Key performance indicators, or KPIs, are a critical component of an overall corporate or enterprise performance management (CPM/EPM) process.
They play an important part in monitoring financial and operational results on a regular basis, and highlighting areas that might need attention. But there are many considerations here:
- How do you select the right KPIs and align them to the strategy?
- How do you communicate KPIs and get your team to manage to them? How do you tie them to compensation?
- And how do you update or adjust KPIs over time?
These are questions that were addressed at a panel discussion I recently moderated for the Boston chapter of the CFO Leadership Council. The title of the panel discussion was “Minding the KPI Gap: Adoption & Communication Strategies for Success.” The panel of experts included Bob Badavas, Board Member/CEO, Greg McKenzie, a KPI consultant, and Sean Quinn, CFO at Cimpress. Here are the highlights of the panel discussion.
Selection of KPIs
The panelists highlighted that the selection of KPIs should be both a top-down and bottom-up process. Most important is that the KPIs are focused on the main goals and objectives and what’s important to the business. One panelist put this in terms of “what rings the cash register.” But they must also reflect the priorities of senior management and line of business managers. The CEO and board of directors can also play a key role in determining KPIs, especially reflecting what’s important to investors.
A methodology such as the balanced scorecard (roughly 20% of the audience polled positive for using this) can be effective in identifying financial and non-financial KPIs and in ensuring departmental or functional KPIs are aligned to corporate strategy.
KPIs can certainly vary based on the stage of maturing of a company – for example, an early stage company focused on rapid growth vs. a more mature company focused on profits. KPIs will also vary by industry – for example, a SaaS company focused on customer acquisition and retention vs. a CPG company focused on orders and shipments.
KPIs can also vary based on whether a company is privately or publicly held. The key for public companies is to ensure consistency in external KPI reporting. This enables stakeholders to see KPI trends over time.
Communication and Management of KPIs
In terms of getting management to buy in and take ownership of KPIs, again the panelists commented on the top-down and bottom-up nature of setting KPIs. The goal here is to meet in the middle, with KPIs that meet the needs of line managers and that align to corporate goals and objectives. KPIs can and should be tied to management compensation and incentive programs. This can be structured in the form of quarterly or annual MBOs and bonuses. The panel also spoke about the need to balance corporate and personal KPIs in the incentive compensation program.
When asked about how to balance short-term vs. long-term goals, one panelist spoke about a long-term incentive program that was based on the company meeting hurdles for growth in its average share price over a 6- to 10-year period, vs. the typical short-term focus.
In terms of the number of KPIs that should be tracked by the organization, the panelists commented that 10 was a reasonable number for the overall enterprise. Another way to approach this is to identify 3 critical KPIs for each function and then roll them up to the corporate level.
In terms of frequency of KPI reporting, the panelists agreed that this should be based on the pace of the business, but that in most organizations, quarterly reporting and measurement was the common practice. KPIs can be leveraged as part of quarterly management or business reviews to track how well the business, department, or individual is performing and what actions should be taken to get performance back on track.
Change Management in KPIs
The last part of the discussion was about the process for reviewing and updating or replacing KPIs. The panelists highlighted that KPI targets should be reviewed and discussed on a regular basis – for instance, quarterly. And if the initial targets were set too high or too low, they could be adjusted annually or semi-annually, based on changes in the business or industry.
But in terms of introducing new KPIs or removing existing ones, that should be considered carefully and done on a less frequent basis – for example, as part of the budgeting and goal-setting process for a new fiscal year.
This was a lively panel discussion with many questions posed by the audience. Unfortunately, we had to end the panel after 90 minutes, but it could have gone on much longer. One topic that we didn’t have time for during the panel was what type of software tools are used to collect and report KPIs to internal and external stakeholders. This is where the reporting and information delivery tools within CPM/EPM software packages come into play.
KPIs and metrics can be collected through today’s CPM/EPM platforms, which typically include the ability to integrate data from multiple sources across the enterprise. Examples include financial, ERP, HCM, CRM, and other internal systems, such as data warehouses or data lakes. These systems can store and report on actual KPI metrics and how they compare to targets or prior period performance. And KPI metrics can be presented through many methods:
- Formatted financial statements
- Management reports with drill-through to underlying details
- Graphical scorecards and dashboards with interactive charts
- Excel spreadsheets with links to CPM/EPM databases
- Mobile devices
To learn more, check out this recent white paper by Ventana Research titled “Analytics is Critical to Effective Performance Management.”
Feel free to post any additional comments or suggestions for selecting and managing KPIs.