Book Key Performance Indicators

Developing, Implementing, and Using Winning KPIs

David Parmenter

Wiley, 2015 more...

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Success depends on setting the right key performance indicators that support the right goals.

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Many managers don’t know how to measure performance. Leaders often choose “key performance indicators” (KPIs)
that reveal little and don’t really help. David Parmenter, a KPI expert, offers a definitive manual, now in its third
edition. He explains different performance measurements and how to use them to manage your workforce and your
organization. This is the essential read for anyone seeking to measure an organization’s progress, but if you mostly
need basic data, focus on the opening chapters. getAbstract recommends Parmenter’s meaty, detailed primer to
executives who must measure the right performance factors, and to project managers who organize and administer
KPI projects.

In this summary, you will learn

 What primary measurements organizations should make;
 How to measure and apply “key performance indicators (“KPIs”) and “critical success factors” (“CSFs);
 How to develop KPIs in six stages; and
 How to recognize and thwart common myths about performance.

Take-Aways
  Performance measurements include “key result indicators” (KRIs), “result indicators” (RIs), “key performance
indicators” (KPIs) and “performance indicators” (PIs).
 KRIs assess organizational performance, such as “net profit before tax.” RIs assess team achievements, such
as “yesterday’s sales.”
 KPIs evaluate critical actions, such as the number of “visits to top customers.” PIs show how individual teams
perform, such as their number of “late deliveries.”
 KPIs support the “critical success factors” (CSFs) that determine if a company thrives.
 Critical success factors are the source of all KPIs, which guide employees to focus on the right priorities.
 The “balanced scorecard” concerns “strategic initiatives,” not success factors.
 Most companies do not use KPIs properly or measure performance correctly.
 More than half a typical organization’s KPIs may promote unhelpful behavior.
 An organization with 500 or more employees should have “10 KRIs, up to 80 RIs and PIs, and 10 KPIs.”
 Every company needs a “Chief Measurement Officer” who is responsible for all metrics.

Summary
Measuring Performance

Most organizational leaders don’t know how to measure performance. Mistakes include relying on measurements that
don’t correlate to the factors that make them successful, and measuring performance quarterly instead of weekly, daily
or even constantly.

“Performance measurement is failing organizations worldwide, whether they are

multinationals, government departments, or nonprofit agencies.”

To help their employees focus on the right activities, organizations need the right “key performance indicators” (KPIs).
Many organizations evaluate performance with the “balanced scorecard approach” (BSC), which it measures
performance holistically. The KPI approach supports the BSC method, however many BSC initiatives aren’t effective
and eventually fail.

“Many organizations that have operated with key performance indicators (KPIs)
have found the KPIs made little or no difference to performance.”

British Airways

British Airways had a problem with planes that were late for arrival and departure. Operating on time became one of
the airline’s primary KPIs. The senior executive in charge of turning the tardiness around insisted on receiving news
of any flight delay anywhere in the world. When a delay occurred, the executive called the local manager. These calls
could be career killers. Once the company presented objective data to the flight operators, they fixed the tardiness
problem.

“KPIs need to be reported 24/7, daily or at the outside, weekly; other

performance measures can be reported less frequently (monthly and quarterly).”

“Performance Measures”

Performance measures, including KPIs, fall into two groups: “result indicators” (RIs) and “performance indicators”
(PIs).
 “It is a myth that the more measures there are, the better performance
measurement will be. In fact, as has no doubt been witnessed by many readers,
the reverse is true.”

Result indicators summarize the work an organization does. Because they are broad, result indicators work best for
monitoring organizational performance, not team performance. “Key result indicators” (KRIs) provide broad-based
data to the CEO and the board. KRIs might include “net profit before tax,” “net profit on key product lines” and
“return on capital employed.” Such KRIs may reflect monthly or quarterly reports. Result indicators demonstrate how
groups of teams achieve results. Examples include “sales made yesterday,” “number of employees’ suggestions
implemented in the past 30 days” and “number of managers who have not attended leadership training.”

“You could be in your tenth year with a balanced scorecard and still not know
your organization’s critical success factors.”

Performance indicators measure the work of a team or group of teams working together. PIs do not concern financials.
They provide indicators for judging specific work units according to their accomplishments. Examples may include
“late deliveries to customers,” “number of innovations implemented” and “sales calls organized for the next week, two
weeks, and so forth.”

“The balanced scorecard is often based on only four perspectives, ignoring the
important environment and community and staff satisfaction perspectives.”

