KPI Examples

Key Performance Indicators (KPI's)
A set of quantifiable measures that a company or industry uses to gauge or compare performance in
terms of meeting their strategic and operational goals. KPIs vary between companies and industries,
depending on their priorities or performance criteria. Also referred to as "key success indicators
K!I"". #otes$ A company must establish its strategic and operational goals and then choose the
KPIs which best reflect those goals. %or e&ample, if a software company's goal is to have the fastest
growth in its industry, its main performance indicator may be the measure of revenue growth year(
on(year. A company's KPIs will be stated in its annual report. Also, KPIs will often be industry(wide
standards, like "same store sales", in the retail sector.
Key Performance Indicators KPIs" provide vital information to the organisation for tracking and
predicting business performance against strategic ob)ectives in a way that compliments financial
measures. KPIs can be part of a corporate(wide *alance !corecard implementation or can be used to
monitor each individual business function. *y measuring and monitoring operational efficiency,
employee performance and innovation, customer satisfaction, as well as financial performance, long
term strategies can be linked to short term actions.
MAINTENANCE KEY PERFORMANCE INDICATORS (KPI's or
METRICS)
KPI Example >
Effective key performance indicators (or metrics) are a valuable tool for triggering corrective maintenance
actions. Often however, maintenance metrics are worthless since they do not provide worthwhile indications of
maintenance performance, particularly when this performance is below acceptable levels.
The key to this is that a KPI should normally have a trigger level set on it that is used to initiate some
corrective maintenance action. If no trigger has been set then your maintenance metric is ineffective. If no one
has defined the level on the metric where performance becomes bad enough to reuire corrective action, then
there is no point in recording it.
! realistic period must also be used for each metric " in some cases this may be one hour while in others it could
be one year.
KPI Example as applied to a Production Process Maintenance Metric
#et$s say that we are monitoring the production output from a critical machine. %a&imum output volume from
the machine is '()* widgets per hour but rather than drive it at full speed production volumes are set at '***
widgets per hour. Output is monitored as a KPI on a one hourly basis.
In this e&ample we could turn on a warning light when volumes drop below +)* per hour. !t this point a
maintenance technician would be called in to address the problem. The significant thing is that our KPI is set at
+)* and this is defined as the trigger level at which some action is reuired.
The same principles can be applied to less obvious ,-I$s such as planned maintenance backlog. .or e&ample it
may be decided that when -% backlog reaches a total of '** hours then overtime must be used to reduce the
backlog. Once again the key point is that a trigger level of '** hours has been set.
Technicians and first line supervisors should be heavily involved in setting targets for performance indicators
since they are usually best placed to decide what actually are acceptable targets and because management
driven schemes often fail to work in the long term.
/hile it may be possible to create a metric for a particular factor it is not always practical. /e must balance the
effort involved and the cost of collecting the data with its actual or potential value. .or e&ample we may
consider that it would be useful to develop a metric that indicates the number of work dockets completed
against the number issued. -oor performance on this metric would indicate a reduction in commitment on behalf
of the technicians to input data to the 0%%1. .or this to be useful however would entail a very significant
amount of work in scanning the 0%%1 for each work docket which was not completed and then trying to
determine to whom it was issued, etc.
Some Typical Maintenance Key Performance Indicators
Overtime worked against plan
-% schedule compliance
Time taken to answer maintenance calls
2udget compliance
-% 2acklog man"hours
0ritical Euipment availability (3on4t worry about non"critical euipment)
5umber of breakdowns (6nplanned maintenance)
-roduction euipment performance (2y output volume levels)
Euipment performance (with respect to uality)
%T2.
KPI Example
+*I,-A Profitability
.alculation $ +*I,-A / 0evenue
Information $ 1perating +fficiency Indicator
%requency $ 2onthly
*usiness 3alue 4rowth
.alculation $ *usiness 3alue current" / *usiness 3alue previous period"
Information $ *usiness 2anagement +fficiency Indicator
%requency $ 5uarterly
*rand 0ecogni6ebility
.alculation $ 2entions #umber 0eceived by 0epresentative !ampling
2arket !hare 4rowth
.alculation $ 2arket !hare current" / 2arket !hare previous period"
Information $ 2arketing +fficiency Indicator
7ost .lients 0ate
.alculation $ 7ost Accounts #umber / 1pening ,otal Accounts #umber
Information $ *usiness 0isk Indicator
Prime .lients 0ate
.alculation $ .lients 4enerating 89: of 0evenue / ,otal Accounts #umber
Investment Pro)ect +valuating !peed
.alculation $ Pro)ects, evaluated in time / ,otal pro)ects prepared
Information $ 1perational +&ecution and 2anagement %le&ibility Indicator
Key Performance Indicators (Human Resources)
K!I"".
#otes$ A company must establish its strategic and operational goals and then choose the KPIs which
best reflect those goals. %or e&ample, if a software company's goal is to have the fastest growth in its
industry, its main performance indicator may be the measure of revenue growth year(on(year. A
company's KPIs will be stated in its annual report. Also, KPIs will often be industry(wide standards,
like "same store sales", in the retail sector.
!taff ,urnover
.alculation $ !taff 7eaving over the 2onth / !taff #umber at the 7ast -ay of the 2onth Information
$ +fficiency Indicator
%requency $ 2onthly
0ecruitment 5uality
.alculation $ #ew ;ires 7eaving <ithin = 2onths / ,otal ;ires 1ver the >ear
Information $ +fficiency Indicator
%requency $ 2onthly
,raining -ays +&ecution
.alculation $ Actual ,raining -ays / *udget ,raining -ays
Information $ +fficiency Indicator
%requency $ 2onthly
%ill 3acancy ,ime
.alculation $ Average time ;0 required to fill ? vacancy broken down by grades"
%requency $ 2onthly
Key Performance Indicators (Finance)
K!I"".
#otes$ A company must establish its strategic and operational goals and then choose the KPIs which
best reflect those goals. %or e&ample, if a software company's goal is to have the fastest growth in its
industry, its main performance indicator may be the measure of revenue growth year(on(year. A
company's KPIs will be stated in its annual report. Also, KPIs will often be industry(wide standards,
like "same store sales", in the retail sector.
.alculation $ +*I,-A / 0evenue Information $ 1perating +fficiency Indicator
%requency $ 2onthly
Accounts 0eceivable
.alculation $ Accounts 0eceivable Information $ *usiness 2anagement +fficiency Indicator
%requency $ 2onthly
-ays !ale 1utstanding
.alculation $ @9 / ,otal monthly revenue / Average accounts receivable per month" Information $
*usiness 2anagement +fficiency Indicator
%requency $ 2onthly
1utstanding debts over A month
.alculation $ 1utstanding debts over A month / Average accounts receivable Information $ 2arketing
+fficiency Indicator %requency $ 2onthly
Key Performance Indicators (General)
K!I"". #otes$ A company must establish its strategic and operational goals and then choose the
KPIs which best reflect those goals. %or e&ample, if a software company's goal is to have the fastest
growth in its industry, its main performance indicator may be the measure of revenue growth year(
on(year. A company's KPIs will be stated in its annual report. Also, KPIs will often be industry(wide
standards, like "same store sales", in the retail sector.
.alculation $ +*I,-A / 0evenue
Information $ 1perating +fficiency Indicator
%requency $ 2onthly
*usiness 3alue 4rowth
.alculation $ *usiness 3alue current" / *usiness 3alue previous period"
*rand 0ecogni6ebility
.alculation $ 2entions #umber 0eceived by 0epresentative !ampling
2arket !hare 4rowth
.alculation $ 2arket !hare current" / 2arket !hare previous period"
7ost .lients 0ate
.alculation $ 7ost Accounts #umber / 1pening ,otal Accounts #umber
Prime .lients 0ate
.alculation $ .lients 4enerating 89: of 0evenue / ,otal Accounts #umber
Investment Pro)ect +valuating !peed
.alculation $ Pro)ects, evaluated in time / ,otal pro)ects prepared
Information $ 1perational +&ecution and 2anagement %le&ibility Indicator
Key Performance Indicators (IT)
Data loss accidents
.alculation $ -ata loss accidents happened
Information $ I, efficiency indicator
%requency $ 2onthly
uality of soft!are
.alculation $ Average score at ?9(grade. !cale obtained at users survey
IT "ud#et execution
.alculation $ Actual I, costs / Planned I, costs
uality of communications "and!idt$
.alculation $ Average score at ?9(grade. !cale obtained at users survey
Key Performance Indicators (%onstruction industry)
%ost of construction
Information $ .hange in the current normalised construction cost of a pro)ect at .ommit to
.onstruct point *" compared with one year earlier, e&pressed as a percentage of the one year earlier
cost.
Defects
Information $ Impact, at the time of handover, caused by the condition of the facility with respect to
defects using the ? to ?9 scale set out below.
The headline Defects KPI is currently recorded on projects by the Construction Clients Forum
(CCF) survey using the folloing scoring system!
"# $ %pparently defect free
& $ Fe defects no significant impact on client
'() $ *ome defects some impact on client
+ $ ,ajor defect major impact on client
" $ Totally defective
%lient satisfaction
Information $ ;ow satisfied the client was with the finished product using the score against the ? to
?9 scale set out below.
Profita"ility
Information .ompany profit e&pressed as a percentage of turnover.
Producti&ity
.ompany value added per employee e&pressed in dollars.
Return on capital
0eturn on capital employed.
'alanced (corecard ) *easurement and Feed"ac+
*easurement and Feed"ac+
In traditional industrial activity, "quality control" and "6ero defects" were the watchwords. In order
to shield the customer from receiving poor quality products, aggressive efforts were focused on
inspection and testing at the end of the production line. ,he problem with this approach is that the
true causes of defects could never be identified, and there would always be inefficiencies due to the
re)ection of defects. <hat -eming saw was that variation is created at every step in a production
process, and the causes of variation need to be identified and reduced. If this can be done, then there
is a way to reduce the defects and improve product quality indefinitely. ,o establish such a process,
-eming emphasi6ed that all business processes should be part of a measurement system with
feedback loops. ,he feedback data should be e&amined by managers to determine the causes of
variation at each step in a process, identify the processes with significant problems, and then focus
attention on improving that subset of processes. -eming proposed a continuous cycle, usually
referred to as the Plan(-o(.heck(Act cycle, to implement a philosophy of continuous product and
process improvement.
Total uality *ana#ement
,he -eming philosophy emerged in the B! government in ?CD8 via two initiatives, one military and
one civilian. Bnder -efense !ecretary %rank .arlucci, the ,otal 5uality 2anagement ,52"
program was introduced to create a new focus on total ownership cost in acquisitions. ,his initiative
brought significant changes in -o- policies, including the near(elimination of 2I7 !P+.s,
elimination of employee performance appraisals "2anagement by 1b)ectives"", and simplifications
in the %ederal Acquisition 0egulations %A0".
T$e 'aldri#e ,!ard
,he civilian initiative of ?CD8 was the 2alcom *aldrige #ational 5uality Award, named after the
first !ecretary of .ommerce under 0onald 0eagan who died tragically in a horseback accident".
0eali6ing the significant strides Eapan had made in industrial quality, particularly in the auto
industry, *aldrige sought a way to rebuild American competitiveness. ,he 0epublican
administration was unwilling to offer direct corporate handouts, but they wanted to do something to
encourage the new management philosophy. !o they created a prestigious award that would be given
to large and small product and service companies that showed the best scores on a carefully(
designed questionnaire, the "*aldrige .riteria". <inners would receive a handsome trophy in a
high(visibility ceremony in <ashington, and could use the publicity in their advertising. In
e&change, they would be asked to reveal some of their management's best practices so that other
companies could benefit from their e&perience.
After more than ten years of e&perience, the *aldrige Award has proven to be a good incentive for
many companies, and a predictor of future stock performance for its winners. Although a few
winners have faltered, their overall growth has outperformed the !FP G99 and other common
market indices. ,he *aldrige .riteria, which are refined each year, have become a credible set of
guidelines for business success. American competitiveness has indeed rebounded, as recent
economic data amply indicate.
