How do you choose which measurements are really going to make a difference to business performance?

1. The need for business leaders to know exactly
Business Management how their business is PERFORMING is in built.
in a changing market Anyone who has ever run a business, a
department or a team of people, will
understand that to be able to know what is
happening without being involved in every
Understanding the difference between transaction and interaction requires
KPI’s and KRI’s performance results to be available and
measurable.
At the moment, the businesses managers who
are tracking and measuring key criteria feel At the helm of a business, understanding
that they are in control – however, research historical values of sales, turnover, profit or
has shown that many of the indicators that are loss, and having management reports that
being tracked are Key Results not Key show how the cash generated is being used
Performance. within the business is an essential given.
There is a world of difference – in brief, the When figures are broken down into
Key Results Indicators (KRI) are measures departmental performance, the manager is in
against what has happened, Key Performance a position to be able to understand what
indicators (KPI) are measures against what IS performance is required from the team that
happening. they are managing to ensure that the business
hits targets for growth, and that they are able
This article attempts to show the potential to explain each team member’s role in the
effects on business performance that a review overall strategy.
and change of Key Performance Indicators can
have, allowing Directors and Managers to get This is where the main source of confusion
more from their business resources in arises about what is and what is not a KPI.
response to changes in market conditions.
The way to begin to understand whether your
KPI’s are really KPI’s is to count the number of
KPI’s you believe your business uses. When
you start counting, add together the exact
number of KPI’s used by the business
directors and include lower level KPI’s used by
each department.
When you have the total – ask yourself – are
these ALL related to business strategy.
The reason the confusion arises is
because not only can we confuse KPI’s
with another similar business
indicator (KRI), but we can also
There is difference between the performance misunderstand what a business
figures that managers accept as key to strategy is designed to do.
survival and management information which
when used wisely can cause rapid and
significant change to the way a business
performs. An example of a common business
strategy might be:
The document looks to explain by example
how and why these changes need to come ‘To increase turnover by 300 percent and
about and what effect can be expected when profit by 50 percent over the next five years.’
done well.
This is a KRI –
All referrals and examples are not meant to 1. The figures are quantifiable
involve real companies and any likeness is not 2. There is a known start point
intentional. 3. There is a known end point
4. There is a measureable time frame
What comes from this strategic statement are
a number of departmental and individual
Key Performance Indicators or KPI’s are
business plans, shorter in term, which when
used in almost every business from the small
added together map to the strategic statement
to the large international.
and deliver the WHO, HOW and WHY
elements.
The term Key Performance Indicator is such a
general term that it is often misinterpreted.
These are the same elements that
differentiate the Key Performance
Directors and Mangers think in terms of profit,
Indicators from the KEY RESULTS
loss and turnover.
INDICATORS.
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© John Shenton. BIA. March 2010

2. If we consider how this comes about, it is Every sales manager knows how to break
simplest to look for examples in the sales down, monitor and control sales activities. The
department of a business, for this is normally number of calls to appointments to proposals
where the largest element of targeting and to orders, is regarded as the baseline
measuring exists. measurement on performance for the sales
team.
A Sales Director agrees with the Board at the
beginning of each financial year, what the We might consider that because these figures
business requires to achieve in turnover and are FUNDAMENTAL to the success of the sales
profit for it to match the financial side of the team, they must be KEY PERFORMANCE
strategic plans. INDICATORS, but they are not. These are KEY
RESULTS INDICATORS.
Assuming just for this example that the
strategy was a stand alone and fixed five year The Manager, not the Director, is using these
plan, and the Sales Director has two past to record historical events that show which
years performance history to work with, and sales people are hitting their targets based on
has based their growth plans on a historical success factor requirements for sales
performance increase of a percentage per year people to stand a chance of hitting their
for five years, then the task of taking last personal sales targets.
years performance and raising the targets for
this year by x percent is relatively straight The reality is that any sales person who does
forward. not hit these targets stands the real danger of
losing their job, BUT, some sales people over
The Sales Director can now pass these new achieve their sales value targets but under
targets to each of their Sales Managers and perform in their call rate targets.
ask them to define HOW they intend to
achieve this level of growth. Is the sales manager going to take any action
if the salesman sells more than his target –
As constant growth cannot be achieved very unlikely.
