Background

The term KPI has become one of the most over-used and little understood terms in business
development and management. In theory it provides a series of measures against which
internal managers and external investors can judge the business and how it is likely to
perform over the medium and long term. Regrettably it has become confused with metrics – if
we can measure it, it is a KPI. Against the growing background of noise created by a welter of
such KPI concepts, the true value of the core KPI becomes lost.

The KPI when properly developed should be provide all staff with clear goals and objectives,
coupled with an understanding of how they relate to the overall success of the organisation.
Published internally and continually referred to, they will also strengthen shared values and
create common goals.

What are the key components of a KPI?

The KPI should be seen as:

Only Key when it is of fundamental importance in gaining competitive advantage and is a

make or break component in the success or failure of the enterprise. For example, the level of
labour turnover is an important operating ratio, but rarely one that is a make or break element
in the success and failure of the organisation. Many are able to operate on well below
benchmark levels and still return satisfactory or above satisfactory results.

Only relating to Performance when it can be clearly measured, quantified and easily
influenced by the organisation. For example, weather influences many tourist related
operations – but the organisation cannot influence the weather. Sales growth may be an
important performance criteria – but targets must be set that can be measured.

Only an Indicator if it provides leading information on future performance. A considerable

amount of data within the organisation only has value for historical purposes – for example
debtor and creditor length. By contrast rates of new product development provide excellent
leading edge information.

Obviously KPI's cannot operate in a vacuum. One cannot establish a KPI without a clear
understanding of what is possible – so we have to be able to set upper and lower limits of the
KPI in reference to the market and how the competition is performing (or in the absence of
competition, a comparable measurement from a number of similar organisations). This means
that an understanding of benchmarks is essential to make KPI's useful (and specific to the
organisation), as they put the level of current performance in context – both for start ups and
established enterprises – though they are more important for the latter. Benchmarks also help
in checking what other successful organisations see as crucial in building and maintaining
competitive advantage, as they are central to any type of competitive analysis.

Start with what you need to measure and monitor

Different organisations need to monitor different aspects of their environment. For example,
the airline industry has a complex set of issues many of which (but not all) are different from
the dairy farmer. Ibis has created a number of separate business monitoring modules for
medium sized companies which we believe cover the majority of requirements for the
development and maintenance of their organisation, that are part of a bottom up planning
system based around knowledge centres.