<hat is so special about the *aldrige .riteriaH <hat 'best practices' have they revealedH
,he *aldrige Award questionnaire booklet is published each year by the #ational Institute for
!tandards and ,echnology, which also administers the award reviews. ,he booklet contains, in
addition to the questions, several pages describing various underlying concepts and values. In brief,
what the *aldrige Award winners have in common is a management system that incorporates
something like -eming's Plan(-o(.heck(Act cycle, in which both strategic and tactical plans are
deployed along with a measurement system, and feedback is obtained from the data to monitor
results and revise the plans. ,his is not implemented as a special pro)ect but as a continuous cycle
that is aimed at continuous improvement and continuous ad)ustment of strategy to new business
conditions.
7acking such a measurement system does not necessarily mean that managers are not doing a good
)ob, nor that people are not productive or happy. ,he *aldrige Information and Analysis .riteria are
simply looking for data to answer the question, ";ow well do we know how well we do our workH"
T$e *easurement Imperati&e
In private companies, measurements are simply essential in order to provide a rational basis for
decisions. Eac %it6(+n6 *enchmarking !taff Performance, ?CC=" offers the following admonition$
"2easurement of any work process or practice is more than possible. It is imperative. It applies in
both routini6ed process work and in individual professional practices. <hether we are talking about
a benchmarking pro)ect or )ust tending to day(to(day management, without number we don't really
know what we are doing. If managers do not know ImeasurementsJ, I have only onequestion$ <hat
do you think they are managingH <ithout metrics, managers are only caretakers. ,hey are
administrators of processes."
In government, is performance(based management another management fad that is going to
disappear tomorrowH 1n the contrary, it appears to be becoming more entrenched. An illustration of
that is the passing in ?CC@ of the 4overnment Performance and 0esults Act 4P0A" ( the relevant
e&cerpt of the Act is here. ,his Act requires all government agencies to deploy a strategic plan, set
performance targets, and measure performance over time. %uture budgets for the agencies will be set
by the 1ffice of 2anagement and *udget, not the -epartments" with consideration given to
progress in achieving performance targets. ,his is reality (( the B! ta&payer wants to see a
government that has demonstrable results and progress. 1therwise, there will be massive
outsourcing of every possible function to private industry, where market forces promise better
performance.
In the -epartment of -efense in particular, it is clear that the 4P0A will be taken seriously. ,he
!ecretary of -efense, <illiam .ohen, in his previous position was one of the !enate sponsors of the
4P0A. 0ecently he has flatly announced that there will be new rounds of *ase 0ealignments And
.losings *0A.s". ;is goal is to cut civilians in the -o- by K9:. At the same time, he and
.ongress agree that there is a need for the country to preserve its technology base and special skills,
so there is a desire for )udicious, surgical(style force reductions. 5uantitative metrics such as scores
of *aldrige(based self assessments will be one of the criteria considered in making future decisions
about these reductions.
,he handwriting is on the wall. 4overnment leaders that want to survive must make significant
efforts to improve performance (( and be able to prove it with verifiable measurements.
'ut -$at *ust 'e *easured.
,he earlier era of measurement(based mangement was focused on industrial production. In
operations such as automobile production, there are numerous tangible, repetitive processes that can
be precisely measured and monitored. !hewhart, as early as the ?C@9's, had begun to institute such
methods as !tatistical Process .ontrol !P." for industrial processes. ;owever, in the ?CC9's the
economic drivers are not industrial mass production companies and blue(collar workers, but office(
oriented production by 'knowledge workers'. In this environment, there is much that is intangible,
and some processes, such as 0F-, are not even repetitive. !o how can performance be measured
adequately in a modern enterpriseH
In most traditional industrial and government organi6ations, there have always been ample
measurements of one particular kind$ financial data. In private companies, profit or the 'bottom line'
is the ultimate indicator of success, and earnings are carefully watched. Public agencies often
operate at a loss and are subsidi6ed, but the loss is targeted to a specified limitL the metric to
compute this is called the #et 1perating 0esult #10". ,his is the dial that senior staff are
constantly watching.
%inancial data are precise and ob)ective. ;owever, they do not tell the whole story of a company's
health. %inancials are lagging indicators (( they show what happened in the past. <hat we would
like to have are some leading indicators to get an idea of what may be ahead. 7acking these,
companies often drive straight ahead in the fog and suffer the consequences.
,he balanced scorecard offers an alternative to the traditional financial indicators. It describes and
e&plains what has to be measured in order to assess the effectiveness of strategies. ,he balanced
scorecard approach to aligning strategy with action is )ust as applicable in the public sector as in the
private sector, particularly for the reason that it does not focus so heavily on financial metrics, such
as profit, which are not relevant in governmental organi6ations. ;ence the balanced scorecard is
being seen as an appropriate way for the government to implement the requirements of the
4overnment Performance and 0esults Act. 0ead more about this in the other articles on this web
site.
Setting and Exceeding Saes !oas t"ro#g" Ke$ Per%or&ance Indicators (KPI)
Have you identified the KPIs in your sales process?
A good KPI example in the sales process might be how many times you advance the first sales appointment to the next
phase, whether thats a demonstration, a site visit, a survey or a proposal Another KPI is how many times you gain a new
customer once the first gateway is passed And when you do gain a new customer, whats the average revenue you
achieve? !hats certainly an important KPI "ecause if your average revenue per sale is #$% less than the average peer
KPI, you might want to find out why and ta&e focused action to improve it, as youre leaving money on the table
And what about the length of a sales cycle in days? Is that conditional or do you have a degree of control over it? If you
have a team member that has an average sales cycle '$% shorter than the peer group, uncover and assimilate those
best practices out to the rest of the sales team (ess time, more results !hat ma&es )*ales +ycle a valuable KPI
,n a practical level, KPIs can provide management prospect reactions to their service offering for feedbac& to mar&eting
and product development, detect problem areas in sales performance and signal the need for strategic or tactical
modifications - even an all.out intervention through pinpoint sales performance training
Perhaps the most overloo&ed KPI is the individual )/agic number0 how many new wee&ly sales opportunities must be
generated based on neighboring KPIs !hin& of the magic number as the fuel in your gas tan& needed to get from point A
to point " Its directly proportional to how far a distance, how fast you drive and your average miles per gallon 1our sales
process )/agic number is a derivative of your average revenue per sale, 2st appointment to poroposal ratio, closing ratio
and revenue goal Its your )Activity barometer and it should be at 2$$%
!he following are some tips for improving several sales process KPIs
If your current 2st Appointment to Proposal ratio is below 34%5
2 Internally define what your )6ext step ob7ective of the 2st appointment is0 a demo, a site visit, a survey or a proposal
!hen train to a process and measure the outcome
8 9ecide to start at the )!op with the fiscal authority that can )+all the shots
' Avoid )*elling your product on the 2st appointment Instead, outline your diagnostic steps to evaluate the fit between
your solutions parallel to their business ob7ectives
If your current +losing ratio is below 34%5
2 As& pertinent :uestions to what the Prospect +ompanys decision.ma&ing process is, what the internal criteria for
change is and what players need to be involved for evaluation
8 +ommunicate a timeline and set a specific date for the 8nd appointment before leaving the 2st appointment
;ncourage that all management players be present at the next appointment
' +atalog ris& factors for each management player and develop strategies, tactics, and tools for direct communication to
them
# Have relevant industry and title reference letters available for )<eal.time credibility
If your current )Activity barometer is below 2$$%5
2 Announce the +ompetency of converting conversations to appointments as a Key performance Indicator for sales
success
8 9efine an appointment setting training ob7ective and set a realistic goal
' 9evelop a training process in line with prospecting scenarios and best practice communications
# 9ont sell your )=idget0 sell the "usiness reason to meet
4 Partner with technology to transfer best prospecting practices into )Intellectual capital promotion throughout your sales
society
>ltimately, sales trainers and management should wor& in concert to create a new culture by replacing random sales
routines with specific KPI competency training
!argeted and timely KPI training can ma&e a critical difference to your monthly revenue scorecard In todays high sales
performance culture migrate away from monthly and :uarterly )?uota focus to daily routines and wee&ly goals !he
opportunity rests s:uarely on switching paradigms from the re:uired );nd result to the necessary steps @KPIsA to get
there routinely !hen build supporting tools for learning and application
And dont forget your )/agic 6umber
De%ining Ke$ Per%or&ance Indicators (KPI)
<eply from ra)n)us on 2B2$B8$$C C52#5$$ P/
9on,
!he *AP /aintenance strategy provides many benefits 5
Its a strategy for all re:uests for maintanance0
Integration of all aspects of plant maintenance processes,
including plannin# , materials, labor reporting, and accounting
in real time0
?,vertime wor&ed against plan
?P/ schedule compliance
?!ime ta&en to answer maintenance calls
"udget compliance
?P/ "ac&log man.hours
?+ritical ;:uipment availability @9on?t worry about non.critical
e:uipmentA
?6umber of brea&downs @>nplanned maintenanceA
?Production e:uipment performance @"y output volume levelsA
?;:uipment performance @with respect to :ualityA
?/!"D
KPI ;xample as applied to a Production Process
(etEs say that we are monitoring the production output from a
critical machine /aximum output volume from the machine is 284$
widgets per hour but rather than drive it at full speed
production volumes are set at 2$$$ widgets per hour ,utput is
monitored as a KPI on a one hourly
What does Key Performance Indicator stand for in
manufacturing?
uestion!
"ns#er!
Its simply a way of checking how well a manufactuing operation is performing against set
targets, and may form part of a supply contract with a customer. 7ou may have targets for
uality and on time delivery at you customers for instance, say each is marked out of '**. If all
targets are met then you score full points. If you miss deliveries or --% rates are too high, you
will lose points.
,-I$s are usually set by managers and can be anything they like.
.or e&ample, it could be percentage of defects must be less than (*8, or number of units
made must be at least )* per day, or low wastage etc. etc.
a key performance indicator is a measure of how well a company is doing, we have them at the
council i work for and a ,-I e&ample is the percentage of enuiries9letters we answer fully
within : working days, a ,-I can be any thing that is relevant and measureable, in industry it
might be the number of faulty goods returned, or orders delivered on time etc
It could be specific goal and target that measures your progress
2eware ;business speak;<<<
,-Is are are set goals as measured against set criteria by management " often fairly abritrary
and usually constructed in such a way as to shed a positive light on a given aspect of the
business which is generally tied in with bonus payments.
In manufacturing specifically, a true ,-I would be the percentage fulfillment of orders within
the mandated time scale (although this can be engineered9manipulated).0ustom... satisfaction
ratings can be used " but these are also manipulated and engineered to give false positives due
to the impossibility of either non"response or a true negative.
.or a true ,-I one should e&amine the business in uestion and it$s minimum reuirements for
sustainability. These should then be weighed against the prevailing economic performance of all
other businesses in related sectors... giving a minimum and ma&imum performance rating at
any given time (and one which is, therefore variable according to the prevailing market
trends)... this can only be truly administered by an impartial observer .. and is almost never
done<<
,-I$s are usually set by higher end mgmt due to client and company needs. 1ome e&amples
are production rate, on"time shipping, inventory accurracy.
$se leading KPIs to spot trou%le
2y =icky 1mith, 0%=-, 0ontributing Editor
-lant1ervices.com
Keywords: KPI
3oes your plant have reliability issues and a hard time meeting production targets> %etrics such as key
performance indicators (,-Is), when identified and aligned properly, can save your plant, your ?ob and
your career. 1o grab a pen, open your mind and get ready to learn.
3oes your plant have reliability issues and a hard time meeting production targets> If so, it4s time to listen
up< %etrics such as key performance indicators (,-Is), when identified and aligned properly, can save
your plant, your ?ob and your career. 1o grab a pen, open your mind and get ready to learn.
It4s ama@ing that most companies in 5orth !merica manage with very few metrics to measure the current
performance of their maintenance and reliability process. They come to me crying for help, seeking a
solution for their lack of management control. I know the feeling, as I was once one of them.
The sad part is, these companies aren4t even aware they need ,-Is to know where to focus. They fight
reliability, production and uality issues on a daily basis, and seem to be lost in a uagmire. %any are
replacing managers so fast, the people on the plant floor aren4t sure who is in charge from one day to the
ne&t. They4re crying for help and don4t know which way to go.
