Key Performance Indicators

Presented by Joel Leifer

Agenda for the session

What are Key Performance Indicators Why are KPIs important KPIs: A Balanced Scorecard How to implement KPIs Sample KPI Measurements and Reports

KPIs are quantifiable measurements that reflect the critical success factors of a business.

What are Key Performance Indicators?

Key Drivers that have a major impact on the performance of the business A handful of numbers that give the owner an at a glance view of the business Keep their finger on the pulse of the business Identify hot spots that need attention Act quickly to drive the business forward

Why are KPIs important?

Owners are overwhelmed and distracted with day to day activities and tasks Owners must make important decisions, quickly, with greater consequences, and often with limited information on hand Owners concentrate on the tactical decisions and neglect the strategic ones

KPIs must be Strategic: how do we differentiate from the competition

Define the market to be served Define the customer Define the critical internal processes needed to capture and satisfy customers What individual and organizational capabilities are required

KPIs: Four Strategic Perspectives

Customer: Marketing and Sales Internal Business Processes
Operations Suppliers

Financial Learning and Growth

Vision and Leadership Human Resources: Knowledge and Skills Innovation: New Products and Services

KPIs should reflect a Balanced Scorecard

KPIs should focus on a single strategy

KPIs should all be linked to the strategy KPIs should be consistent KPIs should be mutually reinforcing

Some Generic KPI Measures

Financial Customer Return on Capital; Cash Flow; Revenue; Profit Customer Satisfaction; Customer Retention; market share Quality; timeliness; costs; returns; rework Employee Retention; Employee Satisfaction; Employee Knowledge

Internal Business Process Learning and Growth

Input versus Output: The Balanced Scorecard

FINANCIAL
Net Profit, Turnover, ROCE, Revenue, etc.

Outputs

CLIENTS

BUSINESS SYSTEMS

Client Satisfaction Questionnaires, Customers Service, Client Retention %, Percentage of referring Clients etc.

Inputs

Internal Business Systems and processes, Policy & Procedures, How To & QA Manuals; Costs; Timeliness; Rework %; Returns

RESOURCES
Human Resources, IT Resources, Plant and Equipment, Working Capital; Employee Satisfaction; Knowledge and Skills

Cause and Effect: The Balanced Scorecard

KPIs: Four Types of Measures

Short Term and Long Term Internal (business processes) and External (shareholders,customers) Leading and Lagging Objective (financial) and Subjective (nonfinancial)

How should KPIs be used?

Communication Informing Diagnostic Learning NOT controlling

Diagnostic versus Strategic

Diagnostic measurements: monitor whether something is in control. Strategic measurements: define a strategy for competitive excellence and future success A Balanced Scorecard is a strategic measurement system.

Sample Balanced Scorecard

Perspective
Customer

Goals
Improve customer satisfaction

Drivers
Decrease lead time Deliver on time

Measurements
Average Lead Time % deliveries on time Number Cycle Time Average of Complaints # of Defects; % Rework Output per employee Average Unit costs Growth Rate in Sales Market Share % of sales from new ROI products and services Time from design to implementation

Internal Business

Continuously improve business processes

Reduce complaints Decrease Cycle Time Increase Quality Increase Productivity

Financial

Continuously Improve Financial Performance

Decrease Costs Increase Sales growth Increase Market Share

Innovation and Learning

Deliver new Products and Services

Increase ROI of new Increase sales products and services Reduce development time

KPIs: The Big Picture

Marketing Sales Operations Production Suppliers Finance and Admin Human Resources Innovation and Learning Stakeholders Clients Attract and retain clients Build and maintain client relationships and loyalty Provide services that satisfy clients needs and lifestyle objectives Staff

Provision of secure employment Provision of enjoyable happy work environment, thats aligned with corporate values Provide career and professional development opportunities Provide succession and exit plan for existing shareholders Provide capital growth in asset and return on investment through dividend streams

Shareholders

How to implement KPIs Step 1: Define Strategic Specifics

Define Your Strategy Vision, Mission and Values reflect strategy Set Goals
Most important business objectives What drivers are critical to success What impacts driver results (leadership, training)

How to implement KPIs Step 1: Define Strategic Specifics

Clarify the strategy Align Team members on strategic issues Identify Barriers

How to implement KPIs Step 2: Audit Existing Measures

Assess strategic fit Identify what data is available Review Measurement Processes
Accuracy Timeliness

Identify Gaps

How to implement KPIs Step 3: Develop New Measures

Bridge the gaps, examples of strategic data often missing:
Employee Satisfaction Survey Customer Satisfaction Survey Rework % On-time Delivery %

How to implement KPIs Step 3: Develop New Measures

Measures must reflect performance and progress of the business Must be quantifiable Must be compared to another number
last year budget/goal trend

Can be acted upon

How to implement KPIs Step 3: Develop New Measures

KPI title: Employee Turnover Defined: number of employees who resign or are terminated for any reason divided by the number of employees at the beginning of the year. Reductions in force excluded Measured: Payroll termination report by reason Goal: Reduce turnover by 10%; FY 2009 objective is 15 %.