Knowledge centre Focus of activity Possible KPI

Administration Leadership, planning and monitoring, PEST elements, budget
balanced scorecard, budgeting, portfolio ratio, high impact/ high
theory, golden circle, decision making, probability assumptions and
creativity, SCORE, corporate governance, boundary conditions
territorial imperative, impact analysis, (strategic risk
 standard operating procedures, mosaic assessment),CGAL,
management, prioritisation, trade offs, contractual, portfolio risk
MBO, succession planning, quality circles, levels, % hurdle rate,
technology audit, vision statement, SBU insurance costs/sales, BEV,
decisions, Abacus principle, time capital spread ratio, cost per
keeping,barriers to entry, critical success sqm or cost per employee
factors, business model, legacy issues, for facilities total space,
successes failures/ lessons learnt, productive hours %, %
authority/ responsibility, recruitment meeting time,utility cost,
appraisal, acquisitions, cascade noise, accidents, %
investment, disposals, premises review, outsourcing, complaint
stakeholder relationships, trade resolution speed, complaint
associations, synergy, recruitment resolution cost, average
appraisal, risk management, planning meetings/ month, utility cost/
effectiveness, legal, health and safety, market cost ratio, premises
SBS, utilities, insurance, security, design cost/ market cost ratio,
for operating efficiency, time study, space utilisation,
complaints, pensions, share options, whistleblowing, temperature,
employee share savings schemes, noise, health and safety
creativity, fringe benefits, bonus breaches, security breaches,
systems,secrecy, meeting management, document loss, pension cost,
time management, cost cutting, facilities theft, AER, budget ratio,
management, stress, forecast grid, trade KFR, project success,
offs, communication, investment certification, wages ratio,
appraisal, health and safety, litigation, internal service
environmental audit, ISO 9000, ISO satisfaction levels, effective
14000, operating financial review (OFR), headcount, % mentoring
working conditions, employee suggestion,
team building, training, internal service
satisfaction
Finance Planning and monitoring, balanced Financial ratios, budget ratio,
scorecard, budgeting, cash flow, profit and % outsourcing, FER, budget
loss, balance sheet, successes failures/ ratio, debt age, cost of
lessons learnt, trade offs, MBO, mosaic finance, capital allocation
management, prioritisation, IFRS, GAAP, ratio, capex, EFT%, CER,
succession planning, accounting tax charge, SPT %, gross
assumptions, technology audit, SCORE, yield, P/E,PEG, EPS, project
decision making, creativity, quality circles, success, DER%, BDR, FCF,
asset register, invoicing,profitability, overdue accounts,
activity, and liquidity ratios, revaluation productive hours %, market
accounting, fraud, capital allocation dynamics capital allocation,
profile, James' rule, contingent liabilities, EBITDA currency/ debt
deferred consideration, cost capitalisation, currency ratio, sales tax rate
brand accounting, cost cutting, payment %, cash interest rate%,
systems, trade offs, documentary credits, depreciation %, internal
time keeping, dividend policy, cash service satisfaction levels,
management, currency management, effective headcount, %
sales tax, depreciation, synergy, mentoring
recruitment appraisal, funding options,
financial reporting, audit, cascade
investment, recruitment appraisal, source
and application of funds, sensitivity
analysis, investment appraisal,
convertibles, tax management, credit
management, hedging, team building,
time management,training, internal service
satisfaction
Marketing/ sales Planning and monitoring, balanced CLV, budget ratio, market
scorecard , budgeting, portfolio analysis, share by segment, trial rate,
 trade offs, MBO, successes failures/
lessons learnt, succession planning,
recruitment appraisal, mosaic
management, prioritisation, technology
audit, SCORE, decision making, creativity,
market drivers, marketing mix, branding,
Single Block Theory, entrants, substitutes,
market research, customer panel, sales
channels, distribution channels, sales
management,investment appraisal, call
centres, marginal profitability, quality
circles, customer loss, products/services
(width/depth), cross selling, value chain,
expectation fulfillment gap, market size,
customer transition, seasonality,
networking, price elasticity,cascade
investment, pricing terms and conditions,
quantitative analysis, customer
satisfaction, reference sale, time keeping,
synergy, pricing power, cost cutting,
market spread, customer investment
review (CIR), marketing myopia, product
age spread, organisational buyer
behaviour, reference sale, customer
spread, product age, competitive
advantage, competitive bidding, trade offs,
negotiation, recruitment appraisal, game
theory, channel management, customer
care, complaints, warranties, mystery
shopper, time management, branding,
team building, training, internal service
satisfaction
Production/logistics/ Planning and monitoring, balanced
service delivery scorecard, budgeting, successes failures/
lessons learnt, standard costing, activity
based costing, trade offs, MBO,
succession planning, mosaic
management, prioritisation, investment
appraisal, design for operating efficiency,
JIT, FMS,technology audit, SCORE
including cost cutting, decision making,
creativity,production efficiencies, PLM,
aggregate demand policy, synergy,
management accounting, OR, suppliers,
supply chain management, MRP,
backorder, time keeping, inventory levels,
production equipment age, quantitative
analysis, design, sophistication, capacity,
TQM, TPM, waste management, condition
monitoring, recycling, complaints,
technical support, recruitment appraisal,
distant data capture, distribution structure
(warehousing, outlet location) and
