Managing with KPIs and KRIs Prepared for: StratexSystems Webinar Series 1 November 2012

Page  2 The objectives of this session are:  Introduce 3 types of indicators  Discuss the steps taken in defining indicators  Provide ‘knowledge transfer’ to give you the skills and tools to define indicators

Page  3 The Balanced Scorecard was introduced in 1992 which led to an explosion in the use of indicators “What you measure is what you get” Raison d'être for Balanced Scorecard was to provide a ‘balanced’ set of performance measurements.

Page  4 The credit crunch and subsequent fall-out is rewriting the rules on strategy execution (and risk management)

Page  5 Firms need to take an integrated approach which enables sustainable strategy execution Performance Management Risk Management Strategy Management Appetite What are we trying to achieve? Are we on track? What is our Risk Appetite? Are we operating within appetite? Governance & Communications Culture

Page  6 Such an approach must be underpinned by a ‘conceptually sound’ data model 6 Objectives KPIsActions Key Risks KRIsActionsAssessmentKey Controls KCIsActionsAssessment Events Certification Risk Appetite

Page  7 What is an indicator?  An Indicator is a numeric value produced through the combination of measures which provides business insight.  Indicators inform management discussions and provides an indication of past, present or future state of the business, from a perspective of:  Performance (KPIs)  Risk (KRIs)  Control (KCIs)  Defining indicators and measures enables:  more focused and timely responses to emerging issues  better informed business decisions

Page  8 Indicators and Measures – What is the difference? What is a measure?  A measure is a business value or fact which is generated as a result of the activities of the business.  Net Income (£) is a measure. It tells us the Net Income in £ terms generated by the business activities. What is an indicator?  An Indicator is a numeric value that is produced through the combination of measures which provides business insight.  Expressed as %’s, ratios etc.  Indicators inform management discussions and provide an indication of past, present or future state of the business.  Net Income (£) as a % of target

Page  9 The three different types of indicators answer different questions Key Performance Indicators  An indicator which enables an organisation to define its performance targets based on its goals and objectives and to monitor its progress towards achieving these targets.  KPIs are used to answer the question: “ Are we achieving our desired levels of performance? ” Key Risk Indicators  An indicator which is used by organisations to help define its risk profile and monitor changes in that profile.  KRIs are used to answer the question: “ How is our risk profile changing and is it within our desired tolerance levels? ” Key Control Indicators  An indicator used by organisations to define their controls environment and monitor levels of control relative to desired tolerances.  KCIs are used to answer the question: “ Are our internal controls effective? Are we ‘in control’? ”

Page  10 Types of Indicators  There are primarily two types of indicators, Leading and lagging (As a rule of thumb a good mix is a ratio of 2:1).  Leading indicators are those indicators that provide an early signal/early warning that the standards set/agreed in the business will or will not be achieved. They are input indicators.  Lagging indicators are those indicators that provide a signal that the desired outcomes/targets have or have not being achieved by the business. They are outcome indicators.

Page  11 The three different types of indicators should be related and can be reused

Page  12 A simple example of reuse of indicators across indicator types

Defining Indicators

Page  14 Basic steps in defining Indicators Step 1 – Set the Context Step 2 – Develop a ‘long list’ potential indicators and measures  Understand the difference between SHOULD, COULD and ARE Step 3 – Evaluate Indicators and indicator combinations to determine the ‘vital few’ Step 4 – Operationalise your chosen few, recognising this is an iterative process and they will change.

Page  15 Step 1 - Set the Context  Are the Objectives, Risks, Controls defined? How well?  Have you undertaken a consolidation/refinement process across your ‘entity’?  Are your objectives clear, well articulated, well understood?  How many risks and controls are you managing? Is there an explicit linkage to objectives?

Page  16 Step 2 - Develop a ‘long list’ potential indicators and measures  Understand the difference between  What should our indicators be?  What could our indicators be?  What are our current indicators?  Avoid the natural trap of using existing indicators and measures, or those that are easy to measure.  Balance the need to ‘navel graze’ against the need for action.  Ask your entity head – what is important and why?  Ask experts, consult industry benchmarks, Google.  Be cautious when using ‘off the shelf’ indicators and measures.

