KPIs Provide "Line of Sight" for Management

“Before defining key performance indicators (KPIs), differentiate those from regular performance indicators (PIs),” advises Gary Cokins.

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“KPIs should be strategic, usually few in number and typically derived from strategy maps and balanced scorecards,” explains Cokins, manager of performance-management solutions within the Worldwide Marketing Group at SAS Institute Inc. (www.sas.com), a Cary, N.C.-based provider of business intelligence software.

Designed to monitor progress toward accomplishing strategic objectives, KPIs require a target measure against which to be tracked. “There should be multiple KPIs working together. Some project-based, some process-based,” Cokins notes. In contrast, PIs, which may monitor processes and not require a target measure, often are reported individually without context to strategy, he adds.

That said, Cokins remarks that little consensus exists about what a KPI actually is. That causes problems. “Companies may report dozens, possibly hundreds of measures and refer to them as KPIs,” he observes. “But many are operational metrics without direct linkage to strategy execution progress.”

Strategy map

What, then, is most important in picking the KPIs? Ideally, their source should be a strategy map providing context, Cokins reponds. One test for a well-selected KPI is whether the metric is improving relative to a preset target. Another important selection criterion is buy-in. “The employee team and managers must agree that the KPI makes sense to monitor because their performance and accountability with consequences will be tied to the KPI,” he counsels.

And although it is counterintuitive, managers and employee teams—not executives—should ideally be the ones to select the KPIs, Cokins advises. “Their involvement is critical to gain the buy-in.” Plus, delegating KPI selection to managers and employee teams also solves a serious problem that causes most strategy execution failures. “Most employees do not understand the executive’s strategy. But involving them assures this problem will be solved.”

Of course, selected KPIs can—and should—be reviewed and negotiated with executives. “But the outcome is that everyone will understand what measures matter for strategy execution,” Cokins states. “More importantly, everyone can monitor progress against targets.”

In the shadow of success, however, lurk two things that could defeat the whole purpose of KPIs: sandbagging and self-promotion. “A KPI system is far more social than it is technical. Since KPIs and their targets involve accountability, psychology comes into play,” Cokins observes. “My advice to prevent sandbagging abuses is for the board of directors to select and promote executives who are fair and equitable.” From those executives, though, must come the capability to champion the KPI process. “If the leadership is weak or dysfunctional, then the organization‘s performance management to excel will be jeopardized,” Cokins says.

Overcoming these potential impediments and achieving success also means that KPIs “should or must be tailored” to the executive team’s strategy. “There is no one-size-fits-all,” Cokins counsels. “Strategy is all about making and completing changes, not just perfecting the same processes of the past.”

Even so, something has to be measured with detail, accuracy and at some frequency. Those factors depend on what’s to be made with the information, Cokins stresses. He cautions, though, that just as KPIs are not PIs, neither are KPIs really business intelligence, or BI, as that term is used now. “BI, which helps managers make better decisions, can provide knowledge and learning to formulate and dynamically adjust strategy. The [KPI] measures then help monitor progress.”

In monitoring progress, though, Cokins notes that one major barrier drives his original caution: know the difference between KPIs and PIs. “A major obstacle is reporting too many measures, the trivial many, rather than the vital few.”

While other hindrances exist, above all, understand that KPIs provide managers and employee teams with a “line of sight,” Cokins declares, “so they can see how their measures contribute to aggregate or lagging indicator measures of output, outcomes or performance.”

C. Kenna Amos, ckamosjr@earthlink.net, is an Automation World Contributing Editor.

SAS Institute Inc.
www.sas.com
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