, including tangible assets (such as buildings and inventories) and intangible assets (such as brand equity, employee retention, and customer loyalty). Several methodologies exist that grapple with this need, including economic value added (EVA) and activity-based costing (ABC).

The challenge is that more than 80 percent of value is created by intangible assets, yet traditional accounting systems do not do a good job of capturing intangibles. The balanced scorecard has proven to be a great tool for making intangible assets visible and valuable.

Information in this area needs to be:

  • Centred on outputs, outcomes or deliverables
  • Closely related to existing valuation mechanisms
  • Standard, repeatable and reliable

Navigation – Internal managers need to make informed decisions on a frequent basis that are consistent with the medium and long-term strategy. Strategy, cascaded downward into the organisation through a strategic balanced scorecard and into operational dashboards, dictates both what should be done and how important it is. This view of performance measures creates alignment of employees’ actions and priorities across all functional and regional boundaries and consistency across time. This is where the EPM/CPM methods with embedded analytics play a critical role.

Information in this area needs to be:

  • Very responsive to shifts in the work activities
  • Process based
  • Related to overall effectiveness and efficiency

Incentive compensation – Scorecard frameworks lend themselves to rewarding employees for contributing to the success of the organisation. Over-performers should be distinguished from under-performers. A key to this view is for the executive team to assign aggressive yet achievable target measures.

Information in this area needs to be:

  • Related to the value that the team can control and create
  • Output and outcome related
  • Accurately measurable and repeatable across locations and time

Benchmarking – An effective way to determine whether an organisation is making progress is to compare it to other ‘things’ (‘comparatives’). There are many comparatives available: competitors, best-in-class, world-class. In the true sense, even target, forecast and revised-forecast are all comparatives too.

The challenge with the benchmark view of scorecards is that the data is sparse and with ‘dirty’ quality. Also, there can be apples-and-oranges inconsistencies (such as including or excluding data, measuring different start-and-end times of processes). Comparatives do not typically go into enough detail to provide operational insights into diagnosing any identified issues and root causes, nor do they cover the full breadth of the executive team’s strategy.

Information in this area needs to be:

  • Available from other sources
  • Understandable and relatively comparable
  • Strategically related to the organisation

Evaluation – Periodically, there is the need to get an accurate measurement of how the organisation is performing. Periodically the organisation needs to undertake such activities as customer surveys, employee surveys, supplier assessments, etc.

These activities are too expensive and time consuming to be conducted often enough to be useful for navigation, but can be used to underpin selection and validation of navigation indicators, support incentive compensation models and be used in reporting performance to outside stakeholders.

Information in this area needs to be:

  • Survey based
  • Comprehensive and rigorous
  • Closely related to overall deliverables

Knowles summarises his five views by stating that most organisations need to consider their organisation’s performance in two or more of these views. For example, a shared service IT department may need to prove and measure its contribution to the organisation’s overall valuation, provide monthly navigational information for the project managers (and service level agreements for their internal customers), and develop a compensation package for use around the globe. They may also need to compare themselves to industry benchmarks.

The various and numerous stakeholders need to initially develop some confidence that the scorecard model adequately describes their view of the organisation. Consider building the various views as a way to speed up implementation of a pilot scorecard. A simple way to do this is to create a single enterprise-wide strategy map, but link different indicators to it for each of the views.

My feeling is that Knowles is on to something important. As I have previously written, there is confusion and a lack of consensus as to what a balanced scorecard is. There is ambiguity. Furthermore, many organisations neglect to first construct a strategy map from which to derive their KPIs. A strategy map is far more important than its companion balanced scorecards and cascaded operational dashboards. They are simply feedback mechanisms. Understanding that there are multiple scorecard views can bring clarification.