Key Performance Indicators KPI 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. For the typical medium enterprise, 80 monitoring elements are part of the standard Ibis kit which is initially proposed during the introduction of knowledge centers. This kit provides a rapid introduction of the key monitoring components. These are the key components of the range of monitoring elements that can be considered in the accompanying table below.

Knowledge centre Administration

Finance

Focus of activity Possible KPI Leadership, planning and monitoring, PEST elements, budget balanced scorecard, budgeting, ratio, high impact/ high portfolio theory, golden circle, decision probability assumptions making, creativity, SCORE, corporate and boundary conditions governance, territorial imperative, (strategic risk impact analysis, standard operating assessment),CGAL, RSM, procedures, mosaic management, contractual, portfolio risk prioritisation, trade offs, MBO, levels, % hurdle rate, succession planning, quality circles, insurance costs/sales, technology audit, vision statement, BEV, capital spread ratio, SBU decisions, Abacus principle, time cost per sqm or cost per keeping,barriers to entry, critical employee for facilities total success factors, business model, space, productive hours %, legacy issues, successes failures/ % meeting time, BS index, lessons learnt, authority/ responsibility, utility cost, noise, recruitment appraisal, acquisitions, accidents, % outsourcing, cascade investment, disposals, complaint resolution speed, premises review, stakeholder complaint resolution cost, relationships, trade associations, average meetings/ month, synergy, recruitment appraisal, risk utility cost/ market cost management, planning effectiveness, ratio, premises cost/ legal, health and safety, SBS, utilities, market cost ratio, space insurance, security, design for utilisation, whistleblowing, operating efficiency, time study, temperature, noise, health complaints, pensions, share options, and safety breaches, employee share savings schemes, security breaches, creativity, fringe benefits, bonus document loss, pension systems,secrecy, meeting cost, theft, AER, budget management, time management, cost ratio, KFR, project cutting, facilities management, stress, success, certification, forecast grid, trade offs, wages ratio, litigation, communication, investment appraisal, internal service satisfaction health and safety, environmental audit, levels, effective headcount, ISO 9000, ISO 14000, operating % mentoring, risk profile. financial review (OFR), working conditions, employee suggestion, team building, training, internal service satisfaction Planning and monitoring, balanced Financial ratios, budget scorecard, budgeting, cash flow, profit ratio, % outsourcing, FER, and loss, balance sheet, successes BEV, BEV/EBITDA, debt failures/ lessons learnt, trade offs, age, cost of finance, capital MBO, mosaic management, allocation ratio, capex, EFT prioritisation, IFRS, GAAP, succession %, CER, tax charge, SPT planning, accounting assumptions, %, gross yield, P/E,PEG, technology audit, SCORE, decision EPS, project success, DER making, creativity, quality circles, asset %, BDR, FCF, overdue register, invoicing,profitability, activity, accounts, productive hours and liquidity ratios, revaluation %, market dynamics capital accounting, fraud, capital allocation allocation, EBITDA profile, James' rule, contingent currency/ debt currency liabilities, deferred consideration, cost ratio, sales tax rate %, capitalisation, brand accounting, cost cash interest rate%, cutting, payment systems, trade offs, depreciation %, internal documentary credits, time keeping, service satisfaction levels, dividend policy, cash management, effective headcount, %

Marketing/ sales

Production/logistics/ service delivery

currency management, sales tax, mentoring, forecast error, depreciation, synergy, recruitment risk profile, average project appraisal, funding options, financial IRR return 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 Planning and monitoring, balanced CLV, budget ratio, market scorecard , budgeting, portfolio share by segment, trial analysis, trade offs, MBO, successes rate, competitive score, failures/ lessons learnt, succession sales by channel, % repeat planning, recruitment appraisal, mosaic purchase, average sales management, prioritisation, technology value, sales productivity, audit, SCORE, decision making, market share, advertising creativity, market drivers, marketing productivity by channel, mix, branding, Single Block Theory, cost per lead, cost per entrants, substitutes, market research, converted lead, bid customer panel, sales channels, success rates, range sale distribution channels, sales %, average discount, management,investment appraisal, call service call out times, centres, marginal profitability, quality productive hours %, circles, customer loss, enquiry response time, products/services (width/depth), cross seasonality ratio, price selling, value chain, expectation index, customer fulfillment gap, market size, customer satisfaction, advertising transition, seasonality, networking, awareness, % branding %, price elasticity,cascade investment, customer investment pricing terms and conditions, review, customer transition quantitative analysis, customer rate, value chain, % satisfaction, reference sale, time outsourcing, MER, budget keeping, synergy, pricing power, cost ratio, EGMG ratio, cutting, market spread, customer customer investment investment review (CIR), marketing return, customer churn, myopia, product age spread, complaints, warranty organisational buyer behaviour, claims, project success, reference sale, customer spread, channel members, product product age, competitive advantage, positioning variance, SER, competitive bidding, trade offs, AER, pricing, price negotiation, recruitment appraisal, elasticity, country spread, game theory, channel management, seasonality ratio, customer customer care, complaints, warranties, spread, product spread, mystery shopper, time management, product age spread ratios, branding, team building, training, segmental leadership, internal service satisfaction TDA's, project success, CIR%, competitive bidding success %, internal service satisfaction levels, effective headcount, % mentoring, forecast error, risk profile, project IRR return. Planning and monitoring, balanced Cost variances, budget scorecard, budgeting, successes ratio,order processing failures/ lessons learnt, standard cycle, production cycle

