Business Solutions with SAP

Using Key Performance Indicators for Building a Strategy Focused Organization

December 18th, 2009 by
Key Performance Indicator

Key Performance Indicator

The key performance indicator acronym (KPI) is used so much that it has come to be associated with any type of business measure.  Everything is called a KPI and it is a silly distraction from an important business tool.  Not every measure is a KEY Performance Indicator, only those measures that are critically important to making a difference in the marketplace are truly KEY to your company health and performance.

Because of this confusion around Key performance indicators the wrong measurements are often used.  Too often a KPI is used to measure discrete components of an organization and are frequently focused on lagging indicators.  

If the KPI can not be used to steer your company, to plot course changes into the future, then they should not be called a KPI.

A proper KPI is:

  1. KEY to your business health (lagging) or growth (leading)
  2. Focused on your PERFORMANCE in the marketplace
  3. And an INDICATOR of your success in delivering customer value.

If your KPI does not fall into these broad categories as the “instrument panel” to keep your company on track then it is not an appropriate KPIs.

I chose those analogies carefully to line up with the 3 key business value proposition areas of process, innovation, and customer focus.  The first two, the way I have defined them are more closely aligned to process and innovation while the last one is exclusively linked to the customer focus.

What Should a KPI or Key Performance Indicator Measure – What is a KPI?

A true KPI should represent an underlying business need that addresses your company’s position in the marketplace–, not a single discrete process measure as so many use them today.  It should be directional in nature providing guidance to broader business activities but it is not a specific organizational performance measure.  However, a good KPI will generally be an index of several organizational performance measures or, more appropriately, several goals from various organizations and activities all rolled together.

Too Many Goals are called KPIs

Many commentators, consultants, and other professionals confuse KEY Performance Indicators with more discrete goals and the metrics to support those goals.  As you move further away from the top level of the KPI to address more discrete elements of operational performance you are no longer looking at KPIs.  Your company does not need a KPI for every metric.  In fact, the most effective KPI will generally be an index of several metrics or several departmental goals, properly weighted to correctly address marketplace competitive pressures.

Key Performance Indicator Alignment

KPIs should align with one or more of the three value proposition areas of operational excellence, customer focus, or innovation.  Underneath those KPIs some of the specific goals, measures, or metrics to define top level KPIs will fall into the area of competitive pressures.  How well you execute against those competitive pressures to enhance your value proposition directly affects your position in the marketplace.  The KPI index of various goals and measures provide a great underlying foundation for a solid ERP, SAP, or IT business case.  These various goals and metrics as well as the processes that support them become a great foundation for your ERP, SAP, or IT business case –, they are powerful for guiding IT spend and IT investment as well as corporate direction.

The components of each of the areas of competitive pressure should focus on the three business drivers: cost, revenue, and profitability.  These three areas should underlay each of the metrics that are used to define your goals, and then the index of those goals and the weighting of each of those measures becomes the KPI or score for your business.

Key Performance is All About Business

One way to determine if you have created an appropriate KPI is whether it is directed at your company’s value proposition (operational excellence, customer focus, or innovation) or whether it is focused on competitive pressures (vendor / customer power, competitors, or new products / services).  A solid Key Performance Indicator can be built from an index of either a value proposition element or a competitive pressure element.  To develop skill with these measures you may wish to define your goals first at the competitive pressure level.  As time goes on and your comfort increases you may begin to align them higher up into the value proposition area.  Then each of the competitive pressures is addressed for each of the value proposition areas you wish to target.

I am a proponent of keeping the KPI at the highest level, at the level of your value proposition.  However in some companies, especially those businesses or industries who deal with commodities, your KPI indexes might be better aligned more directly at the landscape of competitive pressures.  Either way there is a close relationship to your value proposition and competitive pressures so either will work.

KPI, Value Proposition, Competitive Pressures, and Business Goal Alignment

It is not easy!  If it were easy the whole area of strategy and KPI alignment would just be another commodity.  As another commodity it wouldn’t produce results that help your business to win in the marketplace.  But while it’s not easy, it is possible and like all things that take a measure of skill the more you practice it and the more diligent you are the better you get and the easier the exercise becomes.

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Using KPIs to Align Your SAP Business Case to Strategic Business Direction

December 18th, 2009 by
SAP KPI Success

SAP KPI Success

Few companies see dramatic transformations on their first attempt with Key Performance Indicators.  Many businesses or organizations eventually abandon the efforts because they start out with poor alignment between what they are measuring and the business value proposition or their underlying competitive pressures.  Some companies eventually develop some great reports and a “dashboard” for their executives or senior managers.  But few companies make it to the area where they are effectively using a Key Performance Indicator to implement SAP in a way that strategically steers their business into the future.

Key Performance indicators should be developed to refine the metrics or goals which support processes for your business to compete in the marketplace.  Okay, that was a mouthful.  How about if we put it this way, you need good measures for good business results.  These processes, the goals, the metrics, the KPIs, and all of the effort you have put into this then becomes the foundation of a solid business case for your SAP solution.  It doesn’t really matter what solution, whether it is ERP, CRM, APO, BI, or other system implementation efforts, it is still important to decide what is important and how you will measure it.  Armed with these goals and the business case you can then guage the SAP implementation or upgrade project success.  This is the SAP value driven methodology.  Here are some steps to get you started on your journey:

  1. Carefully evaluate your business value proposition.  In other words, why do customers buy your products or services?
  2. Look at the industry as a whole, where are the “points of frustration,” where are customers frustrated or disappointed with the industry as a whole?
  3. Consider what competitive pressures affect your value proposition and the customer “points of frustration” and determine what organization(s) are impacted by those competitive pressures.
  4. Focus on developing a set of goals, metrics, and objectives that address those competitive pressures so that you can then “operationalize” the strategies to address those pressures.
  5. Use the right people, processes, and SAP technology tools to address those new “operationalized” strategies. Implement the systems and technology to support the new strategies and measures.
  6. Develop a weighted index of those goals or metrics that appropriately considers your competitive pressures and your value proposition as your first KPI.
  7. Execute an organization-wide communication program about the new metrics, and the new index, and its meaning to the company in the marketplace.
  8. Provide an incentive, generally provided quarterly, for meeting certain KPI related index targets rather than individual goals or metrics.  Cause the company to pull together in the same direction regardless of some of the competing demands that individual goals might create.
  9. Communicate to the organization that an annual adjustment of goals, or of their weights will be performed and the KPI index measure will be reset each year and that any incentives will be based on the new “norm.”

An Example of the Correct Use of a KPI as a Useful Business Measure

Probably the biggest problem I see with what many practitioners call KPI is that they measure activity and not results.  Just as an illustration consider the call center below.

You need good measures for good business results

If you operate a call center and have defined a “key performance indicator” as the number of calls per hour per phone operator you may not be measuring the right thing.  So what is a proper KPI?

In the brief example of the call center, the company KPI (i.e. the Business RESULT) might be customer satisfaction, customer retention, or customer acquisition.  Those would be proper Key Performance Indicators that would filter down to the individual organizational measurements to show how a crucial business issue is being measured.  In other words, measuring calls per hour might be a cost based performance indicator (measuring activity), but is that really what is important to the business?  Did you take the time to build customer loyalty (i.e. customer retention), was this a prior customer calling about some issue and did you take the time to try to work with them to regain their business?  Was this a brand new customer?  In other words, what business issue are you trying to address with the activity you are performing and want to measure?

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SAP Failures: Is Lack of Sr. Mgt. Commitment the REAL Issue?

December 7th, 2009 by

Senior Management Commitment

When ERP projects fail it is popular (and easy) for consultants and the project management team to simply throw up their hands and site “lack of senior management commitment” as the evil force behind it. However, like much of the conventional ERP wisdom out there today, the real issues can be much deeper than that.

 In my previous blog entries, I posed the following questions:

Why would any management team spend hundreds of thousands or perhaps  millions of dollars on ERP with the goal of failing?

Do ERP Executive Steering Team members in most organizations consider themselves “not committed”?

Do people rise to senior management levels in most organizations because they are totally incompetent?

Many times what is perceived as “lack of management commitment or ownership” is really a failure on the part of your consultants, the executive sponsor, and internal project manager to do their jobs. Stepping back for a moment, commitment to ERP starts with education. However, all too often ERP project managers mistakenly assume that an educated management team is by default a committed management team. This is not a technicality, because in practice there can be a huge difference between “education” and “execution” of the senior management role. This is precisely where consultants and the project management team drop the ball when it comes to managing the executive staff (and yes they must be managed).

A big part of managing the ERP Executive Steering Team is not only educating them on their project responsibilities; but also coaching them on how to fulfill them and making sure they do. This includes specifically what they must do, when they must do it, and in some cases, how to do it. In addition, it involves tactfully reminding executives when they have not completed an assigned task and finding out when they will. We are all big boys but if your consultants cannot add value in this area, you have the wrong consultants.

In addition, this is not about spoon-feeding helpless executives. Remember though, most senior managers did not rise to their level in the organization because they are ERP implementation gurus. Furthermore, it is true they have a business to run in the meantime. Therefore, if you want management to “demonstrate” their commitment to the project, the project management team must plan and facilitate this process and not leave it up to chance. Without demonstrated executive commitment (highly visible involvement; communication and supportive actions); do not be surprised when no one else in the organization takes the project seriously.

Many times consulting firms avoid frank and honest dialog with senior management for the fear of falling out of favor. In other words, they act like sales people not project managers. Other consulting firms simply do not have the experience and skills to manage executives. On the other hand, many internal executive sponsors and project managers are uncomfortable with “upward” delegation of responsibilities to their executives. Nevertheless, a project management team that cannot do this has no business running an ERP project. You see, it is not about becoming the bad guy, disrespectful or rocking the boat. What many fail to realize is most senior management teams (spending millions of dollars on ERP), actually want the project to succeed and have no interest in shooting a project manager trying to do his or her job.

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