It doesn4t have to be that way. A2y aligning our ,-Is properly and managing the right ones, 0arpenter
discovered, for the first time, profits in a down market,B says !donis 0ampbell, corporate reliability
manager for 0arpenter, a =ichmond, Ca."based manufacturer of polyurethane foam. A/eDve seen profits
continue to rise as cost continues to drop by simply managing using leading ,-Is.B
Measure the right things
Think about driving a car with the windshield painted black. 7ou can4t see where you4re going, but you do
get a glimpse of where you4ve gone through the rear"view mirror. 7ou don4t find out whether or not you
were successful until either it4s too late, or disaster strikes. 7our car goes into the ditch (high costs, or
worse), or you never reach your destination (business goals are not met). In the famous words of the
late, great industrial revolutionary -eter 3rucker, A7ou cannot manage something you cannot control, and
you cannot control something you cannot measure.B
3rucker also said, AThe problem with management is they4re measuring the wrong things.B If
management truly understood the power of ,-Is, things would uickly change, but trying to manage
without ,-Is leaves them feeling lost without hope in a reactive environment. This is a serious problem
and it costs companies around the world billions of dollars due to what I consider to be lack of
management control.
AThe number of companies with adeuate, meaningful key performance indicators is e&tremely low,B says
Eames 5esbitt, reliability practitioner and ,-I e&pert, Ivara (www.ivara.com). %anagers seeking to
measure the performance of their organi@ations start by measuring too much. /ithout understanding
where the opportunities are in their organi@ation, they are left trying to translate data from a host of
disconnected or misleading indicators, 5esbitt says. AThis can lead to poor decisions or wasted effort
trying to improve indicators that have marginal or no impact on business improvement.B
&eading 'ersus lagging
#et4s get down to basics and define ,-Is. /ithin maintenance, we must first define the performance we
want to measure. Is it the performance of the euipment> Is it the performance of the spare parts
warehouse> Is it the performance of the maintenance function> These may seem like simple uestions,
but I often see companies mi& their ,-Is, as they haven4t defined the specific area of the business for
which they are attempting to measure performance.
.or e&ample, we want to measure the performance of the maintenance function. There are really two
kinds of ,-Is to choose from in measuring any particular function of a businessF leading indicators and
lagging indicators, or leading ,-Is and lagging ,-Is.
/e need leading indicators to manage a part of the business, while lagging indicators tell us how well we
have managed. #eading indicators let us directly and immediately respond when a poor result is found.
#agging indicators tell us how well we performed, but we have little opportunity to immediately affect
underperformance. Instead, when we see an unacceptable lagging indicator, we typically must drill down
to the leading indicators to uncover the cause of the underperformance, and from there we can implement
appropriate changes.
#eading ,-Is for the maintenance function measure how well we are conducting each of the steps in the
maintenance process. .or e&ample, a leading ,-I for the work planning element of maintenance process
could be Athe percentage of planned ?obs that were e&ecuted using the specified amount of labor.B If the
planner is estimating labor correctly, we will see a high percentage of ?obs completed using the planned
number of hours. If the maintenance manager finds that the value of the ,-I is lower than e&pected, he
or she can discuss with the planner how best to immediately improve the results G possibly for the
remainder of that day.
/ith all ,-Is, by definition, we are measuring past performance, so I4m not suggesting that leading
indicators can be tweaked to improve upon past performance. 2ut as you can see in this e&ample, if we4re
managing using leading indicators, we can respond immediately when needed.
! lagging indicator would measure the results of how well we managed the maintenance function. .or
e&ample, where the maintenance function is well managed, we would e&pect an appropriate balance
between the cost of maintenance and the plant availability. ! lagging indicator could therefore be Athe
actual maintenance cost for a month as a percentage of the budgeted maintenance cost for that month.B
If the actual maintenance cost for last month is found to be ''*8 of budget, there is really very little we
can do to directly influence the performance of this ,-I today. Instead, we would look at all of the leading
indicators, probably including those that measure the performance of our maintenance process, to
determine whether those values give us a signal for managing the problem.
Table ' lists some ,-Is I prefer to use, along with the world"class level where applicable. #eading
indicators such as A-ercent reworkB and A-ercent of -%s e&ecuted on timeB affect the overall performance
of the maintenance process. The corresponding lagging indicators are A%aintenance cost as a percent of
budgetB and A-lant availability.B !t least one of these lagging indicators will suffer if there is sufficient
underperformance in the leading indicators.
Ke$ Per%or&ance Indicators (KPI)
Drom D Fohn <eh,
1our Guide to /anagement
FREE 6ewsletter *ign >p 6owH
How an organization defines and measures progress toward its goals
Key Performance Indicators, also &nown as KPI or Key *uccess Indicators @K*IA, help an organiIation define and measure progress
toward organiIational goals
,nce an organiIation has analyIed its mission, identified all its sta&eholders, and defined its goals, it needs a way to measure progress
toward those goals Key Performance Indicators are those measurements
'"at Are Ke$ Per%or&ance Indicators (KPI)
Key Performance Indicators are :uantifiable measurements, agreed to beforehand, that reflect the critical success factors of an
organiIation !hey will differ depending on the organiIation A business may have as one of its Key Performance Indicators the
percentage of its income that comes from return customers A school may focus its Key Performance Indicators on graduation rates of its
students A +ustomer *ervice 9epartment may have as one of its Key Performance Indicators, in line with overall company KPIs,
percentage of customer calls answered in the first minute A Key Performance Indicator for a social service organiIation might be
number of clients assisted during the year
=hatever Key Performance Indicators are selected, they must reflect the organiIationEs goals, they must be &ey to its success,and they
must be :uantifiable @measurableA Key Performance Indicators usually are long.term considerations !he definition of what they are and
how they are measured do not change often !he goals for a particular Key Performance Indicator may change as the organiIationEs
goals change, or as it gets closer to achieving a goal
Ke$ Per%or&ance Indicators Re%ect T"e Organi(ationa !oas
An organiIation that has as one of its goals Jto be the most profitable company in our industryJ will have Key Performance Indicators that
measure profit and related fiscal measures JPre.tax ProfitJ and J*hareholder ;:uityJ will be among them However, JPercent of Profit
+ontributed to +ommunity +ausesJ probably will not be one of its Key Performance Indicators ,n the other hand, a school is not
concerned with ma&ing a profit, so its Key Performance Indicators will be different KPIs li&e JGraduation <ateJ and J*uccess In Dinding
;mployment After GraduationJ, though different, accurately reflect the schools mission and goals
Ke$ Per%or&ance Indicators M#st )e *#anti%ia+e
If a Key Performance Indicator is going to be of any value, there must be a way to accurately define and measure it JGenerate /ore
<epeat +ustomersJ is useless as a KPI without some way to distinguish between new and repeat customers J"e !he /ost Popular
+ompanyJ wonEt wor& as a KPI because there is no way to measure the companyEs popularity or compare it to others
It is also important to define the Key Performance Indicators and stay with the same definition from year to year Dor a KPI of JIncrease
*alesJ, you need to address considerations li&e whether to measure by units sold or by dollar value of sales =ill returns be deducted
from sales in the month of the sale or the month of the return? =ill sales be recorded for the KPI at list price or at the actual sales price?
1ou also need to set targets for each Key Performance Indicator A company goal to be the employer of choice might include a KPI of
J!urnover <ateJ After the Key Performance Indicator has been defined as Jthe number of voluntary resignations and terminations for
performance, divided by the total number of employees at the beginning of the periodJ and a way to measure it has been set up by
collecting the information in an H<I*, the target has to be established J<educe turnover by five percent per yearJ is a clear target that
everyone will understand and be able to ta&e specific action to accomplish
Ke$ Per%or&ance Indicators M#st +e Ke$ To Organi(ationa S#ccess
/any things are measurable !hat does not ma&e them &ey to the organiIationEs success In selecting Key Performance Indicators, it is
critical to limit them to those factors that are essential to the organiIation reaching its goals It is also important to &eep the number of
Key Performance Indicators small 7ust to &eep everyoneEs attention focused on achieving the same KPIs
!hat is not to say, for instance, that a company will have only three or four total KPIs in total <ather there will be three or four Key
Performance Indicators for the company and all the units within it will have three, four, or five KPIs that support the overall company
goals and can be Jrolled upJ into them
If a company Key Performance Indicator is JIncreased +ustomer *atisfactionJ, that KPI will be focused differently in different
departments
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!he /anufacturing 9epartment may have a KPI of J6umber of >nits <e7ected by ?uality InspectionJ, while the *ales 9epartment has a
KPI of J/inutes A +ustomer Is ,n Hold "efore A *ales <ep AnswersJ *uccess by the *ales and /anufacturing 9epartments in meeting
their respective departmental Key Performance Indicators will help the company meet its overall KPI
!ood Ke$ Per%or&ance Indicators 0s1 )ad
)ad2
!itle of KPI5 Increase *ales
9efined5 +hange in *ales volume from month to month
/easured5 !otal of *ales "y <egion for all region
!arget5 Increase each month
What's missing? Does this measure increases in sales volume by dollars or units? If by dollars, does it measure list price or sales price?
Are returns considered and if so do the appear as an adjustment to the KPI for the month of the sale or are they counted in the month
the return happens? o! do !e ma"e sure each sales office's volume numbers are counted in one region, i#e# that none are s"ipped or
double counted? o! much, by percentage or dollars or units, do !e !ant to increase sales volumes each month?$%ote& 'ome of these
(uestions may be ans!ered by standard company procedures#)
!ood2
!itle of KPI5 ;mployee !urnover
9efined5 !he total of the number of employees who resign for whatever reason, plus the number of employees terminated for
performance reasons, and that total divided by the number of employees at the beginning of the year ;mployees lost due to <eductions
in Dorce @<IDA will not be included in this calculation
/easured5 !he H<I* contains records of each employee !he separation section lists reason and date of separation for each
employee /onthly, or when re:uested by the *KP, the H<I* group will :uery the database and provide 9epartment Heads with
!urnover <eports H<I* will post graphs of each report on the Intranet
!arget5 <educe ;mployee !urnover by 4% per year
'"at Do I Do 'it" Ke$ Per%or&ance Indicators3
,nce you have good Key Performance Indicators defined, ones that reflect your organiIationEs goals, one that you can measure, what
do you do with them? 1ou use Key Performance Indicators as a performance management tool, but also as a carrot KPIs give everyone
in the organiIation a clear picture of what is important, of what they need to ma&e happen 1ou use that to manage performance 1ou
ma&e sure that everything the people in your organiIation do is focused on meeting or exceeding those Key Performance Indicators 1ou
also use the KPIs as a carrot Post the KPIs everywhere5 in the lunch room, on the walls of every conference room, on the company
intranet, even on the company web site for some of them *how what the target for each KPI is and show the progress toward that target
for each of them People will be motivated to reach those KPI targets
'"at are KPIs (Ke$ Per%or&ance Indicators)3
uic+ Definition
Key Performance Indicators are measurable, definable metrics typically used to signify company
goals. KPIs are considered to be primary metrics. Key Performance Indicators, when e&posed and
properly analy6ed can be used to understand and improve manufacturing performance.
Expanded Definition
+very company measures themselves to some degree. 1ften measurement and analysis occur based
on historical information. Although there is value in historical analysis, KPIs are biased toward real
time data and are used to support decisions that enhance manufacturing performance. KPIs are tied
to company goals and require careful design and implementation in order to support positive change.
As with many organi6ational issues, acceptance of Key Performance Indicators and how they will be
used to improve performance in critical.
In order to successfully leverage performance improvements based on KPIs there are three main
precursors.
M 2easurability
M ,eam acceptance
M .onformance to organi6ational goals
*easura"ility
,he KPI must be measurable. ,he methodology of the measurement must be documented and
accepted before the process begins. Bnderstanding e&actly what is to be measured will help
determine how it will be measured. ,he effects of changes can be tracked through careful analysis of
the benchmark KPI data. 4oals and desires are often vague ( key performance indicators are always
very specific.
Team acceptance
,eam buy in is often the difference between success and failure of many manufacturing pro)ects. In
regards to KPI it is critical. KPIs are typically the primary source of information regarding the
performance of a process that is being monitored. In order to successfully use the data everyone
needs to understand why the indicator was chosen and how it represents the underlying condition.
Additionally, since the data will be used as an indicator of process performance, it is necessary that
the entire team use it in the same way.
%onformance
4eneral company goals and initiatives are at the heart of KPI. *y determining a way to measure the
success of a pro)ect companies are able to monitor change. <hen action is required, KPIs will
provide advance warning. !uccessful KPI implementation means limiting e&posed performance data
to only key indicators. 1ften there may be a desire to measure the entire process. <hile this is
understandable, the difference between KPI and other metrics must be understood and enforced.
