Process of Identifying Relevant Key Performance Indicators

Process of Identifying Relevant Key Performance Indicators

7/9/2018

Key Performance Indicators

|

Business

Although many organisations attempt to measure their progress with Key Performance Indicators (KPIs), selecting relevant metrics may be difficult. In this article, we'll introduce four steps to identifying KPIs that are relevant to a company's specific objectives.

---

Define an Organisation’s Primary Objective and Key Drivers

Before an organisation identifies its KPIs, its managers should define the company’s mission, core values and vision. Although companies may prioritise intangible outcomes, such as customer satisfaction or service excellence, the Chartered Global Management Accountant (The American Institute of CPAs, 2012) encourages profit-making organisations to establish financial priorities as their overriding objective.

These financial objectives may include:
​

• A percentage increase in the organisation’s return on capital employed within a certain period of time;
• A percentage increase in the organisation’s profit margin, or a numerical increase in their net cash flow, within a certain period of time;
• A percentage increase in the organisation’s target share price by the next reporting date; and/or
• A percentage increase in total shareholder return, in relation to a specified benchmark, within a certain period of time. [1]

​Organisations are also encouraged to identify factors that will allow its staff to achieve its objectives. [2]

Choose a Value Proposition

Organisations should select a value proposition that will allow it to increase its market share. The American Institute of CPAs (2012) outlines three potential primary value propositions that may allow organisation to remain competitive in their market:

• Operational Excellence: Ensuring that corporate initiatives produce effective results
• Product Leadership: Creating products with unique characteristics and value propositions
• Customer Intimacy: Establishing meaningful relationships between an organisation and its customers

The American Institute of CPAs’s industry study (2012) encourages managers to prioritise one specific objective, and to develop the other objectives that they have not emphasized to a threshold level. [3]

Develop and execute Organisational Metrics

Once an organisation has defined its primary objective, key drivers and value proposition, its managers should select metrics to drive their employees towards its strategic goals. For instance, organisations that prioritise value creation may choose to determine its ability to increase their capital returns beyond its cost of capital.

Organisations may measure their progress through financial KPIs, such as revenue, expenses, and investments. They may also measure non-financial KPIs, such as customer loyalty and satisfaction, and product quality. Admittedly, generating financial KPIs may be slightly easier, as they may be numerically measured through an established set of formulae. [4]

However, organisations are highly encouraged to determine a direct relationship between their financial and non-financial measures to gain a holistic perspective of their growth.

Managers should also keep in mind that the link between value creation, financial and non-financial measures may change frequently. As such, these measures must be monitored on a regular basis. [5] In addition, Managers should develop activities that would allow employees to drive the organisation towards its objectives, and are encouraged to generate numerical targets for its employees to reach. [6]

Evaluate an Organisation's Statistics

Managers must consistently monitor the measures that connect their employees’ activities with their organisation’s primary objective.

Managers should also exercise relevant methods for selecting KPIs in order to fully exploit their statistical data. These statistics would improve organisational performance, and is highly necessary to maintain its competitive advantage.

Finally, managers should define and utilise relevant information before their competitors. [7] They should also sieve successful initiatives from underperforming activities, and measure each initiatives’ expenses against their favourable outcomes. [8]

---

references

[1] American Institute of CPAs. (2012). How to Develop a Strategy Map. NY, U.S.A. Published by American Institute of CPAs. pp. 5
[2] Mauboussin, Michael J. (2012). The True Measures of Success. Retrieved from https://hbr.org/2012/10/the-true-measures-of-success
[3] American Institute of CPAs. (2012). How to Develop a Strategy Map. NY, U.S.A. Published by American Institute of CPAs. pp. 6
[4]  Lynch, R. (2015). Strategic Management. London, U.K. Published by Pearson Education. pp.460
[5] Mauboussin, Michael J. (2012). The True Measures of Success. Retrieved from https://hbr.org/2012/10/the-true-measures-of-success
[6] Lynch, R. (2015). Strategic Management. London, U.K. Published by Pearson Education. pp.460
[7] Mauboussin, Michael J. (2012). The True Measures of Success. Retrieved from https://hbr.org/2012/10/the-true-measures-of-success
[8] Lynch, R. (2015). Strategic Management. London, U.K. Published by Pearson Education. pp.461