physical distribution management,
obsolescent stock, cascade investment,
time based competition, time
management, quality circles, order
competitive score, sales by
channel, % repeat purchase,
average sales value, sales
productivity, market share,
advertising productivity by
channel, cost per lead, cost
per converted lead, bid
success rates, range sale%,
average discount, service
call out times, productive
hours %, enquiry response
time, seasonality ratio, price
index, customer satisfaction,
advertising awareness, %
branding %, customer
investment review, customer
transition rate, value chain,
% outsourcing, MER, budget
ratio, EGMG ratio, customer
investment return, customer
churn, complaints, warranty
claims, project success,
channel members, product
positioning variance, SER,
AER, pricing, price elasticity,
country spread, seasonality
ratio, customer spread,
product spread, product age
spread ratios, segmental
leadership, TDA's, project
success, CIR%, competitive
bidding success %, internal
service satisfaction levels,
effective headcount, %
mentoring
Cost variances, budget
ratio,order processing cycle,
production cycle times,
downtime, % outsourcing,
PLER, budget ratio, STR,
capacity utilisation, logistics
cost, SPC, load utilisation,
failure rates, return on plant,
space utilisation, set up time,
waste rates, pollution levels,
emergency delivery, out of
stock %, obsolescent stock
%, recycling%, back order
%, JIT% energy efficiency
ratio, peak capacity %,
supplier ratio, partnering,
obsolescent stock, EOQ,
number of suppliers, supplier
spread ratio, number of
components, emergency call
out, delivery failures,
productive hours %, E-
enablement, vendor rating,
project success, internal
service satisfaction levels,
 processing, trade offs, scheduling, effective headcount, %
purchasing, recruitment appraisal, vendor mentoring
ranking, networking, postponement,
standardization, product/ service design,
team building, training,internal service
satisfaction
Personnel Planning and monitoring, balanced Productivity, budget
scorecard, budgeting, successes failures/ ratio,turnover, absenteeism,
lessons learnt, trade offs, MBO, % outsourcing (temporary
succession planning, mosaic staff ratio), PER, budget
management, prioritisation, quality circles, ratio, labour cost%, wages
Noah principle, decision making, ratio, CNCER, employee
creativity, technology audit, SCORE, eight satisfaction levels, CH/WH
"S", absenteeism, timekeeping, trade offs, ratio, overtime%, skills,
overtime, industrial relations, stress, training, discipline, disputes,
bonus systems, training needs analysis, appeals, timekeeping ratio,
time keeping, recruitment appraisal, time apprenticeship, recruitment
management, team building, cost cutting, costs, training
cascade investment,wages, employee days,productive hours %,
record keeping, synergy, vacation whistleblowing, span of
planning, training, internal service control, appraisals, wages
satisfaction ratio, diversity index, PDP,
project success, internal
service satisfaction levels,
effective headcount, %
mentoring
IT Planning and monitoring, balanced Management information
scorecard , budgeting,successes failures/ system
lessons learnt, trade offs, MBO, functionality,productivity,
investment appraisal, succession budget ratio,stability, web
planning, mosaic management, hits, access speed, site
prioritisation, data mining, technology downtime, site click through,
audit, SCORE, decision making, creativity, productive hours %, Intranet,
Intranet, Extranet, trade offs, Extranet, % outsourcing,
telecommunications and IT platform, ITER, budget ratio, security
management information systems (MIS), breaches, data storage, EDI,
web design and management, cloud web position, quality of data,
computing, systems, time management, information overload, project
synergy, recruitment appraisal, SEO, success, internal service
information flow map, security,mystery satisfaction levels, effective
shopper, teleworking, cascade headcount, % mentoring
investment,quantitative analysis, cost
cutting, time keeping, systems analysis,
team building, training, artificial
intelligence, quantitative analysis,
modeling, encryption, recruitment
appraisal, internal service satisfaction
Product/ service Planning and monitoring, Product age spread, R&D
development budgeting,innovation matrix, balanced %,ideas, strategic fit, budget
scorecard, mosaic management, ratio, protocol score, total
prioritisation, successes failures/ lessons cycle time, project review,
learnt, trade offs, MBO, succession team creation, testing, %
planning,investment appraisal, TBC, outsourcing, NPDER, budget
technology audit, SCORE, quality circles, ratio, license fees, IPR%,
decision making, recruitment appraisal, IPR infringements, IPR
creativity, product age profile, period of maintenance costs, royalty
grace, trade offs, halo effect, identification rate %, time, productive
of new product/ service concepts, hours %, budget,
synergy, cannabilisation, protocol, IPLC, specification, project
 certification, cascade investment, success, internal service
technology transfer, first mover satisfaction levels, effective
advantage, time management,recruitment headcount, % mentoring
appraisal, IPR, successful development/
commercialisation, team building,
training,internal service satisfaction
Contingency planning Authority and responsibility, planning and Risk score, response times,
monitoring, budgeting, successes failures/ budget ratio, KFR, %
lessons learnt, creativity, SCORE, outsourcing, % SOP, %
investment appraisal, assumptions, high training, % above/below
risk/high probability, Black Swan theory, barrier conditions, success
failure points, reducing potential for failure, rates, % budget
setting trigger points, action plan, risk
profile, stage gate, team building,
communication, training, TEWT,
simulations, role play, impact analysis