KPI provides a mechanism for companies to identify areas for improvement, create the metrics that
will be used to analy6e the process and the tools to support change to the future state. 7ean
manufacturing is a process. .ompanies that use KPIs in this conte&t use them to improve every day.
How Can KPIs (Key Performance Indicators) Help My Organization?
1nce you've defined the KPIs that reflect your company's goals and have a consistent way to
measure them, use them to enhance performance by charting the progress toward the target KPI.
1nly then will people be informed and motivated to$
M !upport company initiatives
M 2anage growth
M 2anage change
KPIs provide the tools to measure manufacturing performance enhancements.
Vorne Products and KPIs (Key Performance Indicators)
A manufacturing truth N Oyou cannot change that which you do not measureP. 3orne visual displays
provide real(time information to enhance manufacturing performance by delivering real(time
display of KPIs.
<e offer many visual display and production monitoring products to serve a variety of plant floor
applications. ,he following product solutions are some of the most common.
/irtual KPI ,ndon
P01*7+2 <e are still in the process of defining our key goals and although we need to e&pose
those that we've settled on, are reluctant to do so because things may change.
!,0A,+4>
+&pose KPIs )ust as soon as they are defined and provide this information to the people
most likely to affect changes that enhance manufacturing performance. -isplay KPIs as
deemed necessary to support change.
!17B,I1#
Q7K99 7arge -igital, Q7=99 2ulti(line and Q7D99 Alphanumeric production
monitors can be reprogrammed at any time to show any of the more than ?99 real(time
process variables. Additionally the Q7 !eries products have a built(in +thernet
connection and can push this information over your network. Imagine seeing real(time
production data via a simple web browserR
Real)time KPIs
P01*7+2
<e have )ust a couple KPIs that are critically important to us.
!,0A,+4> 3orne visual displays support a wide variety of KPIs from a single variable such as run
rate or downtime to more than ?99 real(time KPIs including 1++.
!17B,I1#
D8 !eries N 4reat for displaying up to three KPIs such as count, rate and downtime or
target count, actual count and percent efficiency.
Q7K99 7arge -igital, Q7=99 2ulti(line and Q7D99 Alphanumeric production
monitors can be reprogrammed at any time to show any of the more than ?99 real(time
process variables. Additionally the Q7 !eries products have a built(in +thernet
connection and can push this information over your network. Imagine seeing real(time
production data via a simple web browserR
.all us toll free at ?(DDD(-I!P7A>! ?(DDD(@K8(8GAC". 1ur products deliver real(time KPIs that
help you enhance manufacturing performance.
,not$er 0oo+ at KPIs
Hoogle ;key performance indicator; or ;,-I,; and you$ll find almost as much has been written about ,-Is as has been
written about 2ritney 1pears. ,-Is are a topic we deal with daily at 2-% -artners, because nearly every client is or will
soon be choosing a set of indicators. /e recently attended a business intelligence focused conference, and the most
popular topic during breakout sessions and around the breakfast buffet seemed to be the development of appropriate
,-Is. This month$s column collects some of the best current thinking on this topic.
In reading many of the articles published in the last year, there$s a clear path to select and define ,-Is. 7ou identify the
key business ob?ectives and then pick the ,-Is to measure progress against those ob?ectives. There are lists aplenty of
the 3o$s and 3on$ts of selecting ,-Is.
Iowever, there are obstacles and missteps that many companies encounter. =eid ,arabush of 3ecision 1ystems points
out that some e&ecutive teams choose ,-Is that are outcomes rather than causes, results rather than drivers of
success. These ,-Is are consistent with the strategy and vision, but they produce a picture uite similar to a financial
statement. In other words, they give you what you already have. /hich would be more useful to a retail e&ecutive as
an addition to e&isting reportsF a ,-I that shows declining sales, or a ,-I that shows a decline in customer satisfaction>
Taking this further, some companies tell us, ;/e hear that ,-Is should be non"financial metrics because a financial ,-I
?ust mimics a financial statement.; This view is too e&treme. /e believe there are financial ,-Is that meet the criteria
for a good ,-IF they are strategic, they are actionable and they will make a difference in improving the business. In
many cases, a )*9)* split between operational and financial measures would be optimal.
!nother business performance management (2-%) e&pert, 0hris Iervolino of ITE0, has mentioned the ;too high " too
many; problem. This may be a symptom of simply trying to do too much with ,-Is. /hen ,-Is are too high"level, they
might not reliably correlate to actual results. !s a result, their utility to management is greatly diminished. Too many
,-Is, on the other hand, are unwieldy and result in a lack of management focus. ;2asically,; says Iervolino,
;somewhere in the e&tensive negotiations of creating the ,-Is, the $,$ got lost.;
1ou're 2ot (o (pecial ) ,nd T$at's Good
It is difficult for many companies to devote the e&ecutive time it takes to properly evaluate and develop a corporate
scorecard " but you must do it, right> !ctually, the answer is only a ualified yes. 7our industry counterparts " your
competitors " have probably already done some of the work and tested ,-I sets that are relevant and valuable to you.
!s it turns out, appro&imately J* to K* percent of the key metrics for a company are nearly identical to those of other
companies in their industry, much like different species have only a tiny bit of difference in their 35!. The more
regulated the industry, the more metrics they have in common.
This brings us to the industry dashboard, which comes pre"populated with best"practice metrics for your industry. If
you locate a dashboard that is pre"populated for your company$s industry and you like the ,-Is you see there, you can
now focus your attention on the smaller group of ,-Is that are uniue to your business " based on your competitive
situation and growth stage. !nd, if your competitors use many of the same metrics, it$s much easier to make apples"
to"apples comparisons. 7ou can see an e&ample of an industry dashboard at
www.bpmpartners.com/inde&pack.shtml.
! company will have many metrics, but relatively few ,-Is. Iere we confront one of the toughest challengesF Iow do
you get to that short list of agreed"upon key measures> 7ou need a team approach, and the team needs to work down
from the strategy to determine the key business drivers. .or e&ample, if the strategic goal is to be the number one
supplier in the industry, then some key business drivers might be your distribution coverage in strategically important
geographies, productivity of the sales force and customer retention rates.
The bottom"up approach, where a team starts with a huge collection of metrics and then asks, ;/hich of these are the
most important>; has several problems. /hat one C- defines as ;most important; may not tie directly to the
company$s strategic direction. !nother risk is that the group only looks at e&isting measures. If you don$t already
measure client satisfaction, for e&ample, it won$t even be up for consideration as a ,-I. The top"down approach helps
ensure that the ,-Is measure e&ecution of the strategy.
I am a strong believer that the most crucial element is the process used to develop ,-Is. Hive careful thought to who
should be involved, how to deal with the politics of developing ,-Is that people in the meeting may later be
compensated on, and how to ensure that the ,-Is chosen are actionable and meaningful to all business units.
!n encouraging note about this process comes from 0hris Iervolino. The discussion itself, the back"and"forth about
which ,-Is to adopt, can turn out to be ?ust as important or even more useful than adoption of the ,-Is themselves.
These discussions of how to measure and view the business can prompt new, robust conversations about how the
business and its environment have changed over time, what future challenges lie ahead and how these challenges can
be addressed in a timely manner.
(lose the loop
#eading indicators for the maintenance process can support capable management (.igure '). 3ofasco
1teel in Iamilton, Ontario, calls this feedback loop the !sset =eliability -rocess (.igure (). It represents
all the tasks reuired to support the maintenance function. AThe !sset =eliability -rocess is a supply
chain,B says =on Thomas, 3ofasco senior reliability specialist and world"class euipment reliability pro?ect
manager. A#eading metrics presented as ,-Is provide a clear indication if the reuirements of each
element in the proactive asset reliability process are being satisfied.B
If a step in the process is skipped, or performed at a substandard level, the process creates defects
known as failures. AIf those elements aren4t satisfied, leading ,-Is also will determine what action should
be taken to correct the lack of maintenance process adherence,B Thomas says. AThe output of a healthy
reliability process is optimal asset reliability at optimal cost.B
/e can use ,-Is in other areas of the business as well. This approach is particularly interesting where
multiple functional areas each play a role in a given goal, such as plant reliability. -lant reliability is a
shared responsibility of the maintenance, production and engineering functions. #eading indicators for
each departmental process feed the lagging indicators for the department function, which then summari@e
to the plant level (.igure :).
It4s really a simple concept, but most plants don4t get it. AIn studies, more than +*8 of companies don4t
have corporate support for an enterprise"level ,-I program for maintenance and reliability,B says Terry
/ireman, partner, Cesta -artners (www.vestapartners.com). /ireman is an accomplished e&pert in
maintenance9reliability and author of the book, A3eveloping -erformance Indicators for %anaging
%aintenance.B Ie says, AEven at the plant level, maintenance and reliability ,-Is are not clearly defined
and hence aren4t used effectively. In most companies, ,-Is have ?ust become a numbers game.B 6sing my
earlier analogy, these companies are driving their car with the windshield painted black.
!ccording to /ireman, AThe pitfall people encounter is they are trying to manage using too many lagging
metrics, so they don4t have sufficient resources to manage the business process metrics. These
companies never achieve the target business results and never will as long as they are sub"optimi@ing
their measurement system.B
)et serious
The problem is management must learn to manage operations through ,-Is (both leading and lagging).
In my :*"year"plus career, I have seen many plants shut their doors forever. They blamed the closing on
many reasons, but the one thing they all had in common was that none had properly managed with the
,-Is. The metrics or indicators they manage with were ones likeF
0ost
!sset availability
Euipment downtime
OEE
!ll these metrics or indicators, while useful for measuring performance, cannot be used to manage the
maintenance and reliability process. They are simply the results of all the actions that have taken place in
the maintenance and reliability process. !gain, you cannot manage results. 7ou can only manage the
processes leading to the results. If your company uses any of the above metrics to manage their
operation, without using leading indicators, you should work to correct the situation.
!sk some very basic uestionsF
3oes your company differentiate between those ,-Is that can be used to manage (leading
indicators) from those that we can use to measure results (lagging indicators)>
3oes your company measure performance of the maintenance process, where you can easily
manage when needed>
If leading indicators show underperformance, the underperformance will affect the lagging indicator, which
could be reliability, cost, capacity, etc. -eople must understand the relationship between a leading and
lagging indicator and their effects on the maintenance and reliability function.
/ireman described a recent client visit where the company had a completely integrated, enterprise"level
,-I system. This company4s managers are able to review their ,-Is and monitor trends from corporate
headuarters. !s they see negative trends develop in their corporate ,-Is, they are able to drill down to
the plant causing the trend. They can then e&amine their plant"level ,-Is and find the trend driver. This
was usually a process indicator, such as -% compliance.
AOne e&ample clearly showed -% compliance was so low that it caused reactive work to increase,B
/ireman says. AThis, in turn, created more maintenance overtime and impacted production schedule
compliance. This increased the maintenance costs (per unit produced), and also the total cost per unit for
the plant. These cost drivers cascaded upward, impacting the overall corporate costs.B
!n integrated view of the corporation4s plant and departmental performance allowed this client to monitor
its business performance and immediately take steps (manage) to improve the underlying process that
would result in the desired increased profitability. /ireman says, A6nfortunately, only '*8 or fewer of
companies understand ,-Is well enough to develop this types of performance management system.B
%ost maintenance managers are told to control cost, improve reliability and increase asset availability
with no idea where the problem may be in their maintenance process. 6nfortunately, many lose their ?ob
as a result. The fact is you cannot control cost, reliability or availability without managing the
maintenance process.
Step*%y*step
Iow much money do corporations lose every year by managing plants without good leading and lagging
,-Is> The costs may be too high to calculate, so we must stop them now by putting a plan in place to
develop and align ,-Is. This section may save your plant or your ?ob, but I warn you, don4t look for
shortcuts in the process, because there are none.
1tep 'F Educate management, from the e&ecutive level to floor"level supervisors, on ,-Is and how
leading and lagging indicators should be aligned to meet business goals. 7ou then must provide a similar
education to the maintainers and operators.
1tep (F 3efine and assess your current maintenance and reliability process against a future state
consisting of known maintenance and reliability best practices. !s part of this assessment, you must
develop a business case with financial opportunities and cost of change. This step continues the education
process and creates awareness of the opportunity at"hand.
