WHAT EXACTLY DOES “KEY” MEAN IN KEY PERFORMANCE INDICATOR?
What exactly does “key” mean in Key Performance Indicator? There is a degree of truth in the saying “What gets measured gets done”. You get what you measure. We can establish that organisations measure all manner of things: market shares, quality, profitability, return, costs, efficiency, productivity, customer base, order stock, time to launch, number of patents, customer satisfaction, employee satisfaction, leadership index, media image and much more besides. However, this does not mean that they obtain what they want from the organisation in these areas.
Sometimes, the parameters that are measured in this way are called Key Performance Indicators (KPI). I conducted a survey of a Swedish company in a corporation listed on the stock exchange and identified 273 KPIs. In one department of a large Swedish vehicle manufacturer, researchers found 178 KPIs. Of course it’s good to measure, but how is anyone to keep track of so many KPIs? Are all of them really equally important? The answer is both yes and no. As long as each individual person has a limited number of goals and related measurements, a large organisation can of course have many goals. However, it is important to bear in mind that working towards goals is a zero-sum game. The time that an organisation has to work towards its goals is limited. The consequence is that the more goals there are, the less time is spent actually reaching a given goal. The person who tries to control everything doesn’t actually control anything.
According to rumour Percy Barnevik was a great fan of carrying out measurements. His view was that different things should be measured at different levels. At his level, which was the very top, he measured how well his subordinates measured their own operations. In many cases a measurement gains an undeserved reputation of focusing on details and using up a lot of resources because of everything that has to be measured, which of course does not always have to be the case. The example of Percy Barnevik is proof that measurement does not have to be a matter of tiny details, nor does it have to be particularly comprehensive – it can still contribute valuable information.
When drawing up strategy, we want to impact the employee’s behaviour as early as possible. We want early indications so we can avoid risks and reap the benefit of opportunities as quickly as possible. That is why it is important to know how various results are created, often far more important than knowing the results themselves.
Traditionally, financial data has been the main source of what we know as KPIs. In the 1990s professors and corporate leaders Kaplan and Norton minted an expression that they termed ‘balanced scorecard’, relating to organisations that attempted to manage their operations based on financial information. The aim was to find a way of identifying as accurately as possible the factors that lead to a financial result, thus creating greater proactivity in the control process. The framework they launched had four perspectives that were equally important to measure and follow up.
Over and above economy, the perspectives are customer/market, processes, and human capital. The balanced scorecard is one of the most common tools for breaking down a strategy into things that can be measured. A few examples of Swedish companies that use balanced scorecards are ABB, Ericsson, Skanska, Tetra Pak and Skandia. Many municipalities and state organisations also use balanced scorecards to monitor their operations.
In recent years another term has appeared: Key Result Indicator (KRI). The way I see it, the difference is that a KPI “leads” and a KRI “follows”. What I mean is that a KPI is about a measurement that shows where a KRI may be placed. A KPI indicates and hopefully leads to a given KRI. Many financial indicators are result measurements that show something that has already become a given result and should therefore be classed as a KRI, rather than a KPI. This can be seen as a kind of clarification of how the various perspectives in the balanced scorecard relate to each other.
In Skanska’s balanced scorecard there is a firmly expressed idea that they call the “success model”. Put very simply, it is as follows: good leadership creates satisfied employees (human capital). Satisfied employees do good work (processes). Good work leads to good products and therefore satisfied customers (customer and market). Satisfied customers are more likely to return, which leads to more predictable profitability (economy). There is nothing remarkable about this, but it clearly shows from where the company believes its results are actually generated, and what can therefore be classed as KPIs and KRIs.
Another analysis that becomes important is just how many KPIs a person can keep track of. Opinions are divided on this issue, but one indication is that in using the word “KEY” (which means important or crucial) this logically suggests that the Key Performance Indicator is important or even crucial. Bearing in mind the brain’s limited capacity, we should limit the number of KPIs used. The brain is believed to be able to collate about seven factors when we make decisions. Kaplan and Norton give 16 in a balanced scorecard, but of course it is up to each individual organisation to make up its own mind.
This guest blog post was written by Pontus Wadström, advisor at A Real Movement and a researcher at KTH.