By Antoine Damelincourt, Senior Consultant, MEGA International
A more accurate vision of performance
What should KPI do? They should be a reflection of how your business processes perform, that means they have to be grounded in the operational processes. It also means that they must be held against the process objectives. A positive KPI should reflect a reached objective and a negative KPI be a sign of a failure to accomplish said objective. Not only are KPI based on the processes, they are also a reflection of the strategy of the organization through the establishment of threshold and objectives. A company has a hierarchy of objectives from macro strategic objectives to process level operational objectives. KPI should be attuned to these various objectives.
Some KPI design guidelines have been put forward in the SMART criteria in the early 80’s. SMART stands for KPI that: have a Specific purpose for the business, are Measurable to really get a value of the KPI, the defined norms have to be Achievable, the improvement of a KPI has to be Relevant to the success of the organization, and finally it must be Time phased, which means the value or outcomes are shown for a predefined and relevant period. These criteria are obviously appropriate for creating KPI, however they are not sufficient.
Using such traditional KPI fails to take risks into account: in a commercial bank, monitoring the number of new account gives an idea of the volume of activity whose variations you can monitor. The reasons for these variations could be as simple as the economic downturn, an exogenous factor, however they could also be risk-related, a software failure could have delayed some openings for instance. In this case, your KPI is affected by a risk but the risk doesn’t appear in the indicator. The risk is an explaining factor that could give substance to your KPI.