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Performance Measurement
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Measuring and managing the performance of your company entails you pulling away from your daily routine, standing back and assessing the bigger picture.
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When you stand back and think about what your company does and how it does it, you can more easily determine how your company is operating…. ….. which allows you to address the shortfalls and any other problems that you identify in the process.
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Valuable feed back that will assist you with:
Improvements – by tracking performance, you will be able to improve your systems, and address problem areas – for example, improving customer loyalty. Planning and forecasting – are you meeting your goals? Do you need to revise your budgets and forecasts? Competition-compare performance against competitors and industry benchmarks, identify your weak areas and address them. Rewards/Incentives-by knowing whether goals have been achieved, performance-related incentives or bonuses can be fairly distributed to employees based on their direct reports. Compliance- measure performance so as to ensure compliance with standards and industry based regulation.
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Three aspects of measurement:
Measure activity – a straightforward measurement of activity in your business – ….x number of plastic cups were produced this month…. Compare results– comparing current and past results To show performance against a pre-set goal-compare performance against a pre-set goal of the company
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Critical Success Factors Key Performance Indicators
Understanding the terms used in Performance Measurement: Critical Success Factors these are activities or processes that are vital for a business strategy to be successful. Why would a customer choose us? The answer would be a Critical Success Factor, or ‘CSF’ – “because we provide customer service via a 24/7 call centre…” (critical activity) Key Performance Indicators this is a measure that quantifies management objectives, targets and thresholds. Key performance indicators or ‘KPI’s’ enable the measurement of strategic performance. For example, a KPI would be the number of new customers obtained this month. The threshold set would be “we need 10 new customers this month”. The KPI would be reached if 10 new customers were obtained.
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Example of Performance Measurement Objectives
“to be the best retailer in the market” Mission “Customer Satisfaction” Business Goal or Strategy CSF “activity: create efficient customer call centre” KPI “number of new customers obtained in a month” – set target or threshold at 10 new per month
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So how do I implement a Performance Measurement System for my Company ?
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The first step: Define your company’s strategic goals and objectives
Review the company’s strategic plan Understand the vision and strategy for the company A comprehensive business plan would assist you with identifying your strategies and overall objectives Once you have identified your business goals, you will be able to determine what activities to look at to measure, activities that are critical to your success…. Identify your company’s mission statement, develop a strategic plan on what you want your business to achieve, and how you will get there. A well documented business plan is essential – setting out your S.W.O.T analysis, market analysis, competitors and capabilities. Develop goals and targets, and thresholds in your business plan.
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Second step: Identify Critical Success Factors (CSF’s)
Knowing your overall goal allows you to identify key business activities or Critical Success Factors (CSF’s), needed to achieve that given strategic goal…. In our example, the goal is to increase customer satisfaction……. ………...and a number of CSF’s you could identify to achieve that goal would be to “create an efficient customer call centre” or to “reduce staff turnover” (customer’s prefer to deal with the same sales person)… Identify the key business activities or CSF’s needed to achieve your company’s overall goal. These key activities are what your company needs to get right and do on a regular basis to achieve success. They are business processes and activities that drive your business results.
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Third Step: Decide on appropriate KPI’s to use to measure your key activities (CSF’s)
……. knowing your CSF’s allows you to put into place the appropriate KPI’s to measure their progress and efficiencies…. In our example, the KPI will be designed to measure how well you are performing the task of obtaining new customers or reducing staff turnover…..by setting targets and thresholds to be achieved and measured
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There are three types of KPI:
Process KPI’s – measure the efficiency or productivity of a business process, for example, number of days to deliver the order, number of people customer must talk to before issue is resolved Input KPI’s – measure the assets and resources invested in or used to generate business results, for example, ZAR spent on research and development, or funding for employee training Output KPI’s-measure the financial and non-financial results of business activities, for example, revenue, number of new customer’s acquired
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For each kind of business activity there are numerous KPI’s to use:
Key activity or CSF KPI Sales % of customer visits or phone calls that generate sales % increase in sales over previous period or year Human Resources Workforce turnover Rates of absenteeism Selecting KPIs To Monitor There are literally hundreds of KPIs that could be used to track your business’ performance, and you need to carefully select which KPI is most appropriate in your business to measure your CSF’s. KPIs are not necessarily those things you measure in Rands. Many equally critical activities, such as ensuring customer loyalty, can’t be measured in Rands and Cents, so there are in fact many non-financial KPIs as well. The key to effective measurement is to identify a small number of KPIs, (say 6-8), that measure the really critical activities - and to watch them carefully. Sub-KPI’s The business wide goal may be interpreted into different activities for different activities or processes. Take a cash flow example: The accounts department would be set a target of collecting x amount in debtors for the month, which will increase cash flow. The sales department would be set a target of x amount of sales for the month, also impacting on cash flow. Different KPI’s would be set for each department, however, both have the same goal – improving cash flow.
