Key performance indicators (KPI)

How the KPI system is created?

When the system of target indicators are carried to contractors of processes – the staff of the company, appropriate to speak about KPI, i.e. key indicators of activity. In effect any of indicators of operational controlling or BSC can be carried to KPI as for each such indicator the manager of the highest, average or lower link on whom responsibility for achievement of the set target measure values is conferred should be defined. Nevertheless, KPI represents specific area of a system of controlling of the company. This field of management has special appointment and the methodical principles of creation.

The KPI system intends for the solution of the following tasks:

• Formalization of determination is more whole for the staff of the company;
• Assessment of activity of employees;
• Determination of remuneration of employees.

In this case it is about the purposes and indicators of employees while in a case with BSC, we deal with strategic objectives of the company. In a case with operational controlling, it is about the purposes and indicators of processes or the centers of responsibility.

At creation of KPI of this or that employee we should define in what processes or projects the employee participates and to connect indicators of these processes and projects with the specific contractor. Let's consider, for an example as KPI of the employee of department of technical support of users of the IT company are defined. This specialist advises the clients addressing for support. Therefore, its KPI should include indicators of processing of requests of users from which main thing is customer satisfaction. These are the indicators which are logging in operational controlling, characterizing the current activity of the company, its processes.

At the same time with the current activity the employee participates in two projects. In one of them it tests the new software product which development is conducted by the company. In other project he participates in implementation of the automated control system for requests of users which should increase customer service quality. These are the projects which are providing achievement of strategic objectives of the company and being a part of the balanced scorecard. The indicators characterizing success of this work belong to area of strategic controlling.

Thus, KPI of this employee consist of the indicators relating to different spheres of activity of the company and different subsystems of controlling.

The given example serves as an illustration to the following important statement. The complete and consistent system of indicators of activity of employees can be constructed only on the basis of previously developed strategic indicators (BSC) and indicators of operational controlling (indicators of processes, financial and economic indicators, etc.). In practice often arrive on the contrary. The heads of the enterprises obsessed with aspiration somewhat quicker to construct the "effective" system of motivation of personnel think out these or those indicators for the employees, without being troubled by formalization of strategy and the analysis of processes. Such, hastily made indicators, most often do more harm, than advantage. Without pressing in detailed analysis of the errors characteristic of early solutions at implementation of KPI, we will give only one example of the indicator which is found almost everywhere.

Practice of establishment of revenue as a target indicator for sales specialists is widespread. This indicator is represented so natural that it is not even discussed. Really, sellers should sell, and their works are result money on accounts of the company. However if to spread out sales process to components, from establishment of contact with the client before completion of the transaction, then it becomes clear that actually a contribution of the seller to the general result of the company is "transformation" of the potential client into the buyer. The efficiency of this process is most correctly measured by so-called "coefficient of conversion" - the relation between number of buyers and number of potential clients on "input". Certainly, nobody cancelled the sales volume which the seller should provide. This indicator should be a part of indicators of specialists in sales. But it has the mediated relation to efficiency of the seller as depends on a set of the factors which are out of the sphere of responsibility of sales department: number of the clients attracted with advertizing, price policy of the company, quality of processes of logistics, a competitive situation in the market, etc. If we want to manage sales process, then it is necessary to define such indicators which clearly characterize this process. Using only an indicator of revenue it is impossible to manage sales process. It is also impossible to construct and its basis the effective system of motivation of the selling personnel.

Completing consideration of this example, again we will emphasize that before starting creation of KPI, it is necessary to develop the system of indicators of strategic and operational controlling.

System architecture of goals management

At the top level there are purposes and indicators of BSC defining strategic priorities of the company. They are measured and analyzed on the basis of the data arriving from a subsystem of operational controlling which covers a broad spectrum of the indicators relating to different projections of the company – from financial indicators to corporate values.

Target measure values of operational controlling are established proceeding from target measure values of strategic level.

Indicators of a subsystem of KPI form on the basis of indicators of subsystems of strategic and operational controlling.

How to implement KPI

Develop KPI does not mean simply to think up indicators for all employees. Implement KPI does not mean simply to set dependence of remuneration on indicators. That KPI really worked, it is necessary to take care of many other without what indicators do not work^[1].

The opinion is quite widespread that it is enough to think up suitable indicators for employees, to tie remuneration to these indicators and it is possible to do nothing any more - everything will go by itself. Employees will try to keep step with "carrot" and to naturally achieve results necessary to us. No efforts from the head are required any more, it is rather simple to watch the course of affairs and to count profit. Let's not begin to expose these iridescent illusions, instead we will tell about one of recent projects.

