EY-Performance-Key-performance-indicators

This article is an extract from Performance, Volume 6, Issue 2, May 2014. The full journal is available at
ey.com/performance

Key performance
indicators

Winning tips and common
challenges

Having an effective key performance
indicator (KPI) selection and monitoring
process is becoming increasingly critical
in today’s competitive and integrated
business environment. Companies rely
on managers and staff to choose and
monitor the right KPIs. This requires the
development of a robust performance-
measurement capability that is based on
mature KPI-management expertise and
supported by a collaborative performance
culture. This article will help the reader
to use KPIs to generate value in any
organization.

36 Volume 6 │ Issue 2

This article is an extract from Performance, Volume 6, Issue 2, May 2014. The full journal is available at
ey.com/performance

Author
Dr. Rachad Baroudi PhD
Director, Strategy Advisory
Services, EY, United Arab Emirates

37

This article is an extract from Performance, Volume 6, Issue 2, May 2014. The full journal is available at
ey.com/performance

Key performance indicators. Winning tips and common challenges

“A large list of KPIs that does
not have clear linkages to
a business’s overall objectives
may be a sign of a larger problem:
a lack of strategic focus.”

This article will introduce condition for providing good, actionable 3 Develop a process for how you
some tips on exploiting KPIs information at the operational level want things to be achieved, e.g.,
and explore some common where corporate strategy is implemented. this could involve reengineering the
challenges companies face whole process or it could be achieved by
when using them. It also Setting the right KPIs introducing quality assurance checks at
highlights the factors critical various stages of production.
to designing the type of KPIs that will lead It is fairly easy to find suitable financial
to successful strategy implementation. KPIs for an organization, such as a 4 Develop effectiveness KPIs before
The article focuses on the reasons why measure of total revenue. But defining efficiency KPIs. This is because you
some organizations effectively implement KPIs is less straightforward when applied first need to establish your benchmark,
their strategic plans, while many others to more subjective or vague areas of a e.g., how many units you produce in a
fail to do so. In addition, it aims to business, such as customer satisfaction given period of time, before you can
inform the reader of various techniques or employee development. In these begin to think about measuring related
used in KPI management. It is hoped instances, more creativity is needed. efficiencies.
that this insight will help planning and For example, an appropriate KPI for
performance professionals to do their measuring employee development might 5 Develop stakeholder and financial
jobs more effectively. be the number of training days per year KPIs before other KPIs. Stakeholder
A good corporate strategic plan taken by each staff member. To make KPIs for a government organization,
includes a solid set of KPIs that can the selection of KPIs more systematic, for example, might be that every child
translate strategy into manageable organizations need to be particularly receives education. For a company, it
operational actions for employees. careful when developing them. is likely that the financial KPIs, such as
Usually, a business strategy fails to growth and revenue targets, will drive
achieve this objective if it includes The following is a typical sequence for all other strategic objectives. Hence, it’s
too many or unaligned KPIs. This can developing KPIs within an organization: logical to set these KPIs before any others.
weaken the focus on objectives, making
it difficult to communicate a consistent 1 Identify a problem, situation or
implementation plan to staff. KPIs should objective you are trying to address,
give individuals concrete links to the e.g., reducing the number of defective
organization’s corporate objectives. products at the end of the manufacturing
Moreover, a large list of KPIs that does process.
not have clear linkages to a business’s
overall objectives may be a sign of 2 Develop a view on how you would
a larger problem: a lack of strategic like the results to look, e.g., target
focus. Selected KPIs in any strategy number of defective products to reduce
should have clear and solid links to the from 20% to 5%.
overall performance. Understanding
the importance of different KPIs in
driving these objectives is a necessary

38 Volume 6 │ Issue 2

This article is an extract from Performance, Volume 6, Issue 2, May 2014. The full journal is available at
ey.com/performance

