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KPI – Friend or Foe?
March 3, 2020
When we talk about performance measurement, KPIs are a common tool. It can be a financial measure or an operational measure. However, in recent years, KPIs seem to have fallen out of favour because it fails as a useful indicator of business performance. Consumers, investors and stakeholders are interested in other measures that show the organisation is fulfilling its responsibility as a good corporate citizen. Should we abandon KPI? I believe KPI is still a useful tool but we must take good care when choosing and designing KPIs so as not to fall foul of unintended consequence. This article looks at the importance of designing and defining appropriate KPIs in performance measurement.
A well designed KPI does not only indicate how well an organisation is delivering its goals but also encourages continual improvement. As with any objective setting, the SMART approach should be applied when designing KPIs. SMART stands for specific, measurable, achievable, relevant and timely. Unlike vision or mission, KPI is not an aspiration. It is a means to an end - KPI should be actionable. This aids formulating operational plans. An FP&A professional together with the CFO should have a clear understanding of the organisation goals and how the goals can be met when deciding what the KPIs to use. A collaborative approach between those delivering and those measuring will help to formulate KPIs that can promote positive change.
Given that KPI is used to guide an organisation to make corrective decision or improvements, it is essential that KPIs are clear in their messaging. Poorly communicated KPIs can lead to confusion and hamper effective performance measurement. It often falls on FP&A’s shoulders to show how KPIs are calculated and to agree on this with stakeholders. Buy-in is important. FP&A need to secure this from their business partners to ensure successful implementation and continual improvement.
KPIs can have unintended consequences especially when compensation/reward schemes are linked to them. Some years ago, I worked for a company with an objective to grow B2B revenue. To encourage employees to deliver this KPI, the compensation scheme of the sales organisation was linked to the revenue generated. This did not take into account the associated margin. As a result, despite, hitting the revenue target, the bottom line was suffering. It may be common sense not to onboard loss-making clients but if the KPI and the reward scheme are not specific enough and do not link to other areas of the P&L, a well-intended KPI can result in negative unintended actions.
We should not forget that an organisation is essentially made up of people. People tend to strive to break the next record – in this case, KPIs. Business managers will look for ways to achieve the KPI. These methods can sometimes cause issues in other operational areas. For example, a state health system delivered via regional clinics sets a patient waiting time to see a doctor as their KPI. This waiting time is defined as how long a patient needs to wait to get a doctor’s appointment and the benchmark is set at two weeks. In order to ensure that this target is met, some clinics can inform patients that they cannot make an appointment that is more than two weeks in advance. This means some patients who require regular visits (say six monthly) cannot get an appointment until two weeks before their visit is due. This causes inconvenience to a patient (or customer care in business terms). Patients may not be able to get a check-up appointment because the available timeslots are filled by patients who “got there first”.
KPI should also evolve with the organisation. The larger and more complex an organisation is the more important it is that various facets of the business are considered when designing a KPI. Business managers should look at the relationships between KPIs as well as operational implications. This reiterates the A in SMART approach.
The role of FP&A in KPI design to help an organisation understands what it is trying to achieve, what to measure and how to measure it. FP&A should have a good grasp of the drivers and work together with stakeholders to develop what matters to them. The Pareto rule is particularly applicable when choosing KPIs - KPIs are only useful if they give actionable insights. For example, it's not always about revenue for broadcasting companies. The market is interested in the number of listeners, subscribers, retention rate, and in some cases, new and original production over a period.
I hope this article has given you an opportunity to think about the importance of designing and defining appropriate KPIs and revisit your relationship with stakeholders when it comes to what KPI to use and its design.
Disclaimer
Any views or opinions expressed are solely those of the author and do not necessarily represent those of The Warranty Group. The Warranty Group is part of Assurant.
The article was first published in Unit 4 Prevero Blog
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Muhammad Adeel
June 19, 2020
Biggest challenge now a days for large scale organization having this KPI compensation matrix applicable is alignment with respects to the changing scenario, Covid-19 is most relevant right now, or any other regulatory change may lead to changing situation.