Personnel

IT

costing, activity based costing, trade times, downtime, % offs, MBO, succession planning, outsourcing, PLER, budget mosaic management, prioritisation, ratio, STR, capacity investment appraisal, design for utilisation, logistics cost, operating efficiency, JIT, SPC, load utilisation, FMS,technology audit, SCORE failure rates, return on including cost cutting, decision making, plant, space utilisation, set creativity,production efficiencies, PLM, up time, waste rates, aggregate demand policy, synergy, pollution levels, emergency management accounting, OR, delivery, out of stock %, suppliers, supply chain management, obsolescent stock %, MRP, backorder, time keeping, recycling%, back order %, inventory levels, production equipment JIT% energy efficiency age, quantitative analysis, design, ratio, peak capacity %, sophistication, capacity, TQM, TPM, supplier ratio, partnering, waste management, condition obsolescent stock, EOQ, monitoring, recycling, complaints, number of suppliers, technical support, recruitment supplier spread ratio, appraisal, distant data capture, number of components, distribution structure (warehousing, emergency call out, outlet location) and physical delivery failures, productive distribution management, obsolescent hours %, E-enablement, stock, cascade investment, time based vendor rating, project competition, time management, quality success, internal service circles, order processing, trade offs, satisfaction levels, effective scheduling, purchasing, recruitment headcount, % mentoring, appraisal, vendor ranking, networking, forecast error, risk profile, postponement, standardization, joint planning ratio, project product/ service design, team building, IRR return. training,internal service satisfaction Planning and monitoring, balanced Productivity, budget scorecard, budgeting, successes ratio,turnover, failures/ lessons learnt, trade offs, absenteeism, % MBO, succession planning, mosaic outsourcing (temporary management, prioritisation, quality staff ratio), PER, budget circles, Noah principle, decision ratio, labour cost%, wages making, creativity, technology audit, ratio, CNCER, employee SCORE, eight "S", absenteeism, satisfaction levels, CH/WH timekeeping, trade offs, overtime, ratio, overtime%, skills, industrial relations, stress, bonus training, discipline, systems, training needs analysis, time disputes, appeals, keeping, recruitment appraisal, time timekeeping ratio, management, team building, cost apprenticeship, recruitment cutting, cascade investment,wages, costs, training employee record keeping, synergy, days,productive hours %, vacation planning, training, internal whistleblowing, span of service satisfaction control, appraisals, wages ratio, diversity index, PDP, project success, internal service satisfaction levels, effective headcount, % mentoring, risk profile. Planning and monitoring, balanced Management information scorecard , budgeting,successes system failures/ lessons learnt, trade offs, functionality,productivity, MBO, investment appraisal, budget ratio,stability, web succession planning, mosaic hits, access speed, site

Product/ service development

Product age spread, R&D %,ideas, strategic fit, budget ratio, protocol score, total cycle time, project review, team creation, testing, % outsourcing, NPDER, budget ratio, license fees, IPR%, IPR infringements, IPR maintenance costs, royalty rate %, time, productive hours %, budget, specification, project success, internal service satisfaction levels, effective headcount, % mentoring, forecast error, % NPD sales over three years, risk profile, project IRR return, reverse engineering Contingency planning Authority and responsibility, planning Risk score, response and monitoring, budgeting, successes times, budget ratio, KFR, failures/ lessons learnt, creativity, % outsourcing, % SOP, % SCORE, investment appraisal, training, % above/below assumptions, high risk/high probability, barrier conditions, success Black Swan theory, failure points, rates, % budget reducing potential for failure, 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