indefinitely, the sales manager might request
further resources to be able to achieve the Is the sales director going to take any action if
new targets, he doesn’t need to, of course not.
possibly based
on an accepted The end result might therefore be that no
or historical action arises if these performance indicators
value of the are above or below the accepted norm, if the
sales results end result is that the sales team hits it’s target
figures from his for sales turnover.
existing sales
team. This is a fundamental reason why
Simplistically put entrepreneurs find they are very successful at
- more salespeople sell more, creating more getting a new business up and running but
turnover and more profit. falter once the business reaches a certain
point in its growth.
However, there comes a point in every growth
strategy when the impact of increasing output The detail required when a simple
from one department has a knock on effect on business strategy only includes sales
other departments. In this case, the and profit is far less than when the
implication might be that by adding more strategy needs to include the more
salespeople, will (in the short term at least) detailed WHY, WHO and HOW that
increase costs to a point where profit margins comes into play once the business size
fall and the strategy is not achieved in the needs to include others.
required timescale.
There are in fact so many inter related factors
to be considered, that the Strategy needs to What others are involved?
send a clear message to every member of
staff, and to clients and suppliers, about HOW Every business operates in a MARKET
the strategy is intended to work, and what which is constantly evolving.
VALUES the business holds internally. Customers and customer satisfaction
is also KEY.
If this year’s targets need to be achieved Each business must work with
WITHOUT increasing the headcount, what SUPPLIERS.
would the Sales Director along with their The Environment is becoming a KEY
management team need to do differently in element as is SUSTAINABILITY.
order to meet the needs of the business A business is only as strong as it’s
strategy? PEOPLE.
Fairness is now also a factor
This one simple change in the description is The NATIONAL ECONOMY has
what differentiates KPI’s from KRI’s. become the GLOBAL ECONOMY.
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© John Shenton. BIA. March 2010

3. Whilst business planning might look at each of
the above, the business strategy calls for an
overall understanding in simple terms about
HOW the business intends to continue growing
taking all of these into account.
Whilst an economy is moving as rapidly as it is
now – the fundamental approach needs to
take into account how the business and its
employees are expected to react to changes
so that the business continues to reach its
financial targets.
If we consider how
many targets are
incorporated into
every day business
The early business strategy was to sell enough
life, we can begin to
of the space to make a profit.
understand the
As the business grew it became important that
difference between
the bigger customers felt they could rely on
KEY RESULTS
delivery to very tight schedules.
INDICATORS – those
that look backwards,
The more lorries the business needed, the
and KEY PERFORMANCE INDICATORS, those
more personnel were required.
that MUST CAUSE A CHANGE in the way that a
The more personnel the more locations
process is being used, or HOW an individual
needed to meet demand.
does something within the organisation, in
order to ensure that the BUSINESS
As the economy grew – with the availability of
STRATEGIC REQUIREMENTS are being met.
cheap finance options – the quicker the
growth.
Each KRI has a place, and transactional data is
built up over time, stored in a part of an
As the world economy grew, so did exports
organisations database. Often each
and so on.
department has its own data store, where
KRI’s are a function of INPUT into a process
And then came change – rapid change, the
software application.
global economy went into a downward spiral.
Sales Figures occur in the Sales files.
The strategy in a growth market was to
Production Figures in the production
increase profitable sales on the back of an
software.
expanding customer base by increasing the
People in the Human Resource Files
spread of the business throughout the UK, to
Buildings, photocopiers and
be financed in part by loan capital and private
telephones in the Facilities files.
investment.
IT infrastructure in the IT files.
Profit. Loss Turnover, Return on
The performance indicators in a rising
Capital employed in the financial files
market were to monitor the sales growth, the
and of course much much more…
customer growth, the related costs and all
details related to vehicle movement.
If we are measuring these KRI’s then we know
how the business is performing against
The directors could understand what was
historical data, and in normal business times
happening on a day to day basis and if
that’s all we needed – Now, with the current
changes occurred, such as drop off in orders
economic environment we must now look
or shipment deliveries, they could define
forward and use a few (really few) focused
where in the business the problem lay and
KPI’s to enable us to drive the business in the
take action accordingly.
direction that will meet the strategic goals.