6 Develop output KPIs before input In other words, KPIs are tools to create a appropriate from this shortlist. A half-day
KPIs for each objective. It’s not climate for action and to support dynamic workshop, in which managers and staff
possible to start thinking about input high-level discussion. collectively decide which KPIs to apply
KPIs before output has been determined. to each objective, can help the selection
For example, you need to know what Putting theory into practice process. For example, a workshop could
your production target is, i.e., how many produce 50 KPIs that then need to be
cars you need to produce, before you There are many possible KPIs for every discussed and filtered down to 15 KPIs
begin to think about KPIs relating to the business objective and, for each objective, before being agreed.
manufacture of those cars. management should carefully consider the
following: When thinking through the selection,
7 Select best-fit KPIs, share, the following considerations can be
approve and document them. • Topics that executives need to discuss, helpful: strategic relevance, practicality,
frequency, ease of communication and
Companies should always have a flexible e.g., profitability or productivity. clarity of representation.
and creative mindset when developing
KPIs, as their ultimate goal is to drive • KPIs that already exist and those that Selecting the right KPIs comes with
the performance changes required experience. However, there are many KPI
by the corporate strategic plan. KPIs need to be established. sources for people to use, such as staff
cause divisions and departments to act workshops, competitors, benchmarking,
differently, improve certain processes and • Improvement requirements, e.g., industry standards, historical information
drive discussion and agenda items at the and websites.
executive level. Well-designed KPIs enable better remuneration program.
management to ask the right questions,
rather than give neat answers and results. • Behavioral changes demanded by this

objective, e.g., more loyalty among
employees.

Filtering and selecting the most
appropriate KPIs is the first step.
Managers and their support teams should
list potential KPIs and then select the most

39

This article is an extract from Performance, Volume 6, Issue 2, May 2014. The full journal is available at
ey.com/performance

Key performance indicators. Winning tips and common challenges

Figure 1 “Well-designed KPIs
enable management to
Organizational indicators maturity model ask the right questions,
rather than give neat
Lagging Organization Leading answers and results.”
Corporate maturity level Operational
Effectiveness Efficiency
Qualitative VS Quantitative
Financial Non-financial
Short term Long term
Project based Business
Output Outcome

Which type of KPI is best? recognize they need to broaden out to performance expert to look at a
include non-financial measures, such as company’s balanced scorecard and
There are many types of KPI. It is employee and customer satisfaction. assess that organization’s maturity
important to keep a balanced perspective level. If there are lots of KPIs on the left
by selecting KPIs that cover the breadth For example, “lagging” versus “leading” side, this indicates the company is very
and indicate the health of an organization. refers to those organizations on the left effective and short-term focused. The
For example, when a doctor sees a new (lagging) that focus only on how much effort is in getting things done rather
patient, they will conduct a series of profit they’ve made at the end of each than understanding how much things
measurements, such as blood pressure, financial period. In comparison, more are going to cost or how they may
height and weight, and from these, mature companies, on the right of the impact the business. If the scorecard
determine the person’s health. KPIs are diagram (leading), are measuring success measures are more to the right of
similar to these medical measurements. as they go along, by monitoring aspects Figure 1, then the company is migrating
They are extremely effective indicators such as number of clients lost and the and looking toward the long term.
of the health and maturity of an number of projects won.
organization. When setting KPIs, there are six common
Another example could be a forms, each of which has its own strengths
Figure 1 shows a range of key maturity government that is, initially, keeping a and weaknesses:
indicators. Organizations normally move focus on effectiveness, e.g., number of
from left to right on this diagram during hospitals or schools built. But, as their 1 Absolute number, e.g., total
their lifetimes. What is meant by this organizational maturity develops, they profit. This is one dimensional. The
is that organizations will start, in their begin to change their focus to efficiency advantage is that it’s a very clear target
early years, for example, by focusing on measures, such as what is the cost per but it doesn’t address a specific context.
financial KPIs but, as they mature, they hospital bed or the cost per student?

In this way, it’s possible for a

“Companies should
always have a flexible
and creative mindset
when developing KPIs.”

40 Volume 6 │ Issue 2

This article is an extract from Performance, Volume 6, Issue 2, May 2014. The full journal is available at
ey.com/performance

Figure 2

KPI definition sheet

Role Name Division Dept or section Title Phone or email Date Ver.

