The buzz in IT these days - at least when the topic is business performance management (BPM) - is about key performance indicators (KPIs). How do you pick the right KPI? I'd like to submit the opinion that the only good KPI is a strategic KPI. By strategic, I mean that any KPI you define for your BPM system should be directly traceable to some component of your overall corporate strategy. There should be a direct link from KPIs to goals, from goals to objectives and from objectives to strategies.
Let's take a look at how to develop one. Let's say your company has developed a strategy to improve its overall operational excellence. While this strategy is certainly achievable, it is hardly quantifiable; therefore, it's far from being a KPI. However, one objective you could establish to execute the strategy you've developed could be to improve operational performance in the company's call center. From there, two sample goals to meet that objective could be to improve customer service on calls and to reduce call center costs. These goals are concrete and well on their way to being quantifiable in that you can attach numbers to them, but they're still not metrics that enable you to monitor performance.
Developing those metrics is simple, however, once you have developed the concrete goals. For example, let's examine the goal to reduce call center costs. The KPI for this goal would obviously be the percentage by which call center costs are reduced over a defined period of time.
Once you've defined your KPI, you can then decompose that KPI into its various systems of origin, dimensions and calculations. The system that feeds information to the KPI calculation would be your cost accounting and forecasting package. The dimensions or ways by which you can sort the information could be time period, function and business unit. The calculation would be costs incurred in this year's Q1, Q2, etc. versus the costs incurred in the prior year's corresponding time periods.
The key here, however, is that there's a direct link between the actual, hard numbers and the high-level corporate strategy. The KPI of cost reduction percentage rolls up to the goal of reducing call center costs, which in turn rolls up to the objective of improving operational performance in the call center, which - finally - rolls up to the strategy of improving overall operational excellence. The implication is that if you meet the KPI numbers - whatever you have set the numbers to be - you meet the goals and objectives and execute the strategy you've set.
You must be careful, however, to keep KPIs performance driven. Any KPI is only a number to be monitored. Let's say you define that number to be a 10 percent reduction in call center costs by fiscal year end. The first-line managers and employees involved in doing what it takes to reduce those costs should obviously have their performance evaluations tied, in part, to how well they meet their goals.
It's extremely important that you don't let the numbers become a numbers game. If too much emphasis is placed on how well employees perform the numerous, individual tasks involved in reducing costs, the overall goal can become cloudy. Employees and managers might focus too much on meeting their numbers and may become reluctant to take on special projects that will meet the strategic goals in the long run, but may cause them to temporarily neglect their assigned tasks. If this happens, the organization may be not be able to fully utilize all the resources at its disposal to meet its goals.
With the example we've discussed, it seems simple to ensure that the KPIs roll up into the overall corporate strategy. To an extent, it is. It's akin to a litmus test for KPIs. If a path can be traced directly from KPI to goal to objective to strategy, then it's a good bet that the KPI really does measure how well the organization is doing strategically. If not, the KPI may not be as useful in measuring the performance of the organization as it may appear. Information you thought was important may, in fact, be interesting but essentially useless in indicating how well the organization is actually executing its strategies.
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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