Page  17 Step 3 – Evaluate Indicators, and indicator combinations to determine the ‘vital few’  Good Indicators should be 1.Focused 2.Objective 3.Balanced 4.Fact-based 5.Owned 6.Practical SMART Indicators Specific Measureable Actionable & Aligned Realistic Time framed

Page  18 Step 4 – Operationalise your chosen few, recognising this is an iterative process and they will change.  Defining Indicators can become a time consuming process – don’t attempt to develop a ‘perfect’ set!  Adopt an iterative approach.  Accept they will and should change.  Use initial set of indicators for approximately 3 months (3 cycles) then review.

Page  19 Defining an indicator… capture key data Governance and ownership Meta data about the indicator Baseline and Thresholds

Page  20 Indicators are scored using a simple, 3 colour RAGAR approach Out of control. Take action now! Out of tolerance. Monitor, action may be required. Within tolerance. Learn the lessons and disseminate

Page  21 The different indicators types enhance the ‘standard’ Strategy Map

Page  22 Risk Maps and other high level visualisations of data are important

Page  23 Each of the indicator types can be included within a separate scorecard Strategy Scorecard Risk Scorecard Control Scorecard

Page  24 Example Front-page for a board report

Page  25 Example Indicator Dashboard

Page  26 Example Indicator Accountable Dashboard

Page  27 Example Detail Indicator Dashboard (via SharePoint)

Page  28 Exmaple Indicator Healthcheck

Page  29 Q&A

Page  30 About StratexSystems “StratexPoint enabled us to reduce the value of our operational losses by 94%, the volume by 63% and our economic capital provision by 23%” - Head of Operational Risk, HML - Skipton group “StratexPoint enabled us to reduce the value of our operational losses by 94%, the volume by 63% and our economic capital provision by 23%” - Head of Operational Risk, HML - Skipton group Our mission To provide an integrated strategy and risk management solutions which enhances strategy execution, enhance capital efficiency by 15% and reduce operational losses 25% while providing 100% confidence that your business is operating within appetite.

Page  31 Our solution enables our clients to “control their risks while executing strategy”

Page  32 Free trial of StratexLive Stratex Bootcamp  30 day free use of StratexLive  Regular ‘coaching’ session online  Load your own data  Add your own users  START NOW

Page  33 End

Page  34 Additional Slides

Page  35 Good indicators are focused  Providing a ‘signal’ on specific, desirable results or outcomes.  Articulating the indicator as a true indicator, rather than a measure provides focus.  Rather than ‘Total Operational Losses’ consider Operational Losses as a % of Revenue  Can work in isolation or in combination with other indicators.

Page  36 Good indicators are Objective  There should be no ambiguity as to what the indicator is measuring.  There should be general agreement on how the indicator should be interpreted.  Documenting the indicator with notes, rationale etc.

Page  37 Good indicators are Balanced  Generally should use a combination of Leading and Lagging indicators.  Use a combination of financially and non-financially orientated indicators.  Consider your total number of indicators and their balance between performance, risks and controls. Sometimes a single indicator can be ok!

Page  38 Good indicators are Fact-based  Where possible, indicators should generally use ‘hard’ facts / numbers.  Fact-based indictors are not as open to interpretation or ambiguity as ‘soft’ numbers.  However ‘soft’ facts and ‘gut’ feel have a vital role to play in decision making. They should supplement ‘hard’ facts via management discussions.  Good example: Net Promoter Score

Page  39 Good indicators are Owned  Indicators use a partial RACI (Accountable inferred from the parent Performance, Risk or Control)  Indicators have an updater, if manual.  Indicators can have an approver (often this is the accountable of the parent Performance, Risk or Control)

Page  40 Good indicators are Practical  An indicator is only practical if data can be collected in a timely fashion, at a reasonable, acceptable cost... Or there is a plan to make this happen!  Indicators should inform the organisational discussion.  Indicators should focus on the ‘vital few’ - it is not practical to have indicators for everything.  It is not practical (or desirable) to have indicators for everything or to develop a perfect set of indicators.