Establish current performance, benchmark and target levels

For each monitoring module, one can then establish what the current level of performance is
in a measurable and understandable way. This is the current performance. From industry
sources, the benchmark level can normally be introduced (getting to benchmarks is often a
difficult process and one requiring a mixture of low cunning and/or sophisticated analysis).
Then a target level of achievement can be entered. Let us take an example of a financial
management module for an established manufacturing company and what it will tell us. 

Financial knowledge centre monitoring components

Factor Current Benchmark Target

Gross profit % 68 52 72
ROCE % 13 10 20
FCF 12 n/a 10
Gearing (DER) 15 38 15
Debt age (years) 8.5 6.3 10
Interest cover X 8.3 3.7 10
AER % 8 12 6
SER % 10 12 6
Debtor length (days) 102 95 60
Creditor length (days) 60 63 60
Stock turn/year 5 4 8
Current ratio 4 3 4
Budget ratio 95 n/a n/a
Capex ratio 8 4 7
WCR 1.7 3.2 1.7
Z score 3 7 3
Tax charge % 12 19 10
Depreciation % 15 12 n/a
Cost of finance % 3 8 3
EFT 82 n/a 88
Overdue accounts % 2 n/a 1
STP% 92 n/a 95
FER% 3 n/a 2.6
Project success ratio 90 n/a 90
Internal satisfaction level % 67 n/a 90
Effective headcount % 64 n/a 75

We can gain an enormous amount of information and control from such a chart, but obviously
not all components will meet the criteria of being a KPI – otherwise we are back into the
problem of measuring everything and not concentrating on a limited number of core criteria.

Add KPI project control elements

This ratio based analysis is combined with a review of individual projects – normally based
around the three key performance criteria, whether the project is on time, on budget and on
specification. For projects involving significant expenditure the measurement of stage gate
components will also significantly add to the level of control at a knowledge center level.

An example from the same knowledge centre would look like this:

Project Due date On time On budget On spec Stage gate

Debt August Yes Yes Yes None
refinancing
Tax review September Yes Yes Yes None
Sales insurance August Yes Yes Yes None

How do I use such a format to develop and understanding of what is a KPI?

As different individuals and organisations will put a different emphasis on each item of
information a definitive list of what is and what is not a KPI will depend on individual
decisions, and will vary considerably according to the stage of company development. Start
up enterprises need to place their emphasis on structural factors; established companies on
operational performance. 

However, one can set some guidelines. The most rapid way to establish the KPI within any
set of monitoring information is to work through the three criteria in sequence.

Is the control information key to the success of the organisation?

Can we measure it and influence it?
Does it provide leading edge indications of future developments?

Which measures in the above chart are key?

Gross profit is one key measure to the success of the organisation. Research shows that
survival rates are linked to levels of gross profit; gross profit margins above that of the
competition provide clear evidence of competitive advantage.

Return on capital employed is another key measure of the success of the organisation. The
ability to use investment effectively is central to effective long term development.

Z score is a measure of the liquidity of the enterprise and clearly defines positive or negative
trends.

It would be the Ibis argument that the other components of the chart are not key – they are
valuable items of information but are not make or break aspects of company management
(unless they are grotesquely different from benchmark values).

Are these performance measures – can we quantify them and influence them?

Yes
Do these provide leading edge indications of future performance?

Yes

The conclusion from this analysis is that in financial reporting the company should
concentrate on gross profit, return on capital employed and Z scores as their key performance
indicators. Both gross profit and return on capital employed are part of the “model” balanced
scorecard for overall objectives that Ibis propose for the majority of enterprises as part of their
planning platform.

Other components within the financial reporting module that might be considered as KPI's are
factors such as the levels of gearing (debt/ equity ratio – DER), project success rates, bad
debt rates, and free cash flow (FCF). Including time, budget and specification to project
reporting would also be a natural addition.

The balanced scorecard and KPI's

In addition to the creation of the enterprise balanced scorecard, in which gross profit, return
on capital and Z scores are standard elements, the identification of KPI's in each of the
operational areas or knowledge centres also assists the enterprise in plan development.
These KPI's will change over time, but their creation as part of the initial creation of each
knowledge centre will focus and direct their operational activities.

KPI's and the management information system

In a decentralised planning system focused around knowledge centers the choice of key
performance indicators is the first stage in the re-evaluation of the information system to make
it more valuable and relevant to the operating unit rather than one that is centrally provided.
Thus the KPI determines what will drive that part of the enterprise and what information must
be collected to analyse and manage it. Such information gathering or software choices create
information networks that are relevant and provide data which is used specifically for
operational purposes, reducing information overload and information for information sake.

Where else are KPI's valuable?

The KPI is central to a number of other elements in the planning platform which provides the
basis for answering the three crucial planning questions:

Where are we?

Where do we want to be (and when)?
How are we going to get there cost effectively?

In addition to the creation of knowledge centres and business monitoring, KPI's have a vital
role to play in:

Action planning and implementation with an emphasis on management by objectives which

will include a standardised rate of return and detailed project control;

Training as part of a company wide approach to focusing staff and management on essential
operational requirements;

Central to business planning as a core part of the business plan outline;

Identification of necessary actions in change management, exit planning and survival and
recovery planning;

They set priorities for investment appraisal, and the choice of emphasis that should be given
to the main strategies within the golden circle, consolidation (including cost cutting), market
penetration, ,market development and product development.
Training on key performance indicators, the creation of a business plan and standard
operating procedures is available from Ibis.