Part 2: Understanding How to Harness the Power of Key Performance Indicators

As we discussed in part one of this three part series, Key Performance Indicators are graphical representations of critical business activities.  Rather than analyzing revenues and costs as represented by GL accounts, Key Performance Indicators analyze business processes such as the time required to complete a sales order (e.g. order receipt to shipment), inventory turns, day's sales outstanding for overdue invoices, actual vs. standard manufacturing times and any other business process that significantly impacts efficiency or effectiveness. 

Underlying this analysis is one key concept.  If the efficiency of a critical business process or activity is optimized, the Income Statement will take care if itself.  The question then becomes one of determining which business activities are critical to your success and how these business activities should be represented so that you can quickly determine which activities need to be analyzed and improved.

Actually there are two types of Key Performance Indicators.  Status indicators such as the pie chart below represent information that exists at a specific point in time.  In this case the Pie Chart may represent an analysis of a firm’s top ten customers.  The second example below represents the % of support calls that were escalated during a specific time range.  Although it isn’t pictured, one additional KPI might represent the distribution of customers over a given geographic region. 

The common theme for all such displays can be thought of as a snap shot taken at a specific point in time.  This type of display may be sufficient for a presentation to senior management, but there is one significant weakness.  A snap shot does not paint a picture of a business activity over time nor does it represent where this condition should be.

The third and fourth images below introduce the concept of time and therefore help users “see” whether a KPI is changing over the specified time range.  The Bar Chart is easy to read but doesn’t show users whether the results for each time period is on target or not.  The Line Chart displays both the results for each time period as well as the target or budget for the time period.

he Bar Chart may be attractive, but the Line Chart paints a complete picture of a business activity and therefore helps users determine quickly whether the condition pictured requires their attention.  Although the Actual Results in the Line Chart are at times below expectations, the pattern over time indicates that the business activity does not require close attention.

here are literally thousands of ways Key Performance Indicators can be defined, displayed and utilized.  The key to this entire concept is the development of an understanding of the key business drivers that influence efficiency and effectiveness and ultimately profitability.  In essence you need to answer one key question. “What do we need to do very well in order to succeed?”  Having identified each key business driver, you then need to determine how the driver should be defined and ultimately how the key business driver should be represented in a graphical setting (i.e. the Key Performance Indicator).  Finally with time-based KPIs you need to establish target values that will enable you to determine whether the business activity underlying the Key Performance Indicator requires your attention.

Key Performance Indicators can become powerful Business Intelligence tools.  Rather than just jumping into the deep end, take whatever time is required for you to understand the nature of Key Performance Indicators and how they can help you more effectively manage your critical business activities.  Obviously your first step must be a thorough analysis of your business processes and what information you need to manage them effectively.  Talk to your ERP reseller.  Develop a thorough understanding of their product’s ability to support KPIs and how these KPIs can be displayed to your advantage.  Since your knowledge of KPIs may be somewhat limited, ask your ERP reseller how they can help you educate yourself and if they have clients in similar industries.  Finally as we will discuss in part three, create an internal KPI management system that gives people the ability to identify issues that need to be addresses.

Key Performance Indicators can become powerful Business Intelligence and change management tools, but you need to be careful.  Just because you can display business related information in the form of a KPI doesn’t necessarily mean you should.  Create KPIs that actually make sense to you and reflect the way you want to run your business.

For more information about the value of establishing KPIs for your business, please contact Rob Gillespie at Premier Computing, a Utah based Microsoft Dynamics reseller, who would be happy to answer any of your questions.