The owner of the company - the head of authoritative type. Wishing to implement management on the basis of indicators, he, nevertheless, understands that he deals not with robots, and with people. It was an important circumstance for adoption of the decision on participation in this project by us. The situation in the field of an organization culture of the company at the time of the beginning of the project can be characterized several theses:

• the relation of employees to the work as to a routine which sense is known to the management, but does not concern them,
• lack of financial and non-material incentives for results of work, irregular payment of "awards" which are perceived as tips,
• "manual control" - direct intervention of the owner in everything that becomes in the company,
• lack of the adjusted processes,
• lack of interaction between divisions.

The first stages of the project passed without a hitch:

• Identified processes of the company and defined their main characteristics: purposes, results, indicators, contractors, owners of the ave.
• Set roles in processes and selected functions of contractors.
• Created KPI of contractors, having connected indicators with roles of employees in processes.
• Developed rules of awarding of employees depending on results.

On it "paper" work ended. Employees, of course, participated in it, but they perceived all this a little detached as certain theoretical researches.

Time to implement a system in practice came. It was for this purpose necessary to organize a cycle of management on the basis of goal-setting in which goal setting, task scheduling and indicators for contractors is performed, achievement of results is controlled, an assessment of reached is given. Nothing it in the company was. Everything needs to be created from scratch.

What specifically measure values need to be set to employees for a year, for a quarter, for a month? The answer depends on what objects are set for the company. For obtaining clarity in this question a number of meetings with company management during which it was succeeded to formulate the purposes of the company for year and the tasks of activities following from them was held.

The next step - work planning of divisions. At this stage heads of divisions together with employees carried out study of tasks of divisions which accomplishment will allow to achieve the goal of the company. This work was very difficult for employees. People who got used to receive orders and not to think of sense of what they do could not lay an accurate trajectory of the actions to the purposes of the company. Case was complicated also by lack of clarity in processes. Not the structured activity did not give in to streamlining. Therefore it was necessary to develop regulations of the most important processes and to construct the "an efficiency funnel" allowing to plan and control results of processes. At last, laborious work with employees began to yield results - in the opinion of people understanding gleams appeared. If before they did not see direct link between the actions and results of work with clients, then now they began to realize sense of what they do. Earlier they refused to accept responsibility for the end result as the customer behavior is not predictable and nobody can know, than long process of customer interaction will end. Now causes and effect relationships in a chain of actions became obvious and it became clear what means need to use for achievement of goals.

Thus, we decided on the purposes, plans and set specific measurable indicators for employees, clear to them, and perceived by them as achievable. Now time to organize control procedures of indicators and assessment of results came. Agreed with heads of divisions that the control purpose not in catching and punishing, and in helping employees to reveal weak points and to find the solutions allowing to achieve the goal. The head in this process not the supervisor, but the mentor. For accomplishment of this mission organized weekly meetings of departments during which employees informed on results of last week and tasks on following. The revealed problems were discussed, on them solutions were developed. It is important to emphasize the benevolent nature of these actions aimed at the employees assistance in finding solutions and overcoming difficulties. At the same time employees understand that their direct head and all company are configured on giving them support in the solution of the tasks set for them, and if something did not turn out this time, all necessary measures should be taken for prevention of similar failures in the future.

And there is the most interesting transformation. A planning feature and control turn into function of training of both employees, and heads! This thought is worth a lot! Think of it at a leisure: training as the highest form of government :)

As a result of this work the full stroke of management matching a training cycle was constructed: goal-setting - planning - control - the analysis and assessment - development of the adjusting solutions.

Also the motivation of employees changed. In their actions there was a sensibleness, there was interest in work, desire to achieve results woke up. It became clear to them how their activity conducts to the purpose as results as remuneration are measured and estimated depends on their achievements.

The management style changed. The owner refused direct control of employees and did not allow more violations of official hierarchy, interacting only with heads of divisions. The authority of heads from it increased. They received more independence and responsibility, got into the role of mentors for the subordinates.

Here so, in brief, there passed the project on implementation of KPI. What does it have to do with KPI? - you ask. Well, the owner of the company wanted KPI. He received them. But for this purpose it was required to rebuild all management system for the company. To be more exact, it was constructed again. Here key word "system". A system is such piece in which there are no excess, unnecessary parts and all parts are among themselves connected. Therefore KPI exist there not in itself and as the mechanism working only on condition of successful work of all other parts: goal-setting, planning, control, training, remuneration and all the rest what I spoke earlier about.

Notes

• Controlling
• Budgeting
• Planning and budgeting
• Key performance indicators (KPI)
• Balanced scorecards (BSC)
• BSC, KPI and other indicators