Common mistakes in defining KPIs

It can be said that the success of an operation is defined by the proximity between its execution and its planning. The measurement and analysis of indicators makes it possible to recognize these gaps of performance between plan and execution, allowing the identification and elimination of problems, as well as the recognition of opportunities. However, the development of indicators, identification of key performance indicators (KPIs) and implementation of performance measurement systems performance these are not trivial tasks, and may even be aggravated by organizational culture problems, lack of management support or obsolete processes.

In order to facilitate systems thinking, some conceptual models and methodologies have been developed over the past thirty years. In the beginning, the focus of research was centered on business performance, but with time frameworks have been developing and establishing themselves among researchers and market professionals. Notably, there is the methodology of Balanced Scorecard (BSC) by Kaplan and Norton, perhaps the most widespread since its introduction in 1992, which today describes not only a measurement system, but also a methodology for strategic management that connects business performance with its objectives.

Although these models outline fundamental concepts of the relationship between a company's indicators and its strategic management, some fundamental errors are still commonly committed:

Lack of definition of indicators at the strategic/tactical/operational level and lack of cause and effect relationships between indicators. The main objective of the BSC methodology is to establish an alignment between the company's strategic objectives and its operational performance, but this remains one of the main mistakes made by companies. Ideally, KPIs should be structured hierarchically in layers, such that the top layer shows a global view of performance, and the bottom layers are connected to the top in order to enable deeper performance diagnostics. With regard to transport, for example: at a more strategic level, transport costs are seen as a percentage of sales, a strategic and reference number for senior management that also allows comparing the company's performance with the market. At a more tactical level there is the real per ton of transport, which must be constantly monitored by the area, and at the operational level there are indicators of occupancy, use, age of the fleet and real per kilometer of the vehicles, which allow identifying the root causes of the performance of the real per ton.

Figure 1 – Example of hierarchical structure of transport indicators

Unbalanced approach between financial and operational indicators. Measuring financial performance is important at a strategic level and for reporting, but operational indicators are necessary to measure the efficiency of processes. Financial indicators reflect consequences of actions taken in the past, and an exclusive focus on this type of indicator can trigger decisions that end up sacrificing long-term value creation for the business in exchange for short-term financial benefits. In the same transport example, in addition to the cost dimension represented by the real per ton, quality indicators such as the On Time In Full, and process compliance, such as the percentage of Road Cargo Transport Bills issued correctly.

Figure 2 – Example of non-financial transport indicators

Rigidity of measurement systems. Once established, measurement systems performance tend to remain fixed, and outdated indicators no longer adequate to the new reality of the company remain the focus. Just as company objectives and strategies evolve over time, management must reflect on whether current KPIs remain relevant. Also, it may be that more information becomes available and new KPIs can replace current indicators more completely.

All these problems are nothing new, and are frequent topics of discussions on the subject. Structuring a measurement system is hard work, but perhaps the biggest challenge is to understand that methodologies such as the BSC have as their main teaching to view measurement systems as means of implementing a strategy that can permeate all levels of an organization and direct it to success.

References:

PRC Gopal Jitesh Thakkar, (2012),”A review on supply chain performance measures and metrics: 2000-2011″, International Journal of Productivity and Performance Management, Vol. 61 Iss 5: 518–547.

Robert S. Kaplan and David P. Norton. “Transforming the Balanced Scorecard from Performance Measurement to Strategic Management: Part I”, Accounting Horizons 15, no. 1: 87–104.