Generally KPIs measure “crucial success factors” (CSFs) and concern specific activities. They do not address past
events. You must measure KPIs right away for the data to be worthwhile. KPIs lose value after a few days, and some
require around-the-clock monitoring. Since planning and measuring performance correctly aligns employee daily
actions with the firm’s CSFs or highest priorities, you want to define KPIs that fulfill your organization’s CSFs.

“To fully understand what to increase or decrease…look at the activities that

created the financial indicator.”

A KPI has seven characteristics:

“The biggest culprit in unintended behavior has to be around

performance-related pay. Never in the history of management has so little rigor
been applied in such an important area.”

1. “Nonfinancial” – KPIs are never financial, though result indicators can be.
2. “Timely” – KPI monitoring should take place frequently – either daily or weekly – and sometimes constantly.
3. “CEO focus” – CEOs must pay close attention to KPIs.
4. “Simple” – KPIs point directly to the actions employees should take to help the firm succeed.
5. “Team based” – KPIs reflect the goals of specific teams.
6. “Significant impact”– A KPI concerns a CSF or multiple CSFs and can include “more than one
balanced-scorecard perspective.”
7. “Limited dark side”– Once you target a KPI, test it to ensure that it works and doesn’t prompt negative
outcomes or spur dysfunctional employee behavior.

“Performance management has been much misunderstood, misused and abused,

thereby preventing too many organizations from reaching their potential.”

Primary Characteristics of CSFs

You can’t establish correct KPIs unless you know your CSFs, the “aspects of organizational performance that
determine ongoing health, vitality and well-being.” A CSF must have:

“Many organizations have performed good KPI groundwork, only to have it fail
or become buried when the originator leaves the organization. It is, therefore,
important that the use of KPIs becomes widespread in an organization.”

 Proper wording – Everyone in the organization understands the CSF, what it signifies and why it matters.
 Sign-on from senior management – The CEO, senior executives and board members agree that the
organization’s success depends on its identified CSFs.
 BSC applicability – The CSF will apply to numerous, diverse balanced scorecards.
 Organization-wide applicability – The CSF concerns the whole company, not just a specific department.
 Limited in number – Five to eight CSFs are ample.
 “SMART” – The CSF should meet the SMART criteria. It should be: specific, measurable, achievable, relevant
and time-sensitive.
 Influential – Any CSF influences other CSFs.
 Targeted – A CSF is never vague. It applies to a specific “operational activity.”

“Every performance measure can have a dark side, a negative consequence, an

unintended action that leads to inferior performance.”

Typical CSFs and KPIs

Typical CSFs might include recruiting the best employees, developing quality leaders, making good decisions and
developing customer relations. Typical KPIs include tracking the dates of recent contacts with clients on a major
project; the number of your most profitable customers; the number of customer complaints; the “percentage of
unprofitable customers”; the number of late deliveries; and the “total sales value of the week’s orders.”

“It is essential that the cost of gathering the measure is not greater than
the benefit derived from the measure.”

Many companies tie the wrong performance measures to CSFs, spurring employees to work at cross-purposes to their
organizational strategies. The right performance indicators – those that match your CSFs – enable better
decision-making, enhance performance and prepare your organization for the future.

“Few organizations have spent enough time communicating their mission, vision,
values and management principles to their staff.”

“The 10/80/10” Rule”

Organizations must decide how many measurements to use and in what time frames. An organization with more than
500 full-time employees (FTEs) should have “about 10 KRIs, up to 80 RIs and PIs, and 10 KPIs.” This is the 10/80/10
rule. Many organizations believe the more measurements the better. In fact, fewer become better because you want to
prioritize measuring the most relevant factors.

“Performance Myths”

Numerous myths cloud the question of what organizations should measure to assess their performance and progress.
As a result, many organizations rely on the wrong measures. This can generate inadvertent negative consequences.
Here are some common performance myths:
  “Most measures lead to better performance” – Many measures can lead to bad effects. More than 50% of
all measures may cause negative after-effects.
 “By tying KPIs to remuneration you will increase performance” – This is a counterproductive strategy.
Employees will manipulate situations to win bonuses. “Recognition, respect and self-actualization” motivate
your best employees.
 The company “can set relevant year-end targets” – Actually, no one can. The long-range targets you set are
sure to be wrong. Former GE CEO Jack Welch said that setting yearly targets limits initiative, hampers
creative thinking and “promotes mediocrity rather than giant leaps in performance.”
 “Measuring performance is relatively simple” – Just because executives can set performance standards
quickly does not mean that the assessment is simple or easy – or that the executives know what they’re
doing.
 “You can delegate a performance-management project to a consulting firm” – Handling performance
management in-house is always more productive.