1tep :F 3evelop a plan based on the assessment, with financial opportunities and cost on a timeline. This
plan must includeF
a)3efinition of the elements of your maintenance and reliability process (work identification, planning,
scheduling, work e&ecution, etc.)L
b) 3efinition of leading and lagging ,-Is in each element of your maintenance and reliability processL
c) 3efinition of roles and responsibilities for each taskL and
dM /orld"class benchmarks established against the defined ,-Is.
1tep NF Implement the process and begin managing based on leading indicators. I would begin measuring
only a few ,-Is at first. Then allow people at the lowest levels to make the decisions reuired to ensure
your maintenance and reliability process is proactive and effective. 6sing leading ,-Is is a great
awareness tool and will bring everyone into the decision"making process.
=emove the black windshield and manage with leading indicators, not with lagging indicators. #eading
,-Is should be used to drive your decision"making process. =emember, leading indicators are
manageable, while lagging indicators ?ust tell us how well we managed. If you want to be the best in your
business, step up to the plate and manage in the most efficient manner by following my
recommendations.
If you would like additional information on ,-Is, attend one of my workshops designed specifically to
solve this problem. 1end me an e"mail at ricky"smithOcomcast.net and I will send you a schedule and
locations. 7ou can also contact me if you have problems with or uestions about your ,-Is.

The legacy of +ohn ,ay
The %ount Iolly, 1.0. plant of bath enclosure and shower door manufacturer !luma& was rated as one of
the best maintained plants in the world for more than (* years. AIundreds of companies visited our plant,
paying P',*** each to see our maintenance program up close, but only a few learned from their visit,B
says Eohn 3ay, retired former engineering and maintenance manager at the plant. 3ay also was invited to
visit more than )** plants in the 6.1., 0anada and !ustralia.
AThe one the thing more than +*8 of them had in common was they could not effectively manage their
plants because they had no leading ,-Is in place,B 3ay says. A%any of these companies were crying for
help, but didn4t know which way to go.B %ost managed only with lagging indicators, and made decisions
based on metrics such as cost and reliability.
3ay learned early in his career that without leading ,-Is, you cannot manage euipment maintenance
and reliability. A!luma& had a system in place where we could measure everything in our maintenance
process " from leading indicators such as identification of potential failures through to the lagging financial
results of all actions performed by maintenance,B he says. This separation of leading and lagging ,-Is
allowed him to make management decisions when leading ,-I underperformance was identified, before
cost and reliability (the lagging indicators) were impacted. A.or more than (* years, I could see problems
brewing long before they would become a serious issue,B he says.
!ccording to 3ay, there is a simple reason why most companies don4t succeedF They don4t know what
information needs to be collected. In '+J+, he worked with !luma&4s accounting department to establish
more than Q* financial accounts ?ust for maintenance. These accounts were linked to leading ,-Is in the
maintenance process that provided the information needed to manage proactively.
In turn, these ,-Is were linked to euipment performance (lagging indicators). Each of these lagging ,-Is
had established benchmarks that measured if the maintenance process was in or out of control. This
approach may sound comple&, but once you have it in place, management can truly manage the reliability
of plant euipment.
3ay shared ': years of ,-I data that was so impressive, it would bring tears to any maintenance and
reliability professional4s eyes. AEveryone from a maintenance person to the plant manager had ,-Is they
looked at on a daily or weekly basis to make basic and immediate management decisions,B he says. AEach
level in our organi@ation used a small number of lagging ,-Is along with a larger number of leading ,-Is
that were important to managing their part of the business.B
Over the ':"year period, maintenance cost (a lagging ,-I) didn4t increase, but was constant. %aintenance
cost as a percentage of return on asset value held at around :8. Eually impressive was that the
controllable plant operating cost was very constant over the same time period. This lagging"indicator data
pointed to the obvious fact that euipment reliability directly correlates to operating cost.
2y managing the maintenance and reliability process, element by element, using leading indicators,
!luma& was able achieve these results. 3ay4s e&perience validates that managing with both leading and
lagging ,-Is is the only way to effectively control an operation to achieve the results e&pected to succeed
in business.
2y the way, more than (Q years ago I worked for Eohn 3ay at !luma&, and en?oyed every day I worked at
his plant.
%reatin# Effecti&e KPIs

!rticle published in 3% =eview %aga@ine
Eune A99= Issue

2y -ayne .c/erson
One of the most common uestions people ask about performance dashboards is, Iow do we define effective key
performance indicators (,-Is)> The answer is important because ,-Is govern how employees do their ?obs.
,#ents of 3r#ani4ational %$an#e
The adage ;/hat gets measured, gets done; is true. ,-Is focus employees$ attention on the tasks and processes that
e&ecutives deem most critical to the success of the business. ,-Is are like levers that e&ecutives can pull to move the
organi@ation in new and different directions. In fact, among all the tools available to e&ecutives to change the
organi@ation and move it in a new direction, ,-Is are perhaps the most powerful.
1ubseuently, e&ecutives need to treat ,-Is with respect. !s powerful agents of change, ,-Is can drive unparalleled
improvements or plunge the organi@ation into chaos and confusion. If the ,-Is do not accurately translate the
company$s strategy and goals into concrete actions on a daily basis, the organi@ation will flounder. Employees will work
at cross purposes, impeding each other$s progress and leaving everyone tired and frustrated with little to show for their
efforts.
(u"optimi4ed Processes
! trucking company, for e&ample, that measures performance by the percentage of on"time shipments may drive
hauling costs skyward because the ,-I does nothing to discourage dispatchers from sending out half"empty trucks to
meet their schedules. To keep costs in line, the company needs to add a second ,-I that measures the percentage of
unused cargo capacity in outgoing trucks, and it needs to revise the first ,-I so it emphasi@es meeting customer
e&pectations for fast, reliable shipments rather than ?ust on"time deliveries. This combination of ,-Is gives dispatchers
leeway to contact customers and renegotiate shipping schedules if they know the customer may be fle&ible.
T$e 5en of De&elopment
0rafting sound ,-Is is more of an art than a science. !lthough there are guidelines for creating effective ,-Is (see
sidebar), they do not guarantee success. ! ,-I team may spend months collecting reuirements, standardi@ing
definitions and rules, prioriti@ing ,-Is and soliciting feedback " in short, following all the rules for solid ,-I development
" but still fail. In fact, the danger is that ,-I teams will shoot for perfection and fall prey to analysis paralysis. In reality,
,-I teams can only get K* percent of the way to an effective set of ,-IsL the last (* percent comes from deploying the
,-Is, seeing how they impact behavior and performance, and then ad?usting them accordingly.
%etrics used in performance dashboards are typically called key performance indicators because they measure how
well the organi@ation or individual performs against predefined goals and targets. There are two ma?or types of ,-IsF
leading and lagging indicators. #eading indicators measure activities that have a significant effect on future
performance, whereas lagging indicators, such as most financial ,-Is, measure the output of past activity.
#eading indicators are powerful measures to include in a performance dashboard but are sometimes difficult to define.
They measure key drivers of business value and are harbingers of future outcomes. To do this, leading indicators either
measure activity in its current state (i.e., number of sales meetings today) or in a future state (i.e., number of sales
meetings scheduled for the ne&t two weeks), the latter being more powerful because it gives individuals and their
managers more time to influence the outcome.
.or e&ample, Ruicken #oans identified two ,-Is that correlate with the ability of mortgage consultants to meet daily
sales uotasF the amount of time they spend on the phone with customers and the number of clients they speak with
each day. Ruicken #oans now displays these two current"state ,-Is prominently on its operational dashboards. %ore
importantly, however, it created a third ,-I based on the previous two that pro?ects whether mortgage consultants are
on track to meet their daily uotas every ') minutes. This future"state ,-I, which is based on a simple statistical
regression algorithm using data from the current"state ,-Is, enables sales managers to identify which mortgage
consultants they should assist during the ne&t hour or so.
%$allen#es to %reatin# KPIs
1ome of the challenges with creating effective ,-Is include process nuances, activity measurement, accurate
calculations and lifecycle management.
Process Nuances. The problem with many ,-Is is that they do not accurately capture the nuances of a business
process, making it difficult for the pro?ect team to figure out what data to capture and how to calculate it.
.or e&ample, e&ecutives at 3irect Energy reuested a repeat"call metric to track the efficiency of field service
technicians, but it took the pro?ect team considerable time to clarify the meaning of the ,-I. .or e&ample, field service
technicians primarily repair home energy euipment, but they can also sell it. 1o, is a repeat call a bad thing if the
technician also brings literature about replacement systems or makes a sale> Or, what if a homeowner only lets a
technician make minor repairs to an aging system to save money but calls shortly afterward because the home$s
furnace broke down again>
%ost business processes contain innumerable nuances that must be understood and built into the ,-I if it is to have
any validity, especially if the ,-I is used as a basis for compensation. The worst"case scenario is when employees
discover these nuances after the ,-Is have been deployed, which stirs up a hornet$s nest of trouble and wreaks havoc
on both the performance management system and compensation policies.
Accurate Calculations. It is also difficult to create ,-Is that accurately measure an activity. 1ometimes, unforeseen
variables influence measures. .or e&ample, a company may see a ?ump in worker productivity, but the increase is due
more to an uptick in inflation than internal performance improvements. This is because the company calculates worker
productivity by dividing revenues by the total number of workers it employs. Thus, a rise in the inflation rate artificially
boosts revenues S the numerator in the ,-I S and increases the worker productivity score even though workers did
not become more efficient during this period.
!lso, it is easy to create ,-Is that do not accurately measure the intended ob?ective. .or e&ample, many organi@ations
struggle to find a ,-I to measure employee satisfaction or dissatisfaction. 1ome use surveys, but often employees do
not answer the uestions honestly. Other companies use absenteeism as a sign of dissatisfaction, but these numbers
are skewed significantly by employees who miss work to attend a funeral, care for a sick family member or stay home
when day care is unavailable. 1ome e&perts suggest that a better ,-I, although not a perfect one, might be the
number of sick days taken because unhappy employees often take more sick days than satisfied employees.
Natural Lifecycle. It$s also important to note that a ,-I has a natural lifecycle. /hen first introduced, the ,-I energi@es
the workforce, and performance improves. Over time, the ,-I loses its impact and must be refreshed, revised or
discarded. Thus, it is imperative that organi@ations continually review ,-I usage.
-erformance dashboard teams should automatically track ,-I usage with system logs that capture the number of users
and ueries for each ,-I in the system. The team should then present this information to the performance dashboard
steering committee, which needs to decide what to do about underused ,-Is. .or e&ample, Iewlett -ackard Technology
1olutions Hroup (T1H) holds uarterly meetings to review ,-I usage, which it tracks at a detailed level. ;If a ,-I isn$t
being accessed, we go back to the owners and see whether they still want it. If not, we remove the ,-I,; says %artin
1ummerhayes, program manager.
,-Is are powerful agents of organi@ational change, but creating effective ,-Is is challengingL it is more art than
science. /hile there are many guidelines that can steer teams in the right direction, ultimately, teams must put the
,-Is in practice and see what behaviors they drive. Then, the teams need to continually refine and refresh the ,-Is to
ensure that they are positively affecting organi@ational change, not undermining it.
Key Performance Indicators KPI" are financial and non(financial metrics used to quantify
ob)ectives to reflect strategic performance of an organi6ation. KPIs are used in *usiness Intelligence
to assess the present state of the business and to prescribe a course of action. ,he act of monitoring
KPIs in real(time is known as business activity monitoring. KPIs are frequently used to "value"
difficult to measure activities such as the benefits of leadership development, engagement, service,
and satisfaction. KPIs are typically tied to an organi6ation's strategy as e&emplified through
techniques such as the *alanced !corecard".
,he KPIs differ depending on the nature of the organi6ation and the organi6ation's strategy. ,hey
help an organi6ation to measure progress towards their organi6ational goals, especially toward
difficult to quantify knowledge(based processes.
A KPI is a key part of a measurable ob)ective, which is made up of a direction, KPI, benchmark,
target and time frame. %or e&ample$ 0Increase %verage 1evenue per Customer from 2"# to 2"' by
.34 5##&0. In this case, 'Average 0evenue Per .ustomer' is the KPI.
KPIs should not be confused with a .ritical !uccess %actor. %or the e&ample above, a critical
success factor would be something that needs to be in place to achieve that ob)ectiveL for e&ample, a
product launch.
