In most organizations, the
The first three reports in the package present economic and production information, while the last report provides metrics associated with company objectives and department-specific initiatives. As a general rule, the KPIs provide information about the organization’s success from a strategy perspective (i.e. financial, operational, and
- Quickly show senior
management the measurable progress that has been made toward the achievement of company strategy. - Provide a fast way to explain variances in income statements.
- Make it easy to link departmental contributions to strategy attainment, which aids in performance measurement and management.
- Allow nonfinancial individuals to understand the organization’s success at achieving goals and strategies by tracking how the KPIs change over time.
Aligning KPIs with Strategy
KPIs should be part of every department’s initiatives and be closely aligned with the company’s annual business plan. When the business plan is produced, supporting strategies must be formulated, vetted, and approved among the senior managers.
At the department level, initiatives must then be developed that foster the attainment of the company’s overall business strategy. In turn, KPIs are established to measure the success of the initiatives.
Common strategies with corresponding key performance indicators include the following:
Strategies, Initiatives, and KPIs
Company Strategy |
Department Initiative |
Key Performance Indicator |
Increase Employee Satisfaction |
Companywide
Human Resources |
% Respondents Satisfied or Extremely Satisfied from Employee Surveys
Headcount
Employee Attrition |
Increase Customer Satisfaction |
Companywide
|
% Respondents Satisfied or Extremely Satisfied from Customer Surveys |
Increase Profit Margin |
Sales |
Profit/Units Sold |
Improve Credit Quality |
Sales |
Ensure Client Credit Files contain all executed documents and background checks |
Reduce Seriously Delinquent Account Receivables |
Sales |
90 Day + AR/Total AR |
Execute Targeted |
Marketing |
# of Programs Return on Marketing Investment % |
Contain and Control Costs |
|
Personnel Expense/Units Sold
Non-Personnel Expenses/Units Sold |
Improve Vendor Compliance |
Compliance |
Vendor Costs
Vendor adherence to Service Level Agreements (SLA) |
The strategies presented here are basic and need to be adjusted based on each organization’s specific business model. Also, if the product or service sold includes multiple steps, it is appropriate to include KPIs for each step; the key performance metrics can take the form of values and/or ratios.
Controllers can play a valuable role in establishing KPIs across the organization and helping management at all levels to ensure that strategies will attain the desired financial results, in support of the company’s business goals (growth and profitability).
To develop a KPI scorecard, take the following steps:
- Identify a dozen or so important activities the team can accomplish that will contribute to the strategic objectives or compliance obligations of the business.
- Group the variables in a logical order, such as Production, Operations/fulfillment, Post-purchase Customer Care, Audit, and Compliance.
- Set targets and tolerance ranges.
- Benchmark against your top competitors and add benchmarks for each KPI on your scorecard. This will help in tracking how you are performing vs. the desired performance level.
Once established, the KPIs can be presented to senior managers during regular financial reporting for their review. The KPI report should always include an explanation of why you fell short of, or exceeded, the targeted KPIs. After a few months you will be able to see how the company is trending.
A Few Caveats
Be careful about creating KPIs that, if maximized, could cause problems in another area. As soon as you place a number on a table and publish it, the responsible individuals will do all they can to improve the value and reach the target that is set.
For example, time to complete a process has a very large impact on customer satisfaction. Intuitively, shortening the time element will have a positive impact on satisfaction, except when quality is reduced. If you are going to track time, you should also track error rates or rework required. If time declines and rework also declines or at least stays the same, then you’re on the right track.
Another issue that can occur is when financial people hide behind the metrics. When asked a question, a person responds with the metric, which is appropriate at first. However, especially with ratios, you must understand the ingredients of the ratio.
For example, if a KPI is “90 Day + AR/Total AR” and if the ratio declined (a good factor), did 90 Day Collections improve (which is what you want) or did Total AR increase (which is what you do not want)? Do not just look to the ratio without understanding the significance of the numerator and denominator that generated the metric. There is no replacement for understanding the numbers cold.
I wrote this post for the Institute of Finance Management "
Editor’s Note: Regis Quirin is a financial executive with 23 years of corporate experience, including four years at the New York Stock Exchange, 14 years at JP Morgan Chase, and five years at GMAC ResCap. Since January 2000, Quirin has worked with small and medium-sized entities including joint ventures, start-up entities, and established businesses.