A lot of people agree that the collapse of the Thai economy has provided some valuable lessons of business and industry. Business failures have prompted the question of what is the most efficient way to measure businesses performances. After all, measuring by means of the financial approach may not be good enough. A good example is the closure of several banks and financial institutes, contrary to the general perception that they are of a good financial standard.
Danai Thieanphut, the managing director of DNT Consultants Co.,Ltd., also considered the very same question and that prompted him to develop the use of Key Performance Indicators (KPIs).
The Concept : “The KPIs concept is based on Kaplan and Norton’s book “The Balanced Scorecard’” Danai said. According to Kaplan and Norton, traditional indicators focus mainly on financial performance, which, they argued, only reflects a company’s past performance. However, it is also appropriate to judge long-term investment and customer relation, which are not considered to be serious factors for future success under the more traditional financial assessment method. In this age of technology, businesses need to create a value-added situation in the future by exploiting the returns in terms of their customers, business partners, human resources, business process, technology and innovation investment.
The Objective : “The objectives of KPIs can be derived from the following questions. Firstly, what are key driven factors for the organization’s success? Secondly, what are key strategies to accomplish the organization’s tasks? Thirdly, are there any gaps that need to be narrowed down to facilitate the organization’s success? Finally, what are key success factors, in the eyes of the shareholders’ that will maximize their return on investment”.
The Indicators : In addition to the financial perspective, the factors businesses should bring into consideration when measuring their performances are customer satisfaction, the internal business process, and learning and growth. Under the concept of KPIs, these four factors will truly reflect how good the business has performed. The financial perspective is a commonly-used indicator. It focuses on the organization’s profitability, return on investment, return on capital and employees, sales growth and cash flow management. In terms of customers, businesses consider customer satisfaction, customer relations, new customers and market share. The measurement for the internal business process focuses on two main areas: innovation, eg product design and development; and operational processes including production, marketing and after sales services. The learning and growth perspective is to measure the organization structure for long-term growth which depends upon human resources, systems and processes in the organization.
Vision, Mission and Strategy : Vision development and strategic planning are the first step towards the organization’s success. “The successful organization must have clear vision and mission, “Danai emphasized, adding: “which will be a good platform for objective development. With a good strategic objective, the organization can transform them into realistic goals and practical action”.
Before developing KPIs the organization needs to define Key Results Areas (KRA) to consider whether the mission of each business unit is in line with the organization’s vision, mission and strategy. The establishment of KPIs for Key Job Area (KJA) and Key Result Area (KRA) will provide a clearer picture of each business unit’s performance.
“Normally, businesses look at the big picture” Danai said, adding “that is not enough. In my opinion, it should look into the detail. A high performance organization needs to also have key job areas that match the organization’s concept. “However: he cautioned that too many strategies will do no good either. “Today, strategy is more like a fashion. Most management fail to consider this as significant because they do not fully understand whether such strategy is a mean for their organization’s success”.
A good strategic objective should also bridge businesses and their supporting units together. So, we may need to establish separate KPIs to evaluate the performance of these units. “As you can see KPIs provide us with a valuable tool. It works like a thermometer to check the condition of the organization’s health,” he said.
The Advantage : Another advantage of KPIs implementation is that a special task force is not required. “According to my observations, the management, especially those responsible for strategic planning are satisfied with KPIs. They help them achieve clear, easy to read and integrated strategic planning. More importantly, it is often the first time that they are able to summarize the organization’s vision, mission, strategy and key performance indicators into 1-2 pages of A4.
After implementation, the outcome can be known within six months. However, it will only indicate the level of the organization’s performance, which will vary depending on the division, business and industry. It could be compared to a sprinter, Danai said. If he aims to break a world record, he should develop his performance using the world record as a benchmark. He may have to go through long grueling sessions until his performance reaches that level. “That applies to the implementation of KPIs. If the result is poor, the organization should look back, find out whether there are any defects and try to improve their performance until it reached a satisfactory level.
The Success : With continuous development, Danai believes, an organization with a clear vision and strategy will eventually succeed. “The achievement, however, will depend on the organization’s human resources not on KPIs,” he noted; “KPIs serve only as a yardstick, while the human resources are the driving force that will lead to the organization’s success.”