Contents
IhideJ
? Identifying indicators
A Areas to be analy6ed
@ .ategori6ation of indicators
K Problems
G !ee also
edit! Identifying indicators
Performance indicators differ with business drivers and aims or goals". A school might consider the
failure rate of its students as a Key Performance Indicator which might help the school understand
its position in the educational community, whereas a business might consider the percentage of
income from return customers as a potential KPI.
*ut it is necessary for an organi6ation to at least identify its KPI's. ,he key environments for
identifying KPI's are$
;aving a pre(defined business process.
;aving clear goals/performance requirements for the business processes.
;aving a quantitative/qualitative measurement of the results and comparison with set goals.
Investigating variances and tweaking processes or resources to achieve short(term goals.
<hen identifying KPI's the acronym !2A0, is often applied. KPI's need to be$
(pecific
*easurable
,chievable
Realistic
Timely
edit! "reas to #e analyzed
Among the areas top management analy6es are$
?. .ustomer related numbers$
?. #ew customers acquired
A. !tatus of e&isting customers
@. .ustomer attrition
A. ,urnover generated by segments of the customers ( these could be demographic filters.
@. 1utstanding balances held by segments of customers and terms of payment ( these could be
demographic filters.
K. .ollection of bad debts within customer relationships.
G. -emographic analysis of individuals potential customers" applying to become customers,
and the levels of approval, re)ections and pending numbers.
=. -elinquency analysis of customers behind on payments.
8. Profitability of customers by demographic segments and segmentation of customers by
profitability.
2any of these aforementioned customer KPIs are developed and improved with customer
relationship management.
,his is more an inclusive list than an e&clusive one. ,he above more or less describe what a bank
would do, but could also refer to a telephone company or similar service sector company.
<hat is important is$
?. KPI(related data which is consistent and correct.
A. ,imely availability of KPI related -ata.
%aster availability of data is beginning to become a concern for more and more organi6ations.
-elays of a month or two were commonplace. 1f late, several banks have tried to move from
availability of data at shorter intervals and less delays. %or e&ample, in businesses which have higher
operational/credit risk loading that involve credit cards, wealth management", .itibank has moved
onto a weekly availability of KPI related data or sometimes a daily analysis of numbers. ,his means
that data is usually be available within AK hours as a result of automation and the use of I,.
Categorization of indicators
Key Performance Indicators define a set of values used to measure against. ,hese raw sets of values
fed to systems to summari6e information against are called indicators. Indicators identifiable as
possible candidates for KPIs can be summari6ed into the following sub(categories$
uantitati&e indicators which can be presented as a number.
Practical indicators that interface with e&isting company processes.
Directional indicators specifying whether an organi6ation is getting better or not.
,ctiona"le indicators are sufficiently in an organi6ation's control to effect change.
Key Performance Indicators in practical terms and strategy development means are 1*E+.,I3+!
to be target that will add the 3A7B+ to the business 21!, 21!, S K+> I#-I.A,10! 1%
!B..+!!".
-ifficulty
In reality organi6ations and businesses often when looking for Key Performance Indicators discover
that they cannot get the performance indicators that they would like to get. 1ften they are stuck with
various non(key indicators. ,hese are used as if they were Key Performance Indicators and often
called KPI's since something is better than nothing.
KPIs 2ade +asy
)e"ind t"e data 4as and exec#ti0e das"+oards5 &etrics increasing$ in. to rea/ti&e5 ,ant/%oor data1 Do $o# .no4 eno#g" a+o#t .e$
,er%or&ance indicators (KPIs) and &an#%act#ring exec#tion s$ste&s (MES) to in0est in e%%icient ,rocess i&,ro0e&ents3
Fran. O1 S&it"5 Contro Engineering
Contro Engineering // 6an#ar$ 75 899:
Process control is hip. 2anufacturing line optimi6ation is cool. +verybody from the .+1 down
wants a piece of it. And )udging by the clamor around video walls, information portals, and
e&ecutive dashboards, everyone wants to visuali6e control to drive performance.
4lobali6ation and pressure on companies to compete at the most fundamental level of operational
e&cellence means everyone is looking at the factory, the mill, or the plant more closely. ,he
challenge is whether control engineering can master the strategic role implicit in this level of
scrutiny.
<hatTs strategic in the role can be summed up in three letters$ K(P(I. Key performance indicators
are measures of success or compliance, and the industry is rife with talk of them. Industry analysts,
organi6ations, and enterprises are deep in e&ploration and analysis of how to define, create,
calculate, and disseminate KPIs. And control engineers need to understand them, so they can help in
meaningful ways.
O.ontrol engineers can no longer afford to be satisfied with a controllerTs performance by viewing
how straight the lines on the control chart are,P says Eohn !nodgrass, process control engineer for
.hemtura .orp.Ts 2organtown, <3, specialty chemical plant.
OIn todayTs market, with todayTs technology, typical operators arenTt typical anymore. ,hey donTt
)ust turn valves. .ontrol engineers shouldnTt be typical either,P says !nodgrass. O,hey should be
looking at the information they have and trying to determine what they can do make product more
efficiently. If they donTt, it wonTt be long before there wonTt be a business anymore.P
2+!A International, a trade organi6ation constellated around manufacturing e&ecution systems
2+!", has actively investigated KPIs since early last year. In 1ctober A99=, it published an initial
report on its efforts called O2etrics ,hat 2atter$ Bncovering KPIs that Eustify 1perational
Improvements.P *ut 2+!A concedes itTs )ust scratched the surface of a very comple& issue.
.onsequently, 2+!A working groups are delving deeper still, particularly into the labyrinthine
linkages between KPIs at different business levels within organi6ations. A common thread is the
control layer of a plant, where the data that feeds many KPIs is generated. Another common element
is 2+!. ,hatTs where aggregation of the data and conte&t typically happens before itTs passed up to
enterprise systems and their dashboard and video wall outputs that e&ecutive management sees.
KPIs and 2+! are becoming critical elements to running a plant, because theyTre critical to running
a business. And, in todayTs world, anyone not thinking about the business isnTt as keyed in to
business performance as they should be.
Engineering to &one$
O+verything a control engineer does eventually rolls up into money,P says Eim .hristian, product
manager for ;oneywell. OItTs important to know how what you do contributes to the business. !table
operations translate into greater reliability and better throughput, longer catalyst and equipment life,
and reduced use of chemicals. All are measurable.P
1ne way for control engineers to think about
KPIs is Oto understand how what you do
contributes to your company making money,P
says .hristian. O<hat measurements do you
need to track to know youTre ma&imi6ing
valueHP
A vast, widely prevalent disconnect e&ists in
most organi6ations today, at various levels of
conceptual abstraction as well as within data
flow linkages. O2any of our customers view
KPI initiatives as an engineering e&ercise to
collect data,P says .laus Abildgren, marketing
program manager for production and program
development for <onderware. O,hey donTt
understand the key needs of the businessU
what are the pieces of data that the rest of the
business needs to make decisions.P
,he disconnect is from the bottom up and
from the top down. ,his was revealed in the
survey behind the report that 2+!A
developed. O,he big surprise for us was how
few felt they had a strong structure of linkage
from financial goals and metrics down to the
shop floor,P says Eulie %raser, principal at
Industry -irections, a *oston(area industry
consultancy. %raser was contracted to help drive the 2+!A O2etrics ,hat 2atterP pro)ect. O1nly
@: of the companies we interviewed for the study said they had strong linkage. <e didnTt e&pect it
to be huge, but we didnTt e&pect it to be that small either.P
.ontributing to the problem is structural weaknesses in technology infrastructureUin other words,
an inability to handle the vast number of applications and amounts of data now being generated.
OA20 has worked with manufacturers who have over G,999 point solutions IapplicationsJ in their
portfolio,P says .olin 2asson, research director for supply networks operations for *oston(based
A20 0esearch.
Bnder such circumstances, OitTs not trivial to construct metrics at a single site, let alone across
multiple sites. ,hatTs not even taking into consideration performance data composed of millions of
readings a day and putting that into some business conte&t that has meaning at a higher level,P he
says.
It's not trivial to construct metrics at one site, let alone across multiple sites,
says *olin +asson, research director at A+, ,esearch# -se of specific
metrics varies, as sho!n by the percentages#
!ro4t" o% data &odes
!uch a wealth of data possibilities is contributing to a growing emphasis on standardi6ation of
manufacturing data models that can establish commonality.
,his desire for a comprehensive manufacturing model is one of the market drivers behind the surge
in interest in 2+!, for models are core to functionality of this software. ItTs also whatTs prompted
automation and human machine interface ;2I" vendors to invest in model(driven integration
infrastructures, such as 0ockwell AutomationTs %actory,alk, 4+ %anucTs Proficy, and InvensysT
Infusion platforms. ,hese create Oone common computing environment,P in the words of Peter
2artin, vice president of strategic ventures for Invensys.
1ther factors driving interest in 2+! and KPIs are increasing product and manufacturing
comple&ity and regulatory compliance needs. Align ,echnology manufactures a line of individually
custom(designed orthodontic appliances used to properly align teeth. 1rders are acquired at its !anta
.lara, .A, headquarters, then transmitted to its facility in .osta 0ica where clinical technicians
create @(- representations. ,hese are then sent back to prescribing doctors for verification, before
work orders are transmitted to the companyTs 2e&ico production facility.
Align ,echnology turned to 2+! to enable it to recover the detailed visibility of manual tracking
that was lost when it implemented an enterprise resource planning +0P" system. It uses Production
.entre 2+!, a component of the 0ockwell Automation %actory,alk platform.
O<e manufacture G9,999 custom parts every
dayUand every day itTs a different G9,999,P
says 2ichael ;enry, Align ,echnology .I1
and vice president of information and
technology. O,he KPIs weTve focused on
initially are public facing onesUcycle times
and gross margins.P
*y providing greater visibility into the flow
and status of work orders, 2+! was
instrumental in attacking problems that had
driven up cycle times and eaten into gross
margins. 0eal(time visibility into the status
of work orders in the geographically
distributed process flow helped Align
,echnology identify bottlenecks and smooth
the flow into a more seamless stream, from
order acquisition to finishing and polishing at
the end of the production line.
O.ycle times, which were two weeks, are
down to five days. And gross margins that
were GD: are now up to =C(89:,P ;enry
says.
Reg#ation "e,s3
*usiness metrics such as cycle times and
gross margins are relatively common.
-etermining which manufacturing metrics
are critical to track can be more challenging
Uunless youTre in a regulated industry.
Btica, #>(based .on2ed .orp.,
manufacturer of laparoscopic surgery
+anufacturers are striving to relate KPIs used on the manufacturing floor to
business metrics trac"ed in the e.ecutive suite#
'/he big surprise for us !as ho! fe! felt they had a strong structure of lin"age
from financial goals and metrics do!n to the shop floor,' says 0ulie 1raser,
head of the +2'A '+etrics /hat +atter' research#
products, patient support and other products, is bound by B.!. A?.%0 Part DA9 regulations outlining
4ood 2anufacturing Practices 42P" for medical device manufacturers.
O<e operate in a tightly regulated industry, which determines which KPIs you must track and trend
in your operations. <e have to validate the process to begin with to determine the variable data, such
that when I set these indicators, and the numbers are being met, I know the process is stable,P says
*ill <heatley, .on2ed manager of manufacturing engineering.
OAfter that, weTre looking at$ first pass yields, are we staying capable, is preventive maintenance
effective, IandJ are we preventing breakdowns.P Implementing 2+! was crucial to streamlining the
process, <heatley says. .on2ed uses 3isiprise 2+!.
;ow does a company determine which KPIs to useH Ideally, itTs a top(down decision. OIn concept,
you want to take top(level goals and strategy and build out departmental metrics and link those all
the way down,P says %raser of Industry -irections. O>ou want to take manufacturing metrics...right
down to the machines.P
Ei&inating +o#ndaries
,he whole issue of KPIs is e&ceedingly comple& and, as a Oscience,P is still young and evolving.
*ut progress being made is looping downward evermore inclusively into the domain of control
engineering. As work in the field is revealing, everything is indeed interconnected.
O,he traditional approach over the years has held that automation, 2+!, and I, are three individual
layers,P 2artin says. O*ut itTs an artificial separation. ItTs been necessary, he says, because past
technology required that problems be segmented to deal with the unique requirements at each level.
