How to define Key Performance Indicators (II)

The KPIs definitions by themselves will not solve a problem. We have to create an enterprise performance management capability to achieve the expected outcomes, using the KPIs as a key tool. This capability is comprised of processes, organization and tools that guarantee the cycle which starts with the business strategy,  clear and measurable goals, and the execution measured with by the KPIs.

 

It implies that the business strategy has been defined in measurable terms, i.e. EVA growth, market share growth, talent retention, etc. You can use a methodology for the strategic management of the company like Balanced Scorecard, Value Management, or any other and use them to define the KPI and the KPI tree. Then, you should establish goals to those KPIs. There are several techniques to establish such goals but at the end, they will be linked to the expected business outcomes for the year.

Then, the KPIs and goals defined must be "cascaded" to the tactical and operational levels of the company in order to make them consistent. In such way, every employee will know how he/she will contribute to the overall goals of the company.

As a result of the Operation, the KPIs will be affected and we measure their variations and how close they are to the established goal. Then, we take decisions to improve them. Eventually, the KPIs will help to reshape the business strategy.

In the following diagram, we illustrate how the KPIs cascade from the Strategy to the Operation. As you can see, you can have:

- Functional KPIs, related to measuring the outcomes of a specific function.
- Process or Cross-functional KPIs, which involves the collaboration of two or more functions.

When architecting the KPIs tree, make sure that your definition will help to:

- Implement the business strategy
- Align function and processes to the business strategy
- Identify if the KPI will be lagging or leading and why
- Establish the frequency of KPI measurement
- Define who are accountable(s) for the KPI results