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Defining High-Quality KPIs for the Organization as a Whole

Published
  • May 01 2003, 1:00am EDT
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In August of 2002, I wrote a column about building an enterprise performance management dashboard and defining key performance indicators (KPIs) for the dashboard. The responses I received ranged from, "Great discussion on KPIs!" to, "That's it? Can you explain more?" Well, yes I can.

As I said in my previous column, any solid BI project – especially the construction of an enterprise performance dashboard – is founded upon well-defined, meaningful KPIs. These KPIs are the measuring sticks of organizational progress toward meeting defined goals and objectives. I also warned that KPIs must be similar for all similar business units in all parts of the organization – in other words, you must compare apples to apples.

However, there is more to defining high-quality KPIs than just making sure that they're all similarly defined. KPIs are fundamental gauges of whether or not the organization is meeting (and/or exceeding) its stated goals and objectives. Therefore, it's critical that the people in the organization tasked with KPI definitions understand a few essential characteristics of good KPIs.

The first characteristic of a good KPI is that it is relevant to the performance of the organization as a whole. Sounds pretty obvious, doesn't it? On the surface, it is. However, you'd be surprised at the political infighting that goes on when organizations try to achieve consensus on which KPIs are really important, simply because the management and workers in each business unit have different perspectives on what measures best define organizational success.

For example, finance may define success as better financial-ratio or revenue- assurance numbers. Alternatively, marketing may define success as improved response to various promotions and better campaign management strategies. Neither view is wrong; they're just stovepiped.

Simply put, truly relevant KPIs – regardless of their orientation (finance, marketing, etc.) – provide a benchmark by which you can judge the performance of the entire business, within the context of the success or failure to meet organizational goals and objectives. The origin of the KPI doesn't matter. As long as the KPI helps the business determine success in meeting organizational goals and objectives, it is relevant.

The second essential characteristic of high- quality KPIs is that they are interrelated. Truly relevant KPIs do not stand alone. If a KPI is on an island – in that it draws information from, or is meaningful to, only one department or business unit – chances are that it doesn't support enterprise-wide objectives. If that's the case, then the KPI measures nothing of value to the organization as a whole and should not be included in a mix of organizational KPI definitions.

Relevant KPIs have many touchpoints within the organization. A few of the top points are:

Executive management targets, directives and decisions. C-level management might have set a goal of increasing overall financial efficiency by 25 percent within two years. Obviously, "financial efficiency" would be a pretty ambiguous KPI. However, KPIs that are related to improving financial efficiency include asset turnover ratio, average collection period and inventory turnover ratio. These are concrete KPI candidates.

Enterprise business processes. A primary example of KPI touchpoints with enterprise business processes lies in measuring the success or failure of customer service goals and objectives. For instance, the effectiveness of customer service processes in hitting their stated targets could be measured in KPIs such as order backlog percentage, order completeness percentage and total churn.

Internal and external involved parties. The various stakeholders in an organization also have an interest in measuring the performance of the business as a whole. For example, with both vendors and customers, you could define KPIs to measure the efficiency of service delivery against mutually defined service-level agreements. Also, the old financial standbys of return on equity (ROE) and payout ratio measure how the organization is meeting the goals it has set for satisfying the needs of the company's stakeholders (both internal and external).

Other KPIs. Many KPIs are inherently related to each other. For example, one way to derive ROE is to combine and multiply through a number of other financial ratios such as the debt to equity, asset turnover, profit margin and debt burden. Obviously, each of these sub-ratios that make up ROE could be a KPI in and of itself. Clearly, they are all interrelated in measuring the financial performance goals and objectives of the entire organization.

Defining optimal KPIs for your organization is not rocket science. It's simply a matter of realizing what information will and won't help you determine how the organization, as a whole, is meeting its stated goals and objectives, and understanding that KPIs are inherently interdependent on each other for their success. Once you know the key characteristics of high-quality KPIs, the decisions you make using them have a much better chance of being the most advantageous decisions for your organization.

All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. The views and opinions are those of the author and do not necessarily represent the views and opinions of BearingPoint, Inc.

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