management, prioritisation, data mining, technology audit, SCORE, decision making, creativity, Intranet, Extranet, trade offs, telecommunications and IT platform, management information systems (MIS), web design and management, cloud computing, systems, time management, synergy, recruitment appraisal, SEO, information flow map, security,mystery shopper, teleworking, cascade investment,quantitative analysis, cost cutting, time keeping, systems analysis, team building, training, artificial intelligence, quantitative analysis, modeling, encryption, recruitment appraisal, internal service satisfaction, software alignment, E-enablement. Planning and monitoring, budgeting,innovation matrix, balanced scorecard, mosaic management, prioritisation, successes failures/ lessons learnt, trade offs, MBO, succession planning,investment appraisal, TBC, technology audit, SCORE, quality circles, decision making, recruitment appraisal, creativity, product age profile, period of grace, trade offs, halo effect, identification of new product/ service concepts, synergy, cannabilisation, protocol, IPLC, certification, cascade investment, technology transfer, first mover advantage, time management,recruitment appraisal, IPR, successful development/ commercialisation, team building, training,internal service satisfaction

downtime, site click through, productive hours %, Intranet, Extranet, % outsourcing, ITER, budget ratio, security breaches, data storage, EDI, web position, quality of data, information overload, project success, internal service satisfaction levels, effective headcount, % mentoring, software aligment ratio, Eenablement ratio, risk profile

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 Gross profit % ROCE % FCF BEV/EBITDA Gearing (DER) Debt age (years) Interest cover X AER % SER % Debtor length (days) Creditor length (days) Stock turn/year Current ratio Budget ratio Capex ratio WCR Z score Tax charge % Depreciation % Cost of finance % EFT Overdue accounts % STP% FER% Project success ratio Internal satisfaction level % Effective headcount % Current 68 13 12 0.2 15 8.5 8.3 8 10 102 60 5 4 95 8 1.7 3 12 15 3 82 2 92 3 90 67 64 Benchmark 52 10 n/a n/a 38 6.3 3.7 12 12 95 63 4 3 n/a 4 3.2 7 19 12 8 n/a n/a n/a n/a n/a n/a n/a Target 72 20 10 0.2 15 10 10 6 6 60 60 8 4 n/a 7 1.7 3 10 n/a 3 88 1 95 2.6 90 90 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 refinancing August Tax review September Sales insurance August

Yes Yes Yes

Yes Yes Yes

Yes Yes Yes

None None 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 benchmarks One of the most valuable contributions that KPI analysis can deliver is an understanding of the true nature of the competitive environment. The Ibis analysis looks at the enterprise on the basis of knowledge centers as a starting point. From that one can establish the KPI's and the sensible reference points for measurement. These will vary from knowledge center to knowledge center with a mixture of global non-sector specific, global sector specific, naational market non-sector specific and local sector specific. A typical structure would comprise the following emphasis on benchmark creation for each knowledge center: Administration an emphasis on global non- sector specific; IT an emphasis on global non-sector specific; Finance a mixture of national market specific and global sector specific; Production/ service delivery global sector specific; Personnel - national market non-sector specific; Marketing a mixture of global sector specific and local sector specific; New product development global sector specific When this approach is introduced, there is a rapid re-assessment of the true competitive position of the enterprise or organisation. KPI's, benchmarks and prioritisation Once the organisation has identified the relevant KPI's and benchmarks, priorities for change and potential returns on investment become clearer. A forthcoming article on the development of Greece before and since joining the euro zone which will be available on the controversial cases page demonstrates quite clearly where Greece failed in its economic, fiscal and political development and where the emphasis for change should have been placed. 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 choices of KPI determine 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. The KPI pack - a standard part of Ibis enterprise development One of the first steps in the creation and maintenance of expert systems must be the creation of knowledge centers and the identification of relevant key performance indicators and benchmarks. To assist in the rapid creation of such bottom up planning units, Ibis has identified a basic set of key performance indicators which should serve as a backbone for any enterprise monitoring system, coupled with typical benchmarks for each main sector. Once these are introduced, the specific benchmark requirements of the enterprise can be added so that competitive advantage can be continuously improved. This key performance indicator and benchmarking leads seamlessly into improved planning and control. 30 Steps to plan development The development of knowledge centers, key performance indicators and benchmarks are central to all market driven planning and form a central part of the Ibis 30 step business planning concept. Each element links together to enable the enterprise to speedily develop its planning and monitoring system and build competitive advantage.