Measuring is knowing. Since the 1990s, measuring business processes and business performance has become an indispensable task for professional organizations, including through the Balanced Scorecard. Whereas in the beginning it was referred to as “performance measurement,” during this millennium the focus has shifted toward “performance management”; and thus from pure measurement to controlling performance of processes and organizations. To carry out this control as effectively as possible, organizations name critical performance indicators (KPIs). Certainly larger organizations are fond of using KPIs to measure and manage their organization, personnel and processes. Within large multinationals, this number can reach as many as 15,000.
15,000 KPIs! To me, that is THE sign that a KPI is no longer doing what it should be doing and that using it can even be detrimental to its original purpose. But as an organization, how do you make effective use of KPIs? In this blog, I explain how to develop the right KPIs in a planned manner using an example.
Step 1 – Specify your vision and strategy
The first step in developing KPIs is to specify the organization’s vision and strategy. After all, an organization’s “success” is always linked to its original goal. A clearly articulated strategy is also very effective as a communication tool to all employees who must eventually work with the KPIs. This step essentially describes what being successful means for your organization.
An organization wants to improve the effectiveness of its procurement function. Therefore, the organization sets the following strategy: “Achieve a 5% increase in the added value of the procurement department within one year.”
Step 2 – Describe all processes in scope of strategy
A clear description of the relevant business processes is an absolute must. In fact, processes are the implementation of the business strategy. Ultimately, KPIs are designed on these business processes and if they do not align with the strategy and do not help achieve it, the KPI misses its target. This step helps to further divide the entire process into smaller sub-processes. It is ultimately important that you use the KPIs to measure and control each of these sub-processes.
Possible processes include market analysis, contracting, selection, evaluation, as well as coordination with the needs drivers within the organization.
Step 3 – Recognize and define critical success factors (CSFs).
In this step, the team devises CSFs; that is, what are different forms of success. CSFs are those factors that have a direct and high impact on the efficiency, effectiveness and viability of an organization or product with a clear link to strategy. Processes and activities associated with a CSF must be performed to the best of their ability to be successful. A CSF is a short phrase, for example, “Increase delivery reliability” or “Increase customer satisfaction.” For most organizations and processes, five CSFs are the maximum to work with. Ensure that the CSFs collectively cover all (important) processes in scope. It is also important that the CSFs help complete the strategic goals.
The organization has identified the two most important success factors for it: “Improve procurement effectiveness” and “Improve supplier management.”
Step 4 – Define KPIs
Only in the fourth step do you think about KPIs. Unlike CSFs, KPIs are quantitative. The KPI is the mangraphic-going-up way you are going to measure and control the CSF. So it is important to think carefully about how you plan to measure the KPI. Try to set up a KPI so that it can be measured as a percentage. In addition, data that is collected automatically is a lot more practical than data that has to be retrieved manually. Make sure that the KPI is clearly formulated and that the measurements cannot be manipulated. Especially when personal bonuses are attached to a KPI, this is very important. For example, for “price realization,” it is very important that you clearly formulate how you calculate it, as there are multiple definitions in circulation. Also, involve the whole of your team in developing KPIs. Far too often KPIs are pushed down from higher in the organization. This causes a lot of resistance and ultimately ensures that KPIs have less effect. Involve the team. This often provides new insights and higher motivation!
For KSF “improve procurement effectiveness” two KPIs were selected: “percentage cost reduction per category per month” and “percentage of orders fully delivered on time”. For the “improve supplier management”, the organization selected one KPI because this is where the most attention is now needed: “the percentage of contracts not concluded through a framework agreement.”
Step 5 – Establish how data is collected and how results are displayed
Often KPIs turn out not to work. For example, because the required data is not available or not available frequently. If you as an organization do not adjust your KPI at that moment, you run the risk of getting no or wrong results, which will irrevocably lead you in the wrong direction.
This step involves looking at where the data can be obtained from. For example, are contracts stored centrally and where are records kept of whether they are concluded via a framework contract. To avoid problems with this, it is wise to include this in the design of the KPIs.
Step 6 – Implement the set of CSFs and KPIs
In the implementation step, the system goes live! Data is collected, reports are created and your team gradually starts working more with the system. This is where it becomes very important that your team starts learning how to use the KPIs and that your data flow remains secured. Often a start-up period is needed to evaluate whether all set goals are real and whether all data can be collected in a timely manner. Exactly how long this period is depends very much on the availability of the data and the amount of KPIs. However, discuss the length of this period in advance and stick to it.
Step 7 – Plan Do Check Act
The most important part of designing and using KPIs is using and evaluating the KPIs.cog Make sure you continually test and update your KPIs and their assumptions. Your KPIs should be as flexible as your organization is. A good KPI fits seamlessly with the organization and its processes. A common mistake is that organizations add KPIs fairly easily, but forget to remove old KPIs. As a result, you end up with far more KPIs than necessary. Having too many KPIs prevents you from being able to focus and can leave you rudderless as an organization. So my advice is to remove irrelevant KPIs whenever possible instead of adding new ones.
It is important in the sample organization to measure non-compliance relative to contract management. It is possible that next year this will no longer contribute to the strategy and the KPI will lose priority. Then it is worth considering removing or replacing this KPI. KPIs always have the goal of achieving strategy and are not set in stone.
Does your organization struggle with designing, implementing or evaluating KPIs or controlling the performance of your business processes in general? We are happy to think along with you! It is always possible to schedule a no-obligation consultation with our consultants.
