KPIs (Key Performance Indicators) are commonly used by executive teams to track corporate success.
Traditionally, KPIs are seen as backward-looking, providing feedback on past performance.
However, KPIs can be a powerful tool to predict future changes in the business when properly constructed.
The key to unlocking the predictive power of KPIs lies in mapping relationships and setting appropriate measurement intervals.
The ultimate goal for any business is survival and growth.
Achieving this requires the support of various stakeholders, including business owners or investors who are often at the "end of the queue."
The concept of "end of the queue" signifies that the effects within and outside a business influence return on investment.
A chain of predictive numbers can be established by understanding stakeholder relationships.
Happy employees lead to effective supplier relationships, which in turn drive great outcomes for customers.
Satisfied employees and strong stakeholder relationships ultimately drive results for investors.
Tracking relationships is crucial to unlocking the full predictive ability of KPIs.
Example: A grinding media company (metal balls and rollers for the mining industry).
Four key stakeholders were identified: employees, suppliers, customers, and the holding company.
Each stakeholder relationship is two-sided, with the company and stakeholders exchanging value.
Employees: The company wants employee retention; employees want fair compensation. KPIs include employee turnover and benchmarking against industry standards.
Customers: The company wants revenue, gross margin, and market share; customers want product quality and customer service. KPIs included 7 for employee relationships (safety, employment conditions), and 8 for customer ones (revenue, quality, service).
Example scorecard contains 21 KPIs.
Mapping the relationships between KPIs is essential to understand how one KPI affects another.
This can be done using a whiteboard or flipchart.
Start by nominating the end goal (e.g., investment from the holding company) on the right-hand side.
Work from right to left to identify the drivers of that outcome.
Investment is driven by profit, return on capital employed, and net cashflow.
These are driven by revenue, gross margin, and market share (what the company wants from customers)
These are driven by product quality and customer service (what customers want from the company).
These are driven by KPIs for suppliers and employees.
The cause-and-effect diagram illustrates how issues on the left (e.g., poor employee relations) can affect outcomes on the right (e.g., investment from the holding company).
A KPI scorecard, when viewed as a map, provides a predictive model for performance.
A measurement interval is the time between KPI readings.
The frequency of measurement affects the predictive power of KPIs. Annual employee satisfaction surveys aren't useful for predicting monthly turnover.
Monthly employee satisfaction results are needed to predict employee turnover.
Work from right to left to assign measurement intervals.
If the holding company makes investment decisions annually, but these are driven by monthly profit, return on capital employed, and net cashflow, then all KPIs to the left must be measured at least monthly.
Executive teams need to appreciate the dynamics within a set of KPIs.
Identify key stakeholders and track how they impact each other.
Combine cause-and-effect relationships between KPIs with appropriate measurement intervals.
Scorecard becomes a dynamic representation of how the business will prosper.
CEO of KMS Education and Strategic Factors.
Expert in strategy and performance measurement.
Helps organizations in various sectors create success.
Former professor of management.