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What makes a useful KPI for your business?
It needs to reflect the goals of your business Be critical to the success of your business Be measurable Point to the activities you might need to alter if things start to go off track What Makes A Useful KPI For Your Business? So what would make a useful KPI in your situation? Some apply to almost all businesses, such as a number of financial ratios. But in deciding others that would be useful to your particular business, there are a number of things to consider. To be worthwhile monitoring, the KPI should have these characteristics: Reflect the goals of your business Be critical to the success of your business Be measurable Point to the activities you might need to alter if things start to go off track You need to establish in writing four things about each chosen KPI: A name for it A definition of what it involves The actual method you will use to measure it Your goal, or performance target or threshold for the KPI A KPI should also indicate when you need to improve in certain areas, and activities that may need to change determined according to the results of the KPI measurement. A good KPI should also indicate what the contributing factors may be as to why there is an issue to be addressed. So that a solution may be found. If there is a problem with cash flow the KPI’s set for the accounts department (debt collection) and the sales department (increase in sales) would indicate where the issue may need to be addressed. Is it due to slow paying customers, poor internal cash management processes, not enough sales, or a combination?
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KPI’s – how do I set targets and thresholds:
Conduct surveys Set targets for each KPI or thresholds (whichever appropriate) Use benchmarking Set employee performance standards In the design stage you must establish that the process is measurable and that the benefit the information will provide outweighs the cost of obtaining and maintaining the data. Set targets and thresholds, conduct surveys, use benchmarking and set employee performance standards. Gathering the data should be made easy. Electronically managed and stored data is most cost and time efficient. Gather data on a regular basis, dependent on the context and the type of KPI you are measuring. Once you have defined your KPI, it will become more apparent what the frequency for reporting on that KPI should be.
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Measuring to Assess Goal Achievement:
The feedback you obtain from a set of well chosen and implemented KPI’s will equip you to determine how effective your business strategies and operations are, and to manage and address any areas that need intervention, so that the overall objectives and goals of the company are achieved.
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Balance as the key to a strong performance measurement system:
When deciding what KPI’s to use, it is worth well to consider obtaining a range of information from many sources The company will gain a holistic picture which allows it to learn from previous mistakes and to constantly improve Striking a balance in its performance measurement system, allows a company to compile a more comprehensive picture of how it’s doing
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Seek to balance a company’s
It may be worth considering the Balanced Scorecard Approach Seek to balance a company’s financial perspective with 3 non-financial perspectives – customer, internal processes and growth and workforce learning KPIs - A balanced approach: A business plan and a set of key financial ratios prepared on a regular basis is important– not just your profit and loss account and balance sheet but also a detailed monthly cash flow analysis for instance. Your financials form a major set of KPIs for your business. However, do not focus on just financial perspectives but also non-financial perspectives-customer loyalty, Internal processes and learning and growth within your business.
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This is known as the “dashboard” approach-likened to looking at, and gauging the many instruments on an airplane’s dashboard-such as the fuel gauge and altitude indicator- in order to fly the airplane effectively…
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A comprehensive picture for a company would include looking at a range of factors such as:
Non-financial performance Financial Performance Employee knowledge, Customer delight Profit / Revenue / Cash flow External data Internal data Third party rankings of companies’ product performance vs. competitors Process quality
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Examine backward Examine forward looking Indicators looking indicators
Weigh subjective Weigh objective aspects of aspects of performance performance Customer satisfaction ratings Sales figures Customer satisfaction Employee capabilities Revenues Returns on invested capital
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Fourth Step: Get your team involved
Communicate the business plan and strategic objectives of the company to the team, so that all have a clear understanding of the direction you are taking the business and what needs to be done to achieve it Get your team involved and equipped towards setting KPI’s to measure the processes set to achieve the business goals Get your team involved: Get your team invested in the process and in the company’s goals, by setting up brainstorming sessions with them and involving them with identifying CSF’s and setting KPI’s to measure processes set to achieve the business goals. Allow team members to see some of the data gathered, by using a scoreboard, chart or handout. Some companies even include the team’s bonus evaluation forecast based on the to-date KPI indicators for profit. KPI’s and target setting are motivational and may encourage enthusiasm in achieving set goals and making sure that the KPI’s move in the right direction.