KPIs’ “Seven Foundation Stones”

To create viable, worthwhile performance measurements, establish the seven foundational elements, such as well
defined overall goals, that support good KPIs:

1. “Partnership with the staff, unions and third parties” – Successful performance depends on the
cooperation of “management, local employee representatives, unions… employees, major customers and
major suppliers.”
2. “Transfer of power to the front line” – Empower your employees, especially those who deal directly with
customers. Give them the freedom to take quick, independent action to fix problems that interfere with your
KPIs.
3. “Measure and report only what matters” – Purposeful KPI reporting enables you to take necessary action in
a timely manner. Depending on the KPI, file reports weekly, daily, or every hour of the day and night. All
reports should be brief, timely, easy to create and “focused on decision making.”
4. CSFs are the source for all KPIs – Engineer your KPIs to ensure that your employees take actions that relate
directly to your CSFs. This contrasts with the BSC approach, which ties all performance measures to
furthering strategic initiatives.
5. “Abandon the processes that do not deliver” – Quality performance management depends on flexibility and
adaptability, which management expert Peter Drucker regards as vital for achieving and sustaining
innovation. Establish a monthly “abandonment day,” during which your teams report on what elements they
want to discard. Be ready to jettison all “broken-down balanced scorecards” and any unnecessary reports,
meetings and projects.
6. “Appoint a home-grown chief measurement officer” (CMO) – Business consultant Dean Spitzer developed
this title for an in-house “measurement expert.” Don’t try to develop the right KPIs without an executive in
this role. Give this person the status of your CIO or CFO and the responsibility for driving “21st-century
measurement practices within the organization.” Recruit your CMO in-house, not from the outside. As
Drucker put it, “Never give a new job to a new person.”
7. “Organization-wide understanding of the winning KPI’s definition” – Everyone in the firm must know its
KPIs and focus on performing well against these standards. The CEO and senior executives should
communicate to all employees in precise terms about the KPIs. Senior managers should ensure that
employees understand the differences between “KRIs, RIs, PIs and KPIs.”

How to Develop and Use KPIs in Six Stages

With your seven KPI foundations in place, move ahead with KPI development and implementation. Set up a KPI
project team to handle KPI planning and preparation, which unfolds in six distinct stages:
 1. CEO and senior management commitment – Your senior executives first devote the time and attention
necessary to develop your KPI initiative. Have an elevator pitch ready to win the CEO’s support. Your KPI
initiative should demonstrate “measurement leadership.”
2. “Up-skill in-house resources to manage the KPI project” – After your CMO takes charge of all
measurements, give KPI staff members adequate training. Expect to deploy two to four team members to
work on establishing KPIs.
3. “Leading and selling the change” – Stress the urgency of the KPI initiative by metaphorically placing senior
staff on a “burning platform” with this initiative as the one viable route to safety.
4. “Find your organization’s operational” CSFs – They lead to your KPIs.
5. Determine the “measures that will work in your organization” – Plan how you will work from a
“performance measure database.”
6. “Drive performance” – Develop a robust “reporting framework.” Format your reports for tablets, phones
and other devices.

About the Author

David Parmenter is expert in the development of KPIs and in replacing the annual planning process with quarterly
rolling planning and lean finance-team practices.

This document is restricted to the personal use of Hatem Ramadan (hatemfarouk1@gmail.com)

“Performance measurement is failing organizations worldwide, whether they are

multinationals, government departments, or nonprofit agencies.”

“Many organizations that have operated with key performance indicators (KPIs)
have found the KPIs made little or no difference to performance.”

“KPIs need to be reported 24/7, daily or at the outside, weekly; other

performance measures can be reported less frequently (monthly and quarterly).”

“It is a myth that the more measures there are, the better performance
measurement will be. In fact, as has no doubt been witnessed by many readers,
the reverse is true.”

“You could be in your tenth year with a balanced scorecard and still not know
your organization’s critical success factors.”

“The balanced scorecard is often based on only four perspectives, ignoring the
important environment and community and staff satisfaction perspectives.”

“To fully understand what to increase or decrease…look at the activities that

created the financial indicator.”

“The biggest culprit in unintended behavior has to be around performance-re-

lated pay. Never in the history of management has so little rigor been applied
in such an important area.”

“Performance management has been much misunderstood, misused and abused,

thereby preventing too many organizations from reaching their potential.”
“Many organizations have performed good KPI groundwork, only to have it fail
or become buried when the originator leaves the organization. It is, therefore,
important that the use of KPIs becomes widespread in an organization.”

“Every performance measure can have a dark side, a negative consequence, an

unintended action that leads to inferior performance.”

“It is essential that the cost of gathering the measure is not greater than
the benefit derived from the measure.”

“Few organizations have spent enough time communicating their mission, vision,
values and management principles to their staff.”