Thursday, 22 February 2018

KPIs - it's not just about the money

Everyone lives and dies in this day and age on established KPIs. The ubiquitous Key Performance Indicators hanging over us all, beamed to and from the mother-ship organization, offering all sorts of snap-shots of the health and wealth of the business. These are often a treasured set of tried and tested measures that reflect progress toward the unending achievement of corporate goals and ethereal personal annual objectives.
Typically financial KPIs, let's call them the 'classical' KPIs, are generally based on income statements or balance sheet components. These might manifest themselves in specific business health pointers like loss and gainFree Cash FlowWorking capital ratio or the big one, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
Easy, surely preaching to the choir on that one? But what of the non-commercial KPIs? Where do they get a look in from one year to the next and why are they so utterly critical to the future well-being of your organization?
Typical non-financial KPIs include measures that relate to:
  • customer experience
  • employee sentiment
  • operations
  • quality
  • cycle-time
  • supply chain
  • pipeline to market
Some prefer to use the term ‘extra-financial’ rather than non-financial, suggesting that all measures that contribute to organisational success are ultimately financial in nature, or need at least to appear so like a supporting crutch and an excuse for pursuing them in the first place.
The critical element in developing KPIs is determining what is important or ‘key’ to the organisation. Example being operational measures are also important – they can be termed as just ‘performance indicators’. Developing KPIs should be part of an overall strategic management process that connects the overall mission, vision and strategy of an organisation, and its short- and long-term goals, to specific strategic business objectives and their supporting projects or initiatives. But whilst the pursuit of those 'classical' KPIs will certainly help deliver the majority of these along the way what if your organisation is challenged to become, or even remain innovative or to establish its unique selling point in the competitive market on it's customer or employee satisfaction scores?
If a business cares about the latter, even indirectly, they need to spend a little time investment in pursuing initiatives that sometimes do not hit the bottom line. Complete neglect of change that might bring about a future product innovation or something that enhances it's workforce or user experience might be contributory to other KPIs going sour. What if your customer base tires over time of your current product and votes with their feