Using Key Performance Indicators for Building a Strategy Focused Organization

December 18th, 2009

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:

KEY to your business health (lagging) or growth (leading)
Focused on your PERFORMANCE in the marketplace
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.

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. 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 underly 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 adddressed 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.

Steps on the Path to Key Performance Indicators and a Business Case for IT Development

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 strategically steer their business into the future.

To get to the point where your Key Performance Indicators become a powerful force for your business to compete in the marketplace, it is important to develop or refine the processes that support the metrics for the goals you have developed. 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 ERP, SAP, CRM, APO, BI, or other system implementation efforts. Armed with these goals and the business case you then have the material to guage implementation or upgrade project success. Here are some steps to get you started on your journey:

Carefully evaluate your business value proposition. In other words, why do customers buy your products or services?
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?
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.
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.
Use the right people, processes, and technology tools to address those new “operationalized” strategies. Implement the systems and technology to support the new strategies and measures.
Develop a weighted index of those goals or metrics that appropriately considers your competitive pressures and your value proposition as your first KPI.
Execute an organization-wide communication program about the new metrics, and the new index, and its meaning to the company in the marketplace.
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.
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.”

Working Through an Example of Constructing a KPI and its Components:

If you operate a call center and have defined a “key performance indicator” (or actually a business measure) 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 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 that performance is being measured.

Evalute your Business and IT Strategy to Determine the Correct KPI and Technology Requirements

A measure of calls per rep per hour might support a higher level goal to address a competitive pressure like customer power, or a competitors quick response to problems, but it may not even be the right thing to measure. Previously I wrote about important skills a CRM consultant should have to help your business succeed, and many of these skills are similar requirements to developing your customer centered measures.

The difference between an application technician and a business consultant who knows the application is in knowing what questions to ask to determine what the true underlying business need is. Even when technicians learn the business need they often have no idea how to convert that into a solution outside of their very narrow focus. For example, if you have service or repair requests that seem high, do you focus on solving a quality problem, or on shipping processes, or packaging, or other reasons? And to resolve these issues, do you have or need a solution database? Do you need some form of Engineering Change Management process integrated within the Customer Service processes? Do you need Quality Management (QM)? Is full blown SAP style QM overkill? Is there a way to promote customer self-service with solving some of their own problems, both to empower them and to reduce your own internal costs? Did the ERP or CRM consultant have basic business and troubleshooting skills to ask such questions? If you want ROI for IT expenditures, if you want SAP ERP, CRM, BI, or SOA to deliver business related results, start asking business questions about why you are looking at any technology spend to begin with:
How do you determine customer needs and wants?
How do you track changing dynamics in customer needs and wants?
How do you convince your customer base to execute a purchase based on their needs or wants?
How do you anticipate new products or services your customers may need or want next?
How do you track market spend to new customer or enhanced existing customer product spend?
Do you measure, or need to measure cost per lead and then lead conversion rates?
How do you compare to your competitors?
Is, or should, opportunity tracking be embedded into the customer service process?
Do you know what opportunities can be converted into new customers or into new (or enhanced) products or services?
How do you track opportunity costs?
Do you link complaints / repairs / service / opportunity reporting back to customer attrition?
CRM, ERP, BI and IT Investment, Where Do You Find the Business Benefit? September 19, 2009.
http://www.r3now.com/crm-erp-bi-and-it-investment-where-do-you-find-the-business-benefit

A more appropriate KPI for this might fall under the value proposition area of a Customer Focus. Knowing that customer satisfaction has a direct correlation to customer retention (lagging indicator) and an indirect correlation to customer acquisition (leading indicator) you might create a customer satisfaction index. That index would include the various ways your company interacts with customers and how that interaction is measured. From these different interactions a satisfaction index can be created.

Now that you have determined that Key Performance Indicator, or KPI of a customer satisfaction score, you can then look at the organizational areas that directly or indirectly create customer contacts or customer “touch points” to define meaningful organizational goals.

Using the Market Opportunity of the “Frustration Factor” to Develop a Proper KPI Index for a Call Center

For our fictitious company with a call center we can consider the “frustration factor” because this is where the opportunity for customer focused innovation exists. Part of dealing with that “frustration factor” requires a business and IT strategy that is focused on customer centered innovation.

Call centers represent one of those areas for a company to make significant customer retention improvements by reducing the customer “frustration factor” in dealing with your company. We have all dealt with call centers and some of the rude, obnoxious, or clueless reps; or for the painfully ridiculous voice prompts and everyone I have ever know hates them. An industry-wide “point of frustration” can be a valuable market differentiator if you are able to make meaningful improvements between you and your competition. The real key here is to find a way to do it better and without significant increases in cost compared to your competitors.

Several years ago Dell Computer faced this same issue. While Dell computers are not the cheapest in the market, my personal opinion is they are a good value for the money. A few years back Dell, like nearly every other company, had a customer call center that was measured on the number of calls per rep per hour. Dell realized this wasn’t getting the job done. Dell management looked at the situation by asking the really critical question of “what is important to the customer” that we can do at a reasonable cost? The answer was the customer was calling because they wanted their problem solved and Dell needed to solve the problem regardless of how many calls it took. Their answer was to completely modify the metric to something that was meaningful to the customer–, they changed their call metrics from the number of calls per hour per rep to the number of customers who had their issue completely resolved on the first call. That was a radical performance transformation that ultimately reduced call volume, improved customer satisfaction, and in the end it reduced warranty costs.

Measuring the right thing put pressure on the entire business because the tools, resources, and needs of the call center to accomplish this task became the needs of the business as a whole. Call center employees and managers pushed for tools, training, and resources to ensure that customers had the right answer on the first call. I do not know for sure but I believe that much of the call center feedback then became incorporated into part of the customer service to engineering feedback process. The drive to just do it right the first time became part of the business culture and a strategic transformation followed.

Dell has certainly had its ups and downs in the market just like every other technology hardware company. Overall though Dell has weathered the storms better than many of its rivals and peers and is known for its innovation around direct distribution of computer hardware. Michael Dell is also known as a hard charger who usually makes the right decisions and finds a way to make the business grow. By focusing on the customer, by understanding your customer’s “points of frustration” you can then focus your time, energy, and resources on the areas of your business that are the most meaningful to both customer retention and customer acquisition. Your business focus then becomes ”what does the customer really want?” rather than where can I save a few pennies. By focusing on customer “points of frustration” you can begin to move more closely to customer retention and customer acquisition in a meaningful way. By focusing your business on the right things you can neutralize some of the pure price wars that ultimately move your products or services to being commodities in the marketplace. After all, look carefully through the material on this site, http://www.r3now.com and you will quickly see that our goal and drive is to “Just Do It Right the First Time” and to be sure that you get what you pay for as a customer on your technology investment.

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Bill Wood
+1 (704) 905 – 5175