Owner

Reporting

Objective Code O#
KPI Code K#

KPI definition

Data source Annually Semi-annually Quarterly Monthly
2014 (Jan~Dec)
Calculation method
and assumptions Q2 Q3

Evaluation frequency Feb Mar

Time (year and quarter) Q1 Q4 2014 2015 2016 2017 Decrease
Targets Jan 2018 or increase
2014 time (month)
Targets is better
Unit

2014

Apr May Jun Jul Aug Sep Oct Nov Dec

2 Index, e.g., an internationally used Target setting and It is worth noting that targets could
index, such as the United Nations' motivating employees have disadvantages in terms of setting
Human Development Index (HDI). This direction to employees. Employees
is multidimensional, but it can mask A well-designed strategic plan relies on could focus on what is expected and not
underlying individual variables. establishing targets that are designed to necessarily on what needs to be done.
stretch and push an organization forward Each department should consider the
3 Percentage, e.g., percentage of in meeting its objectives. expertise behind the target-setting and
satisfied employees or customers. how employees concerned will behave.
This is a good indicator of relative change Setting targets allows organizations to:
but is sometimes misunderstood. It’s also important to note that the
• Ensure individuals focus more clearly relationships between targets are also
4 Ranking, e.g., very commonly used crucial. Setting one target inappropriately
to rank institutions such as banks, when given a quantifiable target can have an impact on other targets.
universities or schools. The advantage is Executives should aim to set targets in
that it’s easy to understand, but definitions • Encourage departments to focus on such a way that each individual KPI is
are often inconsistent or unclear. optimized to result in the best overall
executing their business plans outcome for the organization.
5 Rating, e.g., customer ratings of a
product. This is a useful measure • Forge links between individual and One common place to start, when
for nominal data, but it can be biased or setting a target, is to look at past
misused. department objectives performance and current baselines.
Past trends can be extended for modest
6 Ratio, e.g., revenue versus cost • Identify areas in which the department improvement. In addition, corporate
ratio. Ratio measures are much objectives can give the organization clues
used by finance people. They are good at needs to improve as to what targets should be included in
illustrating critical relationships, but can its strategic plan. Benchmarking leading
be difficult to understand. • Set and communicate expected practices is another good source of targets.

Defining KPIs performance levels In summary, the following criteria should
be considered when setting targets:
To ensure consistency in the organization, • Ensure the success of a department’s
a KPI definition sheet needs to be filled • Ensure that the target communicates
and completed for each KPI by those business plans
responsible for setting and reporting on expected performance
the KPI. An example of such a sheet is • Motivate departments, rather than
shown in Figure 2. • Check that the magnitude is appropriate
control or constrain them
to close the performance gap
• Communicate to the department the
• Show the relationship between target
need for change
and corresponding KPI
Targets need to be realistic so that
managers feel comfortable about trying • Define targets as a comprehensive set
to achieve them. In most cases, targets • Set one target per KPI for a certain time
should be mutually agreed between the • Ensure that targets are quantifiable
organization’s executives and the manager
responsible for hitting the target. When
setting effective targets, top management
must strike a balance between setting the
bar high enough to encourage greater
performance, without prompting risky
behavior and leaving holes that allow
managers to play the system.

41

This article is an extract from Performance, Volume 6, Issue 2, May 2014. The full journal is available at
ey.com/performance

Key performance indicators. Winning tips and common challenges

Figure 3 “Management must strike a
balance between setting the bar
Universal target ranges high enough to encourage greater
performance, without prompting
Performance risky behavior and leaving holes
that allow managers to play the
Green Yellow Red system.”