As the technology evolves, Oin time that separation is going away,P 2artin says. ,he push for KPIs
linked from top floor to shop floor is driving the business case for that. And in the end, it truly is all
about the business case.
,hatTs what control engineers need to grasp and master. %orget the flashy data walls and <eb(
enabled dashboards. %ocus instead on the metrics that feed those broadcasts. >our companyTs future
will be increasingly dependent on converting control data into strategic intelligence.
KPIs in action
Performance measurement is not static5 it evolves as performance issues vary, as the mar&et strategy changes, as
technologies and the means to measure and record performance evolves over time *ources of KPIs that others are
using include research from /;*A, A/<, and Aberdeen Here are specific recommendations from users
L=e manufacture 4$,$$$ custom parts every dayM !he KPIs weve focused on initially are public facing ones-
cycle times and gross marginsN
L=e operate in a tightly regulated industry, which determines which KPIs you must trac& and trend in your
operations After that, were loo&ing at5 first.pass yields, are we staying capable, is preventive maintenance
effective, OandP are we preventing brea&downsN
L+orporate division head:uarters set up the specific KPIs they wanted us to useN
L=e put no more than four OKPIsP in front of an operator at any timeN
L,ur company has determined as an organiIation that there are four process areas that the enterprise needs to
focus on !hese include5 financial0 process excellence0 :uality0 and environmental health, safety and security
;verything cascades down from thoseN
LAt the operator level, we use the real.time accounting measurement of cost.per.batch =ith that an operator
can drive down costs and &eep :uality high !he next layer up doesnt want to see the cost of everything, but
Owants insteadP variance.to.budget of production, or variance.to.budget from department to department Its all
based on the same data that flows upN
Onine Extra
I&,ortance o% To,/Do4n KPI I&,i&entaion
Kno4 4"at to trend
!hats what +9 !echnologies Power and ;lectronics 9ivision @P;9A did +9 !echnologies P;9, head:uartered in
/ansfield, /A, manufactures dc converters, power meters, standby and motor power, and other products L+orporate
division head:uarters set up the specific KPIs they wanted us to use,N says *teve Kaplan, global /;* administrator, +9
!echnologies L!hey include first pass yield, scrap rate, and laborBmachine facility cost In order to measure those, each
facility has certain KPIs5 defects per operation, yield after correction, yield by line and shift
L=e have *iemens pic& and place e:uipment that is feeding information on placements made Automated inspection is
recording failures foundN !hat information, fed into /;*, is aggregated and fed into the divisional enterprise system,
Kaplan says
"ut performance measurement is not static5 it evolves as the performance issues vary, as the mar&et strategy changes,
as the technology and the means to measure and record performance evolves over time
L=e shifted from graphing performance in percentages to reporting parts.per.million,N Kaplan states L=ith percentages,
youre loo&ing for an upward trend =ith parts.per.million, youre loo&ing for Iero =hen we made the shift and people
came in and saw a negative trend, there was :uite an uproar =e hadnt educated everybody fully "ut on a positive note,
it showed people were paying attention to the chartsN
Acco#nting/dri0en KPIs
!he importance of top.down decomposition to get to production level KPIs has other nuances and ramifications LPart of
the challenge of rationaliIing KPIs is determining which ones have impact,N says /artin of Invensys
/artin asserts that Invensys has tal&ed with more than 2#,$$$ executives over the course of a decade L/any executives
-especially +D,s-dont believe KPIs are valuable !heyve told us that engineering and operations managers &eep
telling them how much money theyve saved or made for the company, but when accounting loo&s at the balance sheets,
they dont see itN
/artin says Invensys has pushed bac& in terms of as&ing what it would ta&e to overcome this problem LDundamentally,
theyd li&e to do real.time accounting-using KPIs that measure profits and costs ,nce you do that for each process in
the plant, you can easily determine which KPIs are directly associated with adding valueN
!he tric&, he says, in building Laccounting models right on the front linesN !o do that you need a proper LhandoffN down
the chain that ensures that +D,s and +;,s will get bac& what they need to ma&e strategic business decisions =hats
critical is getting the +D, to define what is needed in terms of an e:uationN After that, Lits not that difficult to determine
for each process area in the plant-then down to the process unit level-how to model the process data to calculate KPIs
that feed those e:uations,N /artin says
*ays Fim +hristian of Honeywell5 L!he KPIs that the +;, loo&s at are stoc& price and profitability "ut if youre an
operator on the floor, loo&ing at those KPIs doesnt provide you a means to impact them *o you have to determine
indirect measurements that operators understand If you improve unit utiliIation, you can push more product in the course
of a year
1ou need those high level indicators, but youve got to build lower level KPIs you can put in front of operators that they
can personally controlN
!he &ey to effective KPIs is revealed in the first descriptor5 &ey Identify too many, and you merely end up with
performance indicators L=e put no more than four in front of an operator at any time,N says *nodgrass of +hemtura !he
same holds as you roll up to the highest level +hemtura identified four process areas that the enterprise needs to focus
on !hese include5 financial0 process excellence0 :uality0 and environmental health, safety and security ;verything
cascades down from those
*nodgrass and +hemtura have wor&ed with Peter /artin and Invensys in embracing real.time accounting at the
operations level LIts very exciting,N *nodgrass says ,nce you &now what the company is driving toward in terms of &ey
performance measurements, and you have a unified computing environment that a platform li&e Invensys Infusion ma&es
possible, *nodgrass says, real.time accounting measurements designed for each hierarchical level in the plant becomes
immeasurably more fluid and easy
LAt the operator level, we use the real.time accounting measurement of cost.per.batch,N he explains L=ith that, an
operator can drive down costs and &eep :uality high !he next layer up doesnt want to see the cost of everything, but
Owants insteadP variance.to.budget of production, or variance.to.budget from department to department Its all based on
the same data that flows up and is used for other calculationsN
';IC; KPIS ARE DRI<IN! YO=R )OTTOM -INE3
.ontractor's *usiness 2anagement 0eport"-o you know what's causing profit fade on your )obsH 1r,why A/0s are outstanding for more than =9
daysH Perhaps monitoring your key performance indicators KPIs" could provide insights for corrective actions. *ut what e&actly are meaningful KPIs
for construction companiesH <hat metrics signal where contractors should focus to become more productive and profitable(and reduce riskH
Ke Performance Indicators -rive *est Practices for 4eneral .ontractors, a new white paper from by Ken 0oper and 2ichael 2c7in, management
consultants with %2I .orporation, introduces a set of KPIs specifically for the construction industry. "<e hope contractors will utili6e this information
to drive business process improvements to become profitable and better manage risk," 2c7in told .*20. %urther, he suggests that these KPIs provide
a comprehensive look at "your business and where it is going, and identify items you should address proactively to manage your daily operations more
effectively."
Identifying construction industry KPIs. ,eaming with 2icrosoft *usiness !olutions and !I! !oftware, %2I developed seven indicators as "meaningful
yardsticks that contractors can use to effectively communicate the daily operations of their business see the accompanying sidebar". ,he report
encourages contractors to use these KPIs to benchmark their performances against best(in(class contractors.
KPIs can isolate the breakdowns in contractors' business processes that contribute to poor performance outcomes. +&amining these breakdowns should
produce clues to the necessary remedial actions. %or e&ample, if your receivables far e&ceed those of best(in(class contractors, you would need to
evaluate your invoicing processes, invoice format, follow(up once invoices are distributed, and so forth. ,he goal, observes 2c7in, is to streamline the
flow of information so it doesn't take as long to get paid.
-o KPIs replace traditional financial statement ratios such as quick ratios, working capital turnover, and return on assetsH *oth 0oper and 2c7in told
us no. 0ather, that KPIs are complimentary to the analysis many contractors conduct based on financial statement data. ",hese KPIs are more broad(
ranging because they address more than financial issues." According to 2c7in, they are more comprehensive and specific to construction industry
eccentricities that influence and affect the profitability of a construction company.
2onitoring KPIs in large and small construction companies. Although the white paper makes a case for implementation of integrated systems to
capture data, 2c7in concedes that smaller companies or contractors not ready to undertake such an e&pensive system, "can use the technology that
you have" in a different way. ,he calculation of the KPIs does not hinge on having an integrated system, 2c7in saidL however, the advantage of an
integrated system is its ability to drill down to uncover what is feeding a negative KPI and to isolate specific pro)ects that may be influencing the KPIs.
!till, most contractors run their business on +&cel spreadsheets, says 2c7in, because they don't have an integrated system. <hat's difficult about using
the spreadsheet is the inability to dissect the data to identify what is "causing the numbers to come out as they are." 0oper adds that a database system
with a customi6ed report writer could assist in crunching your company's KPIs.
An integrated system is much more efficient than the traditional system used by construction firms, which is basically a compilation of disparate
legacy systems. !ince "most contractors have one program for accounting, another for scheduling, and another for estimating," observes 2c7in,
"determining the causes of negative KPI outputs is more difficult."
;owever, for contractors with the wherewithal to purchase an integrated system, other pitfalls e&ist. %or e&ample, 2c7in told us$ ",he biggest is an
over(investment in technology and an under(investment in training and implementation. If you were to go to a fully integrated system, that would
mean all of your e&isting systems would be negated." Bpshot$ All of your staff will have to be trained so that the new system becomes the way you do
business. Although a cultural challenge e&ists, he believes there is a bigger challenge$ the fundamental technology skill sets lacking in many
construction companies.
0oper stresses that it is important to have an overall technology strategy for your firm. "0ather than simply buying hardware and software," he says,
"be clear about how you plan to use it in your firm to gain a competitive advantage in the marketplace."
.ompared to other industries, the consensus is that construction is not as technologically sophisticated. 2any contractors lack the skills to run a fully
integrated system. ,hus, they may become frustrated, aborting or diverting energies from adequate system implementation. !o, the system needs to be
simple and user(friendly.
Another pitfall to avoid$ People underestimate the amount of time and energy it will take to make the transition from legacy systems to an integrated
one.
<hich KPIs are driving your bottom lineH #o single KPI can provide a complete picture of your business performance, according to the white paper.
0ather, evaluating KPIs as a group renders a more accurate representation of your operations. ;ere are the KPIs the %2I white paper advocates you
should routinely evaluate$
V 7iquidity. !ince cash is king, contractors should review their liquidity indicators e.g., cash conversion, cash funding, cash demand" and determine
which pro)ects contribute to and which usurp liquidity.
V !chedule variance. 2aintaining an updated schedule that reflects changing conditions increases a contractor's ability to manage the construction
process and hit scheduled completion dates. >ou can evaluate schedule performance by e&amining variance in days and e&pressing the positive or
negative variance as a percentage of remaining duration.
V 2argin variance. ,his KPI identifies the gross margin performance e.g., forecasted gross margin, actual gross margin on closed )obs, <IP gross
margin". *y identifying current and cumulative margin variances, contractors are in a better position to make urgent corrections to control pro)ect
profitability.
V .ash flow. A pro)ect's cash position is a key measure of <IP and pro)ect profitability, encouraging prompt pro)ect billing collections.
V Bnapproved change order. .osts incurred through unapproved change orders pinpoint possible financial e&posure. .ontractors successful at early
notice and timely approval of change orders ultimately reduce their financial risk and increase client satisfaction.
V .ommitted cost. ,his KPI can reveal company e&posure to price increases and promote early e&ecution of pro)ect buyout procedures.
V *acklog. ,his KPI discloses gross margins on future pro)ects and operates as an early warning gauge of reduced profitability.
",hese KPIs put together in a concise format are the key items that we need to manage the business and provide the visibility that our e&ecutives and
pro)ect managers need to successfully e&ecute pro)ects," said Eohn ;odge, 3P of finance with K-A ;oldings, in an %2I press release. "<e know what
we need to be doing better, but until we start looking at the KPIs, we do not have a way to measure how well we are doing."
2c7in told .*20 that monitoring these KPIs forces problems to surface sooner, thus "enabling you to be more proactive about managing your
work."
%or more information$ ,o help construction companies, %2I, 2icrosoft *usiness !olutions, and !I! !oftware have teamed up to present an e&ecutive
<eb cast series, "Key Performance Indicators -riving *est Practices in .onstruction."
