Show me a company that thinks it has key performance indicators (KPIs), which it measures monthly and quarterly, and I will show you measures that don't create change, alignment and growth - and have never even been KPIs.
A lot of firms are using the wrong measures, many of which they incorrectly term KPIs. In my experience, few organisations really monitor their true KPIs, because they haven't explored what a KPI actually is.
Let me explain what a KPI is by telling a story about British Airways' former chairman, Lord King, who hired a group of consultants in the eighties to determine the key measures that he should focus on to turn around his ailing company. They told him that there was one critical success factor: the timely arrival and departure of aircraft. I imagine that he wasn't impressed, since everyone in the industry knew this fact. But the consultants pointed out that this was where the firm's KPIs lay and proposed that he should concentrate on late flights. So King agreed to be notified whenever a BA service was delayed by more than a couple of hours. BA managers then knew that, if a flight were delayed longer that this time at their airport, the chairman would be phoning them to ask why. It wasn't long before BA jets had a reputation for leaving on time.
The importance of the “timely arrival and departure of aircraft” critical success factor can be seen by the impact of delayed flights on all six perspectives of the following balanced scorecard:
- Financial. Increased outgoings, including airport surcharges and the costs of overnight accommodation for seriously delayed passengers.
Customer. Dissatisfaction among delayed passengers and those people meeting them at their destination - they're potential customers.
Environment/community. Increased carbon emissions from aircraft using extra fuel to circle airports after missing their landing slots.
Learning and growth. A negative impact on staff development, as employees would tend to replicate the behaviour that had caused the delays.
Internal processes. An adverse effect on aircraft servicing schedules.
Employee satisfaction. Increased stress for staff who have to deal with unhappy passengers.
KPIs represent a set of measures focusing on those aspects of performance that are the most crucial for the continued success of an organisation. There are only a few in any one firm and, as the BA story shows, they have a profound impact if they're monitored constantly at the top.
A few KPIs can be measured weekly, but most should be measured daily or even hourly. Measuring them monthly is closing the stable door well after the horse has bolted. Most organisational measures are very much indicators of what happened in the past month or quarter. These are not KPIs. That's why a six-monthly customer satisfaction survey can never be a KPI. Some firms conduct customer surveys daily. In their case, there could be a couple of KPIs within the satisfaction measures.
All good KPIs that I've come across have commanded the attention of the chief executive, who'd contact the people responsible for them daily. A potentially career-limiting discussion with the boss is not something that people want to repeat. In BA's case, processes were put in place to prevent recurring lateness.
A KPI should show what action needs to be taken - the “late plane” indicator signalled that everyone should focus on recovering lost time. Cleaners, caterers, ground crews, flight attendants and liaison officers with air traffic controllers would all work some magic to save a minute here and a minute there while keeping up standards of service. A KPI is deep enough in the organisation that it can be tied down to an individual. Return on capital employed has never been a KPI, since it cannot be attributed to one manager.
A good KPI will affect most of the critical success factors and more than one aspect of an organisation's balanced scorecard. When the boss focuses on the KPI and everyone follows suit, the firm wins on several fronts. An improvement in a key measure within the critical success factor of customer satisfaction should have a positive impact on many other measures. The timely departure and arrival of flights helps the ground crews to improve their service, for instance, because it means less crisis management work to distract them.
My extensive research in this area has led me to conclude that there are three types of performance measures:
Key result indicators (KRIs) that tell the board how managers have performed in terms of a critical success factor or perspective of the balanced scorecard.
The performance indicators (PIs) that tell staff and managers what to do.
The KPIs that tell staff and managers what to do in order to increase performance dramatically.
Robert Kaplan and David Norton recommend that forms should have no more than 20 KPIs. Jeremy Hope and Robin Fraser suggest fewer than ten. I think there should be about ten KRIs, up to 80 PIs and about 10 KPIs. Seldom do there need to be more. In many cases it's appropriate to have fewer. The common feature of KRI is that they are the result of many actions. They give a clear picture of whether a firm is moving in the right direction and the progress it's making towards planned goals - that's the role of PIs and KPIs. KRIs that have often been mistaken for KPIs include:
Customer satisfaction or profitability
Employee satisfaction
Net profit before tax
Return on capital employed.
A car's speedometer serves as a useful analogy for a KRI: the board simply wants to know what speed the car is doing, but the managers need more information, since the car's speed is a function of what gear it's in and how many revs the engine is doing. In fact, they might be focusing on something completely different, such as how economically they are driving or how hot the engine is running. These require two completely different gauges and are PIs or maybe even KPIs.
An organisation should have a governance report comprising up to ten measures providing KRIs for the board plus a balanced scorecard comprising up to 20 measures - a mix of KPIs and PIs - for the management team. While they are, by definition, not key to the business, PIs are crucial for teams to align their daily activities with the organisation's strategic aims. They complement the KPIs and are shown with them on the balanced scorecards of the organisation and its divisions, departments and teams. PIs could include the following:
Profitability of the top ten per cent of customers
Net profit on key product lines
Number of employees participating in the staff suggestion scheme.
KRIs replace outcome measures, which typically consider activity over months or quarters. PIs and KPIs are now characterised as past, current or future measures. An example of a past measure would be the number of flights last week that were delayed. A current measure would be the continually updated tally of delayed flights. A future measure would be the number of initiatives to be started in the next month to target problems causing delays to flights. You will find that the true KPIs in your organisation are either current or future measures.
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