Sunday, January 20, 2008

Actual Examples of Key Performance Indicators

This is a continuation of our KPIs series. The article will show you some real examples of companies that use KPIs to measure their success. You may like to compare their KPIs to your current KPIs. If we base our KPIs model along with the approach of Kaplan and Norton, our KPIs will reflect both financial and non-financial perspectives of the business.

The key performance indicators or indexes used to measure the success from the financial perspective usually consist of figures such as operating revenues, sales growth, inventory turnover, percentage increase in sales compared to percentage increase in expenses, return on investment, etc.

For non-financial perspective, the indexes consist of:
(1) Customer Perspective : buying frequency, number of customer complaint, monetary value of each business transaction, customer satisfaction index, size of each transaction, etc.
(2) Internal Business Process Perspective : ratio of job standard that has been developed, number of goods sold per goods return, delivery lead time, ratio of cost reduction of existing production process, inventory turnover, etc.
(3) Learning & Growth Perspective : employees satisfaction survey, percentage of employee turnover, percentage of employee who possess strategic skill, percentage of new innovation, comparison between the system and the plan, percentage of the person’s increasing proficiency in the job, etc.

These are some examples of KPIs proposed by Kaplan and Norton, where I often rely on when developing the KPIs for our local business. Next is an example of KPIs used in automobile and part manufacturing company that I served as a consultant to develop the “KPIs Development Model”. The example should give you some ideas that you can further apply to your business. These are also four strategic objectives that cover four perspectives. 1) Financial 2) Customer 3) Internal business process and 4) Learning & Growth perspective. Each perspective uses the following indexes to measure its success.

1) Financial Perspective : sales volume, production volume, operating budget, ROI, ROA, ROE, revenue generated from new product, production cost, profitability ratio.
2) Customer Perspective number of existing customer, new customer, customer satisfaction, market share.
3) Internal business process : production capacity, cost reduction, on time delivery, valued-added engineering /value of quality control system & design.
4) Learning & growth perspective : contribution fo each unit towards new innovation, innovation HR management, personnel development in each unit, employee satisfaction.

The above two examples should give you a very clear picture of using the KPIs in real business. Be careful however when you are applying the KPIs to your company : the indexes can be similar or different even when being applied to the same business. Success however depends on the correctness of preparing the KPIs Development Model, the analysis of Key Result Areas, which must be analyzed from the scope of the job of each unit or department. So, we may find that some Key Result Areas are still missing from the KPIs, which means that that unit might be omitting some important areas.

Once these indexes have been in place, each unit needs to live it up by further processing the KPIs, which are :
1. Measure and keep track of the percentage, number, ratio, or the amount of time as required by the indexes for every key result areas. These indexes themselves are tested from time to time and be continually improved until they serve as an appropriate indexes. They also lead to strategy preparation and improvement that covers all the key areas. The point to emphasize is a continued improvement of KPIs because they are not perfect numbers or percentages that become valuable within three months. On the contrary, the value of KPIs is it is a tool to achieve the successful preparation of strategy for the whole team.
2. KPIs leads to organization transformation. Because KPIs is a tool, which business can used to measure the success of strategic objective, when the strategy fails to translate into result (as we know that by comparing them to the KPIs), business operator can’t avoid to design their organization so that it meets the strategic objective.

The real danger of KPIs is that business executive, consultant, or KPIs developer is lack a real understanding of KPIs, the KPIs development model, or inexperience in implementation, including using the KPIs as a catalyst for organization transformation. The degree of success depends on the right model-tool-resources and the right advice.

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