,hese <eb casts provide detailed information about the KPIs and describe the practices that the best(of(class companies in the industry are using. ,he
overall ob)ective is to help construction firms increase profitability, improve productivity, and manage risk. All <eb cast participants will receive a free
copy of the white paper on KPIs for construction. 3isit www.fminet.com for registration details.
Key Performance Indicators for .onstruction .ompanies
V Accounts receivable W retention receivable W underbillings S .ash .onversion
V Accounts payable W retention payable W overbillings S .ash %unding
V .ash conversion(cash funding S .ash -emand
V !ubcontractor revenue/@=G days S Average -aily 0evenue
!chedule 3ariance Indicator(Key +quation$
1riginal duration days"(revised duration days" S !chedule 3ariance :"
,otal remaining duration days"
V %orecasted revenue(forecasted direct costs S %orecasted 4ross 2argin
V Actual revenue of closed )obs(actual direct costs on closed )obs S Actual 4ross 2argin on .losed Eobs
V <IP revenue(<IP direct costs S <IP 4ross 2argin
.ash %low Indictor(Key +quation$
!um of pro)ect cash receipts(sum of pro)ect cash disbursements S Pro)ect .ash Position
Bnapproved .hange(1rder Indicator(Key +quation$
!um of costs incurred on unapproved change orders :" S : of 2argin(at(
,otal forecasted gross margin X"
0isk
.ommitted .ost Indicator(Key +quation$
!um of uncommitted costs on contracts in progress S : of Bncommitted
!um of all available committed costs
.osts
*acklog Indicator(Key +quation$
!um of forecasted gross margin(sum of earned gross margin S 4ross 2argin in *acklog
!ource$ Key Performance Indicators -rive *est Practices for 4eneral .ontractors, a white paper by Ken 0oper and 2ichael 2c7in, %2I .orp."
(trate#ies for (uccessful (corecards6 Key to Performance *ana#ement
Initiati&es

!rticle published in 3% 3irect 5ewsletter
%ebruary A@, A998 Issue

2y 6eah ,ac,illan
0ompanies ?uggle a variety of prioritiesF driving innovation, launching products, improving uality, creating value for
customers, developing new markets, managing human capital and, ultimately, increasing shareholder value.
These priorities make up the basic elements of any company$s strategy. E&ecutives and managers must determine the
value each one creates for their particular situation, their relative importance, and the interaction among the processes
that drive them. Once these have been determined, e&ecutives can integrate these elements into a strategic plan and
communicate the plan throughout the rest of the organi@ation.
Employees in all types of organi@ations need to rely on the strategy to guide their decisions and focus their energies on
the areas of highest priority. Iistorically, companies have relied on financial metrics to support these decisions, but this
approach is proving increasingly ineffective. .inancial metrics only reveal the effect of decisions made in the past.
In a comple& and challenging economy, companies need forward"looking or ;leading; metrics that are tied to the
company$s value drivers. #eading metrics (for e&ample, customer satisfaction) based on cause"and"effect relationships
can alert companies to problems before they adversely affect the bottom line. .or e&ampleF declining customer
satisfaction can point to an eventual drop in overall revenue or a loss of market share.
.urther, companies need to integrate these metrics into a performance management environment that can be deployed
across the entire organi@ation. In the e&ample above, many departments have a role to play in managing customer
satisfaction. Employees in each need to know their roles and responsibilities and where they fit into the overall plan.
Factors Impedin# /isi"ility
6ntil now, this has been easier said than done. One of the biggest challenges companies face has been consolidating
performance data from disparate sources into a coherent system that people can trust. 0ompanies usually rely on a
raft of performance data drawn from many different systemsF enterprise resource planning (E=-), customer
relationship management (0=%), spreadsheets, flat data files, data marts, presentation software, legacy data and other
sources. Each system provides important information about a particular aspect of the company$s performance, but each
collects, defines and displays the information in a different way.
3isparate data creates confusion and inefficiencies, and blurs accountability. %etrics based on this data are often
incomplete, conflicting or limited to a particular department or function. 1ometimes they are all three.
! common problem among managers is spending more time discussing the validity of the data than using it to manage
performance. %etrics may show that a problem e&ists but not who is responsible for resolving it. In addition, managers
may interpret metrics differently from what e&ecutives intend. !s a result, their teams may focus on ob?ectives that
conflict with overall strategic goals.
T$ree %ommon 'usiness Pains
/ithout commonly understood definitions and a consistently defined view of their performance, e&ecutives have
difficulty understanding how the company is performing overall, whether the company is going in the right direction,
and who is responsible for taking corrective action when problems arise. %anagers have no way of monitoring their
department$s performance relative to the strategy and risk misallocating resources. Employees have little opportunity
to collaborate for effective decision"making. 1o despite an abundance of performance data, companies still make many
key decisions based on gut feel and best guesses. Three common pains contribute to this problemF
Lack of Alignment
0ompanies risk wasting resources and efforts when they lack a commonly shared and understood strategy. In the
absence of commonly shared source of metrics, managers may measure performance in areas not related to the
corporate strategy or not aligned in the correct way.
This usually leads to managers suggesting different priorities or providing conflicting solutions to performance
problems. .or e&ample, 2alanced 1corecard creators ,aplan and 5orton describe how the () e&ecutives at a then"
recently merged bank agreed ;to provide superior service to targeted customers,; only to find out later that each
e&ecutive had a different definition of ;superior service; and a different image of ;targeted customers.;
'
Lack of Focus on What's Important
%isaligned tactics often lead to an inability to focus. /ithout a commonly shared understanding of corporate goals,
every priority becomes a top priority. This spreads human and financial resources too thin.
%anagers can also become distracted by opportunities that are easy to capitali@e on but do little to support higher"level
strategic goals. Individual employees are caught between competing or conflicting initiatives, lacking both the conte&t
and information they need to decide where to focus.
Lack of Accountability and Ownership
Employees know they are responsible for driving corporate performance. 2ut not every employee knows if or when he
or she is responsible for resolving a performance problem. %any problems persist or go unaddressed simply because no
one person, team or department has been specifically tasked with resolving them. !lso, many problems span
departments and functions.
To resolve these issues, people in each department need to understand how their decisions affect outcomes in other
departments. 7et few employees can easily look beyond their respective silos. %any companies implement a scorecard
system to resolve these issues.
(corecards ,lle&iate 'usiness Pains
1corecarding is a proven approach for monitoring, measuring and managing performance at a tactical or strategic level
for an organi@ation, team or individual employees. !t the tactical level, employees and managers use scorecards to
monitor performance against targets for discrete, specific pro?ects. !t the strategic level, scorecards can be part of a
corporate"wide performance management system that e&ecutives use to map the overall corporate strategy and
communicate it throughout the organi@ation.
! scorecard is a list of key performance indicators (,-Is), or metrics, that present current performance data for a
business process or strategic goal against target values. %ost metrics feature a corresponding color scheme and trend
arrow that indicates whether that performance is on, above or below target and whether performance is trending up or
down. %ost scorecards, such as those used in 2alanced 1corecard implementations, use a mi& of financial and
nonfinancial information, leading and lagging (financial) indicators, and corresponding strategy maps.
The 2alanced 1corecard made its first appearance in the Harvard Business Review in '++(. In their seminal article,
3rs. =obert ,aplan and 3avid 5orton asserted that a company$s financial metrics reflected the effects of only a small
proportion of the decisions made within that company, and that its true value could be more accurately evaluated and
increased by identifying the value created by the interplay of people, processes, and other intangible assets such as
customer relationships, employee skills, and brand.
(
These dynamics would be aligned with the overall strategy and
progress against it would be measured with metrics grouped into four interconnected perspectivesF financial, customer,
internal processes, and learning and growth. These perspectives help companies answer fundamental uestions about
their business performance. .or e&ampleF
.inancialF /hat must we focus on to meet shareholder e&pectations>
0ustomerF Iow should we deliver value to customers in key market segments>
InternalF !t which operational processes must we e&cel to satisfy shareholders and targeted customers>
#earning and HrowthF Iow will we sustain our ability to change and improve>
1corecards help companies translate strategy into specific, measurable ob?ectives that can be consistently defined,
applied, understood, and communicated to everyone. The 2alanced 1corecard illustrates a company$s key value drivers
and shows how they interact to create value and competitive advantage. This is done through a strategy map.
! strategy map is a visual tool that enables companies to illustrate the cause"and"effect relationships between strategic
goals and the processes that companies use to achieve them, and the intangible assets that they need to leverage
effectively.
The 2alanced 1corecard proved immensely successful, helping some companies move from last to first in their industry.
%any companies rely e&clusively on the 2alanced 1corecard, or a modified 2alanced 1corecard, to manage their
performance. 0ompanies also use the 2alanced 1corecard in con?unction with other methodologies such as 1i& 1igma,
total uality management (TR%), activity"based costing (!20) and economic value added (EC!).
(corecardin# ,pplications ) , %$ec+list
0ompanies have tried to support their scorecarding initiatives with a mi& of purchased and homegrown software
applications. %any purchased or proprietary scorecarding solutions are hardwired to E=- systems and reuire e&tensive
coding to change. This makes them more of a burden than a benefit when a company needs to change priorities in
response to changing market conditions and monitor its performance against new benchmarks.
Iomegrown applications rarely deliver the functionality or analysis reuired to resolve performance issues. They consist
primarily of static IT%# pages and usually offer only limited analytical capabilities. They may show that performance is
off track, but they don$t provide any insight into why this might be.
0ompanies need a scorecarding application that can be delivered to every employee so they can monitor their
performance, and that also provides the necessary analytic capabilities that managers can use to understand why
performance is on or off track.
%any scorecarding initiatives fail because of a lack of adoption among middle management. 0onnecting scorecards to a
2I environment can increase adoption within this key audience because it provides managers with relevant tactical
information they need to translate strategy into action.
!nalysts 2ill Iostmann and .rank 2uytendi?k note, ;-ractice shows that if the 2alanced 1corecard somehow provides
basic drill"down capabilities, use on the middle"management level takes off. It is the drilldown for performance
indicators into relevant breakouts that provides a more tactical view. 5ot only does the 2alanced 1corecard benefit
from being integrated into a broader 2I strategy, 2I benefits greatly from the 2alanced 1corecard methodology as
well.;
:
Ensurin# ,li#nment and Dri&in# ,ccounta"ility for Performance *ana#ement
1uccessful deployments at leading Hlobal :)** organi@ations show us that scorecards can be used as the single trusted
source of performance data with which business users can monitor performance against targets. !dministrators create
a metric, process diagram, or scorecard once and use it across the organi@ation to ensure that everyone is working
with the same definitions and to the same targets.
In addition, companies that use strategy maps and impact analysis diagrams can understand the cause"and"effect
relationships of key processes and metrics. .urther, metrics can integrate a range of cross"functional data from any
source, including O#!- and dimensionally aware relational data, E=- and 0=% systems, spreadsheets, flat files, legacy
and mainframe data, and user"entered values.
0ompanies should use scorecards to help business users increase their focus on key issues. -roven practices suggest
companies let users organi@e and view their scorecards by status to uickly identify problem areasL by owner to
understand accountabilityL and by strategy map to see how processes and metrics support corporate strategy.
0ompanies can also leverage new technologies so users can be notified when a metric changes status, such as through
email or -3! alerts and manage corrective actions through embedded initiative tracking and collaboration capabilities.
.inally, when deployed as part of a performance management solution, scorecards can leverage 2I reports, analysis,
dashboards and other content to better analy@e and understand the factors that affect performance.
Today, leading global organi@ations recogni@e that scorecarding provides an essential role in performance management
by helping to answer three essential business uestionsF How are we doing? !y? !at s!ould we "e doing?
Eust as the uestions are connected, the fabric of information fueling the answers must connect as well. The answers
must be based on a common understanding of metrics, data dimensions, data definitions and views of the organi@ation,
delivered through scorecarding.
ReferencesF
'. =obert ,aplan T 3avid 5orton. ;6sing the 2alanced 1corecard as a 1trategic %anagement 1ystem.; Harvard
Business Review, Eanuary".ebruary '++Q.
(. ,aplan T 5orton. ;The 2alanced 1corecardF %easures that 3rive -erformance.; Harvard Business Review,
Eanuary".ebruary '++(.
:. .rank 2uytendi?k and 2ill Iostmann. ;The .ive .atal .laws of 2I.; Hartner 2I 1ummit, 0hicago (**).

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