How to implement KPIs Step 4: Analyze and Report

Easy to Read One Page Summary Graphs

Sample KPI Report Template

KPI Template
Curr Mth Sam e M LY Com parison % Sales Budget Mth YTD Actual %Sales YTD LY Act % Sales Com parison Budget YTD

Sales 1 Sales 2 Sales 3 Total Sales Cost 1 Cost 2 Cost 3 Total COGS Gross Profit Gross Margin Sales & Mktg. Admnin. Other 1 Other 2 Facilities Total costs EBITDA(Op.Inc) Op. Margin Interest/Dep/Amort Net Profit FTE 1 FTE 2 FTE Total Inventory Inventory Turover Back Orders Accts Rec Av Coll. Days Quality Meas.1 Quality Meas.2 Production Meas. 1 Production Meas.2 New Customers Total Customers Forecast this month Work in Progress Project 1 Projects Status Budget and Delivery

F 30 out Mgr. Project 2

F 60 out Mgr. Project 3

F 90 out Mgr. Project 4

F 120 out Mgr. Project 5

F 150 out Mgr.

Sample KPI Trend Report

Sample Trend Report

How to implement KPIs Step 5: Continuous Improvement

Set Priorities base a stragegy SMART Goals Assign Accountability Track Improvement Set New Goals

Sample KPI Measures: Marketing and Sales

Market Share Leads by Source Number of Prospects Conversion Ratio Average Dollar Sale Profit Per Customer Sales by Product Line Number of Transactions/Customer Customer Satisfaction

Sample KPI Measures: Marketing and Sales

Number of new customers Brand Awareness
Value of Brand

Sales Mix Customer Profitability Number of Orders Customer Retention

Reasons for losses

Number of Customers Referrals

Lifetime Value of a customer

Sample KPI Measure: Financial

Dividends Current Ratio Quick Ratio Credit rating Days Sales Outstanding Revenue Profit Margin Gross margin Revenue/Expense Ratio Variable vs non-variable expenses Credit rating Return on Investment

Sample KPI Measures: Financial

Cash in Bank Retained Earnings Cost of Goods Sold Inventory Turns/Year Cash Flow Return on Capital Bank Overdraft Inventory Aged Accounts Receivable Aged Accounts Payable Sales Per Square Foot EBITDA Capital Expenditures Debt to Equity Ratio

Sample KPI Measures: Financial

R&D Expenditures Training Expenditures Marketing Expenditures Depreciation Fixed Assets Current Liabilities Interest Expense Bad Debts Discounts Given/Taken

Sample KPI Measures: Operations/Production

Quality Data Timeliness Response Time Re-work (#,%) Cost per unit Number of Employees Capacity Utilization Safety
# Workers Comp Claims Days lost

Environmental Back orders Costs

Sample KPI Measures: Operations/Production

Post Sales Service
Warranty Claims (#,%) Repairs Returns Defects

Work in Process Labour Hours Overtime Cycle Time Downtime Maintenance Costs

Number of Complaints Value of Customer Complaints # orders failed before delivery # Orders not delivered on time

Sample KPI Measures: People

Employee Turnover Employee Satisfaction Output per employee
Sales per employee Productivity per employee

Drivers of Performance Drivers of Capabilities

Learning Skills mix

Core Values
Customer focus Innovation

Quality of Outputs

Sample KPI Measures: People

Number of Employees # of mangers Manager/employee ratio Absenteeism # new employees Hours or $ of training per employee Ratio direct to overhead employees Cost per new hire % employees fully trained

Sample KPI Measures: Innovation

Revenue from new products Revenue from new market segments Revenue from new geography Number of new customers Time to market for new products/service R&D expense

Sample KPI Measures: Suppliers

Satisfaction with Suppliers Responsiveness Costs compared with competition On-time Delivery Overall Satisfaction/Value Defects (#,%) Credit terms Number of Suppliers Supplier Satisfaction Overall Satisfaction: Opportunity for profits while providing quality Responsiveness Payment

The Top Ten Drivers of Business Performance*

Low levels of late deliveries to customers Higher employee training expenditure % of workforce trained Low absenteeism rate Higher Marketing Expenditures Higher Capital Expenditures Higher R&D Expenditure Higher Stock Turns Higher Cash Balances Lower Debt Levels (more short term than long term)

* Source: Cranfield School of Management, UK

Four Things Every Owner Should Know

The profitability of the business depends on how well the employees consistently perform critical activities. Employees perform best when they understand how their performance affects the bottom line, and how their performance is measured.

Four Things Every Owner Should Know

Small changes in critical areas can have a great impact on the bottom line. What gets measured gets done, and what gets rewarded gets done again.

Sources and References

ActionCOACH System Files ActionCOACH Forum Joel Leifer, Action Coach Kaplan and Norton, 2001: The Strategy Focused Organization: How Balance Scorecard Companies Thrive in the New Business Environment Harvard Business Review Microsoft Business Solutions

Sources and References

Hugh Latif and Associates Metrus Group (www.metrus.com) www.businesslinkwessex.co.uk www.productivesolutions.com.au/kpi.htm www.managing-people-performance.com www.icancit.com