Using key performance indicators - what they are and how to use them. Powerpoint for presentation to Fiji Institute of Accountants, September 2009.

1. Key performance indicators: How they work and how to use them Presented by: Micheal Axelsen Director Applied Insight Pty Ltd

2. Agenda Introduction Key performance indicators defined Aligning KPIs with strategy Implementing KPIs Conclusion

3. INTRODUCTION

4. About this presentation Objectives To identify key performance indicators, their role in management and governance of the organisation, and how to implement key performance indicators for success.

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14. CEO swore because it rarely worked

15. Then the financial controller left...

17. Definition of KPIs Key performance indicators focus on the aspects or areas of our organisation’s performance that are critical or vital for our ongoing and future success measure our success in key areas and processes that affect our customers, our employees, our shareholders or other stakeholders Source: AusIndustry KPI Manual

18. The characteristics of KPIs Non-financial measures Measured frequently (for example, daily, weekly) Acted upon by CEO and the senior management team All staff understand the measure and what corrective action is required Responsibility can be tied down to the individual or team Significant impact – that it is addresses most of the top topeight Critical Success Factors and Balanced Score Card perspectives Has a positive impact – that is, it affects all other performance measures in a positive way

19. Why do we need ‘key performance indicators’? Businesses are frequently accused of focussing on the ‘bottom line’ and the ‘short term’ Kaplan and Norton (1996) promoted the use of the balanced scorecard to look at leading indicators of sustainable, longer-term performance It is a more ‘balanced’ view of organisational performance, and is focussed on monitoring these performance indicators Provides a more holistic view of the business’s progress KPIs for each business will depend very much on its subjective view of the world

20. It’s all about perspective KPIs are usually drawn from four perspectives: Financial perspective: Does implementation and execution of strategy contribute to the bottom line? Customer perspective: What value proposition will the business apply to satisfy customers and thus generate more sales to the most profitable customer groups? Internal process perspective: concerned with the processes that create and deliver the customer value proposition – focuses on activities and key processes required in order for the company to excel at providing the value expected by the customers both productively and efficiently Innovation and learning perspective: Focuses on the intangible assets of an organisation, mainly on the internal skills and capabilities that are required to support the value-creating internal processes.

21. Example Balanced Scorecard (Kaplan & Norton) Financial Customer Cash flow Return on investment Financial result Return on capital employed Return on equity Residual income Economic Value Added New customers acquired Status of existing customers Customer attrition Internal Process Innovation & Learning Number of activities Opportunity success rate Accident ratios & Environment compatibility Overall equipment effectiveness Investment Rate Illness rate Internal Promotions Employee Turnover Gender Ratios

22. Uses of Balanced Scorecard & KPIs Frequently the balanced scorecard & KPIs approach is used to: Drive strategy execution Clarify strategy and make strategy operational Identify and align strategic initiatives Link budget with strategy Align the organisation with strategy Conduct periodic strategic performance reviews to learn about and improve strategy The purpose to which the balanced scorecard and its KPIs is put affects the KPIs to be monitored – leading indicators are preferred, as they show what future performance will be

23. Criticisms A balanced scorecard is by definition ‘balanced’ – if you wish to achieve quick business growth then perhaps the inherent ‘balance’ is of less value, rather than an unbalanced focus on performance activities that grow the business Sometimes used inappropriately – can you really use Balanced Scorecard to govern internal processes? Subjective and KPIs are not based in actuarial ‘fact’ Some criticise any effectiveness in operation as merely a placebo effect – that is, any other management approach might work equally as well

24. Tips for success A KPI has to be suitable for the specific business, industry and organisation and related to the targets on the long run Make it possible to influence the results of the KPI Make the KPI easy to quantify Make the KPI linkable to other relevant data Make the KPI comparable over time. Make sure every KPI has a dedicated, committed owner There may be 80 performance indicators, but you should not exceed 10 KPIs (that’s about 2 per quadrant) These will build on each other and provide guidance on the strategies and initiatives pursued by the organisation in reaching its strategic goals

25. Aligning kpi’s with strategy Conclusion

26. A contribution to strategy A key reason to adopt key performance indicators is to operationalise strategy at the coalface It turns the organisation’s lofty vision, expressed in the strategic plan, into cold hard numbers that can be used to guide everyone’s efforts Like many management measures and approaches, effectiveness will be dependent upon the emphasis placed upon the approach in the organisation – the manner in which it is used

27. Strategy maps A central theme Successful approach to balanced scorecard understands organisational focus and strategic alignment Organisational focus points you to the KPIs to focus on Alignment places the perspectives in order and how they support your organisation Organisational strategy can be presented as a strategy map These strategy maps identify the organisation’s strategic objectives, which in turn assist with identifying key performance indicators

28. Customer value proposition

29. Strategy maps

30. Linking the workface to the strategic objectives

31. KPI Development & Implementation Enoma et al (2007)

32. Implementing kPIS

33. Reporting requirements Report key result indicators (lagging indicators) to the Board Management reporting of KPIs and Balanced Scorecard: daily weekly monthly Team reporting (team KPIs/Pis) Automated and real-time updating of staff of their performance via the intranet Design features should include: Cover all the six perspectives Show linkage to strategy and critical success factors A mix of KPIs and PIs No more than 20 Show trend information (15+ months) No right answer (sculpture) Use a name that means something to staff

36. Underestimating the riskiness of 'big bang' compared to an incremental approach

37. Producing accurate, timely and complete reports that are never used (poor validity) or are meaningless (low integrity & consistency)‏

39. The overall approach

40. Factors in effective reporting

41. Measuring effectiveness

43. Frequently the problem is not technological – the problem is process or people-related (or even financial), and a new system won't fix that

45. Some systems will just never work, or be too dangerous or unwieldy

48. Role of the audit committee

49. Governance calendar

51. Don’t buy the software and cut down on the professional services – buy cheaper software if you need to and grow

53. Quality control framework

54. Policies and procedures

55. Service delivery methods

56. Project management methods

57. Know what is to be done, and do it

59. Reports Interpretation

60. Only write reports that are used and relevant

61. Attraction and retention strategies

62. Role sharing

64. IT is often downside risk

65. Single view of the truth

66. Consistency and compatibility of technologies is most important

67. Role of in-house development

69. Conclusion – meeting the challenges of IT Information Technology & Management Centre of Excellence

70. Conclusion More information www.cpaaustralia.com.au www.isaca.org www.itgi.org Speaking Notes Speaking notes for this presentation may be downloaded from www.appliedinsight.com.au Questions and answers Questions from the audience

71. Contact details Micheal AxelsenDirector, Applied Insight Pty Ltd m: 0412 526 375t: +61 7 3139 0325e: micheal.axelsen@appliedinsight.com.au blog: www.michealaxelsen.com Applied Insight Pty LtdPO Box 603Toowong DC 4066AUSTRALIA

72. About the speaker Services Micheal Axelsen provides business systems consulting services in the governance of information technology, and development and implementation of IT business strategy Position and qualifications Director, Applied Insight Pty Ltd Chair, CPA Australia IT & Management Centre of Excellence Member of ISACA Qualifications Bachelor of Commerce (Hons) Masters of Information Systems FCPA