The Financial Controller and CFO's Toolkit, 3rd Edition

Chapter 18Getting Your KPIs to Work

OVERVIEW

Many companies are working with the wrong measures, many of which are incorrectly termed key performance indicators (KPIs). It is a myth to consider all performance measures to be KPIs. This chapter explores how the four types of performance measures differ, with examples of each type. The seven characteristics of KPIs are defined. The confusion over whether measures are lead or lag indicators is addressed. The questions How many measures should we have? and How many of each measure type? are answered. The importance of timely measurement is also covered.

Performance measurement is failing organizations worldwide, whether they are multinationals, government departments, or not-for-profit agencies. Measures are often a random collection prepared with little expertise, signifying nothing. KPIs should be measures that link daily activities to the organization's critical success factors (CSFs), thereby supporting an alignment of effort within the organization, in the intended direction.

I see this alignment as one of the major goals of management. However, poorly defined KPIs can cost the organization dearly. Some examples are: measures gamed to benefit executives' pay, to the detriment of the organization; teams encouraged to perform tasks that are contrary to the organization's strategic direction; costly measurement and reporting regimes that lock up valuable employee time; and a six-figure balanced scorecard consultancy assignment ...