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Performance: The Role of Key Performance Indicators (KPIs)

Posted on Tuesday, Sep 11th 2007

By David Hatch, Guest Author

Businesses thrive or fail based on their ability to identify, define, track and act upon key performance metrics/indicators (KPIs). Executives and line-of-business management are increasingly feeling the pressure to establish the right KPIs to enable timelier and more accurate decisions. The faster and more accurately KPIs can be accessed, reviewed, analyzed and acted upon, the better chance an organization has for success.

KPIs are at the heart of a performance management initiative, and are meant to provide strategic measures of success (or failure) rather than just measuring non-critical activities and processes. KPIs can provide “business alignment” across all levels of an organization (business units, departments and individuals) with clearly defined and “cascaded targets” and benchmarks to create accountability and track progress. The success of any performance management program is thus dependant on an effective strategy for defining, tracking and acting upon KPIs.

Business executives have many options for implementing a KPI-based performance program, and Aberdeen research conducted as part of an upcoming study, to be published at the end of September 2007, reveals some interesting findings regarding best-in-class (BIC) companies (those that have attained the highest performance results across several financial, customer, process and organizational measures). Best-in-class (BIC) companies have implemented KPI strategies, capabilities, and technologies that have delivered positive results toward improving performance:

* 70% of BIC companies have improved their time-to-decision by greater than 10%; vs. 7% of industry average and 5% of laggard companies.

* 33% of BIC companies improved market share by greater than 10%; vs. 14% of industry average and 3% of laggard companies.

* 47% of BIC companies improved profitability and revenue by greater than 10%; vs. 22% of industry average and 13% of laggard companies.

Best-in-class companies are almost twice as likely as other survey respondents to have dashboard and auto-alert reporting capabilities in-place. As a whole, BIC companies have selected technologies and services that center around providing rapid access to KPI information (Dashboards, Scorecards and Auto-alert reporting) and assistance in understanding the KPI process via management consulting & training.

53% of best-in-class companies are using a balanced scorecard approach. Of those who are utlizing a balanced scroecard, the style and approach is distinctly different among BIC companies vs. industry average and laggard organizations. The differences lay mainly in the level of complexity and logical mapping between strategies and KPIs. Aberdeen research has found that BIC companies are more likely to incorporate a “strategy map” into the balanced socrecard process, and cascade KPI metrics to departmental goals.

What are the common themes that characterize firms enjoying best-in-class performance? The following is a short list of the top characteristics as reported by respondents to Aberdeen’s primary research survey (click here to take the survey!):

  • Institutionalization of a KPI strategy – best-in-class companies are instituting a KPI culture for alignment of business strategy and company goals.
  • Continuous revision of KPI definitions – business changes rapidly, and as it does, so must the KPIs used to measure it.
  • Delivery of KPI information to all decision makers – Dashboards, scorecards and auto-alert reporting are being used by best-in-class companies.
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David, interesting business results achieved by the BIC companies – have any of them attached an ROI to the systems, consulting, training, etc. used to achieve those results?
I’m also curious to know if your research will shed some light on how BIC companies go about identifying the KPIs with the most impact to begin with.
Thanks,
-Ron

Ron Dimon Wednesday, September 12, 2007 at 8:57 AM PT

Ron,

I did not measure individual ROI metrics on each of the capabilities you listed, but we did conduct several 1 on 1 interviews regarding the selection of KPIs. I found that most companies were focusing on financial and operational KPIs (i.e. margins, profitability, revenue, cost, inventory turns, products shipped, bookings/backlog, etc) vs. customer and organizations KPIs (staff hours, productivity, cust retention, cross-sell/upsell, diversity, employee retention, staff experience, quality, etc…

David Hatch Wednesday, September 12, 2007 at 5:52 PM PT

Thanks David.
If you’re interested in Scorecard best practices, my friend Toby Hatch’s new book will be published Nov. 2 by Wiley- “Scorecard Best Practices: Design, Implementation, and Evaluation” – it’s all based on survey response data.
Regards,
-ROn

Ron Dimon Thursday, September 13, 2007 at 5:31 AM PT

[…] Aberdeen research study reveals some interesting findings regarding best-in-class companies that have attained the highest […]

Aberdeen research study: role of KPIs » KPI Library - Where Good KPIs Meet Tuesday, October 9, 2007 at 4:05 PM PT

Thanks for the post. I sometimes have a tough sell convincing smaller business owners of the merits of implementing KPIs so I will bookmark this as sales amunition!

Tom Grimshaw Friday, April 18, 2008 at 4:51 AM PT