>=100% 70%~99% <=69%

Meets or exceeds Failing below Falls significantly
target expected target short of target

Monitoring KPI status Conclusion it’s an art, something that you can only
get really right by trial and error. For
Once KPIs and their respective targets This article has provided a range of example, one expert may recommend
have been set and agreed, it is important, tips and information to keep in mind a list of KPIs and another expert would
over the ensuing weeks and months, to when thinking about KPIs. But, there likely recommend a completely different
monitor performance against them. In are some overarching messages that all list. Neither of them is right or wrong —
order to do this, it is necessary to have organizations would do well to remember. both lists will have their advantages and
well-studied and carefully set ranges for disadvantages. So, be confident with
targets if an organization’s strategic plan Firstly, KPIs can have unintended your target setting: brainstorm, filter and
is to be successful. Figure 3 shows some influences on people’s behavior. For seek agreement. Be realistic, but be wary
universal target ranges that could be used example, a company might set productivity of being vague. Be ready to measure your
by any business. targets to encourage employees to organization’s success! 
complete tasks as quickly as possible, i.e.,
When calculating the percentages some sort of time-related target. But the References
to monitor the KPI status, the unintended consequence could be that • Dennis Campbell, “Choose the
following formulas can be used: employees are so motivated to hit these right measures and drive the right
targets that they endanger themselves and strategy,” Balanced Scorecard Report,
A. For KPIs where an increase is the company finds they have lots of injured January 2006, pp.14–16.
preferable: actual results/target = employees! This is just one example from • Andrew J. Pateman, “Five easy
percentage. For example: US$8m actual many that demonstrates how important it steps for developing your BSC
revenues/US$5m target revenues = is to understand the broader effect a target measures,” Balanced Scorecard Report,
160% (i.e., green per Figure 3). could have on employee behavior. January 2004, pp.15–17.
B. For KPIs where a decrease is • John H. Lingle, From BSC to IS
preferable: target/actual results = A second point is about the quality Measurement, Wm. Schiemann &
percentage. For example: 5 customer of the KPI itself. It’s not good enough to Associates Inc., 2007.
complaints/8 actual complaints = 63% set a vague target, such as “improved • Janice Koch, “The challenge of target
(i.e., red per Figure 3). productivity.” There always has to be a setting,” Balanced Scorecard Report,
quantifiable and realistic goal. It seems January 2007, pp. 14–16.
obvious, yet, so often, this is overlooked.

And, finally, it is worth remembering
that there is no science behind KPIs —

42 Volume 6 │ Issue 2

This article is an extract from Performance, Volume 6, Issue 2, May 2014. The full journal is available at
ey.com/performance

KPIs

Benefits of using KPIs 1Select KPI

• Providing quality feedback 5Keep or The 5 steps 2 Approve and
• Supporting decision-making of the KPI document KPI
• Focusing management attention on what matters most remove KPI life cycle
• Helping managers understand and gauge performance
• Assigning responsibility and encouraging accountability 4Report 3 Gather and
• Providing a common language for communication KPI analyze data
• Providing a way to see if the strategic plan is working
• Serving as risk triggers and early warning signs Why people usually dislike KPIs
• Functioning as tools to drive desired behavior
• Benefit and value of measurement is not understood
Good KPIs • Individuals don't know how to use KPIs effectively
• Accountability is placed with the individual
• Echo an organization’s objectives • Poor performance can be uncovered as a result of KPIs
• Create meaning at all levels • KPIs can be used as a means of punishment
• Are based on legitimate data • Using KPIs costs money, time and effort
• Establish a trend over time
• Are easy to understand Common challenges when using KPIs
• Provide context
• Lead to action • Objectives are not clearly communicated
• Lack of agreement over KPIs
Good KPIs start with • Calculation method is unclear or incomplete
• Insufficient amount of data available
• Percentage of ... • Number of KPIs is too many
• Average of ... • Representation is not credible
• Number of ...
• Value of ...
• Total of ...
• Cost of ...
• Sum of ...

Common challenges in setting targets

• Striking the right balance between being realistic and
challenging

• Achieving alignment between compensation and
performance

• Setting targets rests only with top leadership
• Meeting targets is not achievable with approved resources
• Collecting and reporting on the target data is not possible
• Causing anxiety among staff because of target-setting

process
• Expressing targets in a clear and simple way
• Selecting targets that staff regard as appropriate
• Identifying targets that are achievable within the

required time frame
• Finding alignment with broader objectives

43