Using KPIs as an Organisation Scorecard

Using KPIs as an Organisation Scorecard
By Mike Toten
WorkplaceInfo
Key Performance Indicators can be effective as more than indicators of individual employee performance. They are also widely used to measure overall organisation performance.

Whether for individual or organisation-wide use, the basic principles are similar, but the emphasis and actual measurements are different.

Note also that terminology is evolving. Some organisations prefer the term "scorecard" as an indicator of overall performance. In the last 10 years or so, the term "Balanced Scorecard" has gained momentum, as organisations attempt to widen the scope of their performance measurement in order to reflect changing community expectations and the more complex environments they have to operate in.

The principles of KPIs
The principles of SMARTA (Specific, Measurable, Agreed to, Realistic, Timely and Aligned) must underpin the KPIs. More specifically, they need to meet the following criteria:

• The measurement must make a difference, that is, it must be crucial to the business strategy and mission and reflect the strategy/mission.
• There must be an identifiable cause-and-effect relationship between actions and the measurement.
• They need to provide positive reinforcement for desired behaviour.
• Behaviour must be changed in a desired way.
• They need to make it clear to employees what they have to do in terms of performance to be "successful".
• They have to clearly distinguish between effective performance and ineffective performance.
• They must be quantifiable to a large extent, that is based on behaviour and events that can be observed and documented, and which are job-related. They should also provide ongoing feedback on standard of performance.
• Employees must clearly understand the KPIs, which need to have an unambiguous meaning. Also, consultation is more likely to result in KPIs that are relevant and valid.
• Employees must have a significant degree of control over achievement of the KPI.
• KPIs should have an appropriate time frame (see further discussion below).
• They should take into account both internal capabilities and external environmental influences.
• There needs to be alignment between individual and organisational KPIs.
• The process should be continuous, with ongoing feedback and learning.
• All areas of the business must be accountable.

Importance of balance
There are many examples of measurements that failed because they inadvertently rewarded inappropriate behaviour.

A car dealership that rewarded its service department for controlling costs might discover later that it had done so by refusing to accept customers" legitimate warranty claims, using dodgy parts or encouraging mechanics to take short-cuts with repairs. Later on, after the measurement period is over and the staff have spent their bonuses, disgruntled customers take their cars to other dealers or trade them in on rival makes.

The cost savings are then trivial compared to the loss of customers and damage to the dealer"s reputation. Similarly, if governments apply pressure on their public transport authorities to "just make the trains run on time", the authorities will focus on that measurement only and overlook issues such as safety and passenger needs.

These examples illustrate the importance of a "balanced" range of KPIs. Cost control and meeting deadlines are valid and worthy measurements, but only in conjunction with other measures that collectively take the full range of relevant issues into account – safety, customer satisfaction, employee satisfaction, legal compliance, etc.

Types of KPIs
Continuing with the theme of "balance", the authors of the pioneering book The Balanced Scorecard: Translating Strategy Into Action, Robert Kaplan and David Norton, recommend that the range of measurements chosen should include a mixture of the following:

• financial and non-financial measures
• short-term and long-term indicators
• performance drivers (future-oriented) and outcomes (past-oriented)
• quantitative and qualitative measures
• "lead" and "lag" indicators

Financial, quantitative and "lag" measurements are the traditional, most widely-used measurements. While indicating current and past performance, they are not necessarily good at predicting what will happen in the future, and on their own may lead to inappropriate, short-term behaviour being rewarded, as the above examples show. They still have a role to play, and their "actual result" status gives them credibility with many people, but on their own will not provide an accurate overall picture – hence the need for a balance.

Range of indicators to include …
Kaplan and Norton also argue that the range of indicators should include examples from each of the following:

• financial measures – including profitability, return on investment, revenue growth and mix, cost control, productivity, asset use, investment strategy
• customer perceptions – market share, customer acquisition and retention, customer satisfaction
• internal business processes -- such as customer service, innovation, operational efficiency, quality, cycles, resource consumption
• learning and growth – measures that allow the organisation to develop, change, improve, respond to changing circumstances, and remain sustainable. The main categories are employee capabilities/skills, retention, productivity, information systems capability, knowledge management, employee empowerment, motivation and values alignment

Some later commentators have recommended that the above list also include measures of "community perception", that is how well the organisation serves the general community in terms of corporate citizenship, environmental and social responsibility, etc.

The lists and categories also demonstrate that organisation strategy must underpin the KPIs used. As the book title puts it, they are the means of "translating the strategy into action".

The KPIs, or scorecard, need to provide a framework for both change management and performance management, and therefore overall development of the business.

Strategic versus traditional measures
The now well-documented growth of "intellectual capital" as a proportion of the overall value of organisations" assets is another reason to broaden KPIs away from traditional financial and purely tangible measures, and also to take a long-term and future-oriented approach with measurements.

Strategic KPIs differ from traditional ones in the following ways:

• customer-driven rather than financially driven
• more future-oriented
• more scope for flexibility
• linkages or "value chains" can be demonstrated
• provision for feedback loops, to make the process ongoing
• several factors can be evaluated together instead of in isolation (such as cost, quantity, quality and delivery).

Remember that the basic attribute of a strategy is that it requires choosing between alternatives and possibly making compromises.

How many KPIs?
For most businesses, around 20 is usually recommended, provided the mixture covers all the requirements and types discussed above. Some large organisations, however, have much more than this – over 100 in some cases.

Software providers and management consultants now market various systems and tools that automate large parts of the measurement and summary processes.

A final warning
Developing and setting effective KPIs can be a lot of hard work to get it right. It requires long-term commitment and resources. Don"t treat it as another fad or quick fix.