Monday, January 7, 2008

Key Performance Indicators:Past and Present

Over the past 4 years, all businesses in thailand have gradually realized that they need something to tell them how successful their businesses are. Are their businesses comparable to other world class organizations?

Western businesses are lucky to have two prominent thinkers, Kaplan and Norton, who, in 1996, proposed a way to measure the business success. They proposed the famous Balanced Scorecard method to measure the strategic success of business (in fact, the Balanced Scorecard method had been disseminated in Harvard Business Review during 1990-1992). The latest version of the book titled ‘Strategy-Focused Organization’ will be on shelf around this September. In the last article, I presented some thinking and theories about measuring the business success, to assist in creating a vision and preparing business strategy with the method called Strategic Management with BSC and Key Performance Indicators (KPIs).

I would like to present the KPIs method to you because of my involvement in many studies of various organizations and seminars during the recent years, in many public programs and company’s specific programs, there are several issues that are important to business and its various units. Essentially, I found that :
- Modern businesses need a tool to measure the degree of their success. They need a measurement tool that is tangible, solid, and precise.
- They need to link the KPIs to the actual performance. Simply speaking they need to expand from merely making an individual performance measurement up to scale, to measure the business success as a whole, and link what they find to specify the compensation system such as the annual salary adjustment and the bonus.
- The heart to this is how to make the KPIs work for the entire organization.
- It is glad to know that several business re-processing tools such as TQM, or all versions of ISO apply KPIs as a measurement of success.
- An increasing number of institutions, private and public, are contemplating with an idea of applying the KPIs to their business.

The most common question about KPIs is what actually is KPIs? I’d like to put it this way. KPIs is a key performance indicator. KPIs is a strategic management system or the system that controls the strategy. KPIs will translate mission and strategy into a set of measurements within a specific frame to achievement. Measurement of success is generally based on 4 perspectives: Financial perspective, Customer perspective, Operational perspective, and Learning and Growth perspective. I’ve made an easier summary that “KPIs is a tool to tell the health of business, whether the business is healthy and successful or requires some improvements in different areas. KPIs works like a thermometer”. Certainly, many executive would have questioned the necessity of it. The answer is it is necessary. It is compulsory. We usually pay attention to figures, the financial aspect to business. Unfortunately, figures like return on investment, current asset ratio, cash flow, account receivable, etc. can only give a retrospective view of the business. According to the KPIs, by looking at these figures, business is essentially looking back in the past, looking at its past success or failure. KPIs lends itself more to the future-looking as it attempts to measure success in a broader perspective.

We know that a vision from top executive often fails to become a reality. Why? A vision is normally communicated down the line, onto the Strategic Business Units (SBUs), who then create strategy that will make that vision a reality. But it often turns out that the strategy created by those business units failed. These strategies just don’t work. What is the problem? The answer is the middle level management or the strategic business unit executives do what is not written in the strategy. In other word, they don’t want to do what they’ve written in their strategy. They are forced to create for them to carry out the strategy successfully. Simply speaking, there is no clear and tangible strategy. The remuneration system just doesn’t inspire the executives to stick to the business strategy.

Another problem is the balance of strategy. Is a state of balance in exist strategy in an organization? This is probably an area of strategic management that we receive a minimum understanding from the executive’s viewpoint, or perhaps not at all. And it is, most executives have no understanding in the relationship between the causes and effects of a strategy, not to mention the balance of strategy concept.

Textbooks about strategy during the period before the end of the 20th century explain very little about what factors help to balance the strategy or what relationship exists between the cause and the effect of a strategy.

At this point, KPIs comes in, to manage the relationships among various measurement perspectives. The measurement on these perspectives will be carried out in a balanced way, including the balanced strategic objectives of both strategic business units and various supporting units. I have linked the KPIs principle and the actual business operations by summarizing it into a model called the “BSC & KPIs Development Model”, which consists of 4 major steps:
(1) Strategic Review (2) Fast Track to KPIs Development (3) Process Reengineering (4) Towards and Achievement.

The BSC & KPIs Development Model will assist management and helps them to understand the answer to their questions. The model seeks to clarify problems inherited in vision visualization; it helps to clarify the strategy too. You can email me at drdanait@gmail.com or you may wait for a book of Key Performance Indicators, second publishing, which will present many new theories and ideas about e-Strategy KPIs.

KPIs is a jigsaw that completes the missing picture of business when it attempts to compete with other world class competitors; when business is entering the electronics operation, especially during the transitional period of change in management. The objective is to prepare the business or the organization to become a leading corporation, ready for the battle taking place in the Cyberspace field.

Dr.Danai Thieanphut
Managing Director
DNTConsultants Co.,Ltd.
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