How To Create A KPI System

The second article in a series of three devoted to the adoption of a KPI driven management system

Defining the challenge.

The vast majority of organizations world-wide are small, but management theories too often assume that only big organizations are worth study. Small organizations have a defining characteristic; the resources to make changes, people energy and finance, are scarce and to survive they must be well used. The approach I advocate will be as attractive to small businesses as it is to large because it uses a step by step decision process, with effective staff commitment at each stage of the process.

You can check that your model works before you commit resources to embedding it as part of your management system. You can check that you have selected KPIs that work.

The first article, and the supporting resources from bizlearn.biz explained the KPI modeler's approach to selecting the real KPIs. Now we need to turn this into a system.

I assume that you have developed your model on paper, probably in a workshop with your staff. I assume that you have conducted a preliminary test using historical data and you are confident that your linking formulae work.

Now you are ready to put it into practice.

Step 1 Turn it into an Excel workbook.
Any spreadsheet program will work. You can make a fast start to this process by downloading a generic KPI model that sets up the basic Dupont formula ROFE = Net profit margin x Asset turns. You can then simply add worksheets to dissect and mirror the functional structure of your organization. Modelers call these driver tables "mix boxes". By linking the summary output cells of the mix boxes to the relevant cells in the same or subsequent sheets you integrate the model.

Step 2 Desk test the model using three scenarios; best case, most likely case and worst case for changes in a performance indicator..

Step 3 Conduct a trial of the KPI model.
I suggest you do this on a small scale rolling it out from a single function where you have reliable collection systems for the data you need. The data will be defined in your mix box for the function. Try to select a function where the KPI has a high leverage over organization performance, and where the team has collaborated in developing their part of the model.

You will need some data from the accounting system. I recommend that you do not use financial data from other sources because it is not reliable. You will also need activity or transaction data. You may find that your model needs data from your quality control system.
Where you are using periodic data from multiple sources for your performance measures, check that the reporting periods for different data sources are the same. It is common for accounting reports to operate to be misaligned with operational reports because they are seen to serve different needs.

Run the trial until you are satisfied that the predicted leverage exists. Make sure that staff members have access to the results. Look for a performance improvement. You need early wins on the board.

Step 4 Roll out the trial progressively to other functions. You will find they are keen to start on this step but small steps work to preserve the integrity of the model and its adoption. You need to avoid an attack on the credibility of the process.
Make sure that people are provided with refresher briefings on how the model works.

Step 5 Review the results of the trial and make the changes you discover to be needed. There will always be some.
You should find that the effort you put into the trial process pays off in improved performance.

Step 6 Your tested KPI model is now robust, and it accurately defines the data sources that you need to use to take the manual work out of putting the data into the model. You should have the confidence to invest in a KPI dashboard system or custom programming to make the model a permanent part of your system.
Your tested KPI model becomes the specification for your chosen system provider.

This approach has the great advantage of ensuring that all your staff understand the KPIs for their function because they have been involved in defining them and testing them.

KPI Dashboard programs

There are many great dashboard programs available that simplify the task of making relent performance data available to the people who need it. Most of them offer trend charting facilities with target setting and reporting alerts.

KPIibrary.com offers an excellent dashboard program. Integration with your management information system is made easy but importing the data will always require an investment.

This is the reason I advocate development and trialing of your KPI model so that you can be confident that you have selected the right KPIs for each function and that they are all properly aligned before you embed them in your business. Your staff will understand their KPIs, and will know how to use them so training in the use of the dashboard will be reduced. Their early efforts will have improved financial performance so you will have paid for the investment in a dashboard system before you commit the funds.

Thanks to Michael Taplin / KPI Library