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Use benchmarking to assist with KPI’s
Gather comparative data on the industry External data – research on the web and benchmark companies with information that exists for the identified KPI’s in the industry Internal data – use historical internal data to determine the benchmark KPIs And Benchmarking If you take the KPI figures from a number of similar firms and use them to construct a chart showing the average figure for poor performing firms, the industry average overall, and how the best performers rate, then you have a benchmark against which you can compare your own performance. This sort of information can provide you with the target figures you use for your KPIs.
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Establish benchmarks to use as a baseline in assessing the business’s performance
Use benchmarking and baselines as a basis for setting realistic targets from which to measure your company’s progress A written summary of KPI’s benchmarks in all areas allows you to bring the KPI’s together in an easy to use management control plan
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Setting targets and Employee Performance Standards
Establish a set of performance standards and targets and communicate these to staff Facilitate a team training session to encourage development and ownership of standards Staff will have a good understanding of how to translate the vision of the company into actual behaviour, and will provide objective measurements of performance Once in place, link performance to recognition and reward systems
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A target in the customer satisfaction example would be: we want to achieve 85% of customers who are very satisfied, which would mean an increase of 15% in customer satisfaction- this is a customer satisfaction index The targets need to be realistic, not to high but enough to inspire and motivate staff to achieve the target “Stretch” targets are overly ambitious targets that are set which are mostly unachievable and may have the result of de-motivating staff, and even causing unethical behaviour, known as “gaming” or manipulating the numbers Be careful to set a target that both inspires yet does not overwhelm
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Establish systems for reporting on KPI’s
Design simple systems that allow you to report on KPI’s without difficulty, and regularly Compare actual results vs. the target set, and your business plan Display KPI’s graphically for ease of reading, use pie charts and spreadsheets Establish systems for reporting on KPI’s The best way to make sure KPI monitoring happens is to set up a system for regular reporting of results. .
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Consider the source of the data
Consider the source of the data- is it subjective data or objective data? Subjective data would include surveys filled out by customers in the presence of your employees…….. Objective data is factual-for example the % increase in sales revenue reflected in your financial reports…….
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Communicate the data Use the spreadsheets and charts to effectively communicate the data to employees, managers and executives (the team) Create snapshot views for senior management Select appropriate degree of detail Communicate difficult facts constructively Create opportunities for review and discussion Communicate the data: KPIs need to be communicated to the right person or team within your business. Ensure the person who is expected to operate on the information has been involved in the setting up of the project so you can count on their investment in the project, and that they have the authority to make critical decisions based on the results.
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Analyse and interpret the data
Look for trends Consider the inherent variability in processes being measured Look for events that might be causing the variations Consider whether your targets or metrics need to be changed Investigate and address performance shortfalls by interpreting the data
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Valuable insights and improvements
Analysing the data and investigating the results may provide valuable insights into the company For example, high staff turnover may reveal a trend that staff leave more often after bonuses are paid, or may reveal underlying themes that staff are being headhunted or that there is low staff morale Further investigation of results allows the company to implement changes or improvements thereby facilitating the achievement of its overall strategic goals.
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Conclusion Some people refer to KPIs as their ‘critical numbers’ and that’s no exaggeration of their importance A well designed and regularly monitored set of KPIs can provide you with: A knowledge of how your business is performing and Target the areas where remedial action ought to be applied Goal setting and monitoring really are the basis of effective business performance management In summary: The main issues on performance measurement and KPI’s: The most useful way of measuring business performance Deciding the right KPIs for your business How to construct a KPI that can be measured reliably and consistently Implementing KPI monitoring in your business Using KPI data to improve business performance There are 3 main ways of monitoring performance: Have a business plan to guide your activities. Carry out regular financial analyses of operations. Benchmark your activities against other businesses or the industry Thank you
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Presented by: Name of presenter: Position in firm: Firm name:
Disclaimer- Whilst every care has been taken in the compilation of this seminar, presentation and handouts, no responsibility of any nature whatsoever shall be accepted for any inaccuracies, errors or omissions, nor for the accuracy of any information contained in the seminar handouts.
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