The staff understood the simplicity of these
To enable us to understand how a true KPI
requirements, to “fill” the lorries and get the
might now be used to achieve significant
goods to the customer when and where the
change in the way a process is used in an
customer requested them.
organisation, in line with corporate strategy,
we need a simple example.
Recession bites. The customers demand more
for less. Some customers go out of business
Let me describe the case of an “international
and lorries start to stand idle.
logistics organisation.”
Equipment and buildings financed in the good
This is an organisation which sells space in
times now become an increasing liability.
containers to be loaded on large lorries, to
Managing overheads means potential
move goods around the country and to ports
redundancies for staff, and the possible
where it can be exported. This involved the
closure of buildings.
use of HUBS around the country to act as
dropping off and distribution centres.
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© John Shenton. BIA. March 2010

4. Monitoring turnover and profit and the in the previous 48 hours with all planned
resulting cash flow places pressure on the movements for the next 48 hours.
management team, but none of these
monitors or controls helps to change the way This was a simple task for the HUB manager
the staff manage the business more as the data was stored on his system.
efficiently.
Ten minutes later the CEO having reviewed
A key performance indicator that the situation, called the manager back and
encompasses the way the business asked:
operates is required. A simple indicator that
goes to the heart of what the business is ‘I see that you’ve had three vehicles travel
trying to achieve to become a supplier to its between similar locations with the last 24
customer base that can be trusted to deliver. hours with space to spare, and you also have
another two planned for tomorrow. Why didn’t
you contact this customer to see if they would
Looking at the business strategy and be prepared to receive the shipment either
making a simple change resulted in yesterday or tomorrow?’
such a significant change to the
business overall that the staff and When the manager
customers became part of a working replied that he had been
unit designed to survive whilst at the very busy with all of the
same time exceeding customer other deliveries and this
expectations. shipment had occurred in
his coffee break, the CEO
The fundamental change resulted from suggested that this was
understanding the WHAT the HOW and the his only chance at a
WHEN, BY WHOM and WHY. Management Evaluation
Call that would result in a
Instead of monitoring the movement of successful Job Retention
vehicles and the cost of that movement in Action and left it at that,
relation to the profit of each movement, the thanking him for all his
board introduced a single simple Key hard work in the past.
Performance Indicator that flagged any
movement of a vehicle with less than a This situation never occurred again.
specified load. Customers felt they were getting an improved
service, drivers felt they were not wasting
The movement of loads by customer, from their time, and word spread like wildfire
location to location, by time of day, in relation around all of the hub managers.
to the customer specification, was already
available, but the addition of the Business efficiency escalated and as other
measurement of the load as a percentage of logistics companies failed, this one picked up
the available space in the lorry made all the new business based on their improved
difference. reputation.
Another fundamental change was in the The understanding that a true Key
timing of the report. Whereas the historical Performance Indicator causes a change in
data was made available to the directors and a process in line with the business
the management team on daily, weekly and strategy, which also might need changing, is
monthly basis, it now became available in real the key to making your business more
time by exception. sustainable in a recession.
This meant that as soon as a load was moved To get to this revised KPI will mean looking at
where the load level was below a minimum, the core of your business, understanding what
the Chief Executive received a report on his information is held where, and how you can
”Blackberry”. bring together KRI’s into a measure that
crosses the departmental boundaries.
This report caused an immediate action, He
picked up the telephone and called the HUB
logistics manager and asked WHY a load had
left half empty. Now when you count the number of
indicators and say you have a real set
The HUB manager had access to all of his of KPI’s, you will probably have no
historical reports that told him that on average more than ten. All the rest are KRI’s.
all loads left the building on time in order to
meet a customer’s explicit time of delivery
requirement. As far as he was concerned – he
was meeting the old strategic requirements If you are too close to your business to see
with an emphasis on keeping the customer the changes that will make a difference then
happy. why not talk to other directors who can give
you their opinion, or conversely, call on the
The CEO asked for an immediate report from services of an external consultant who will be
the manager outlining all vehicle movements able to give you an objective opinion.
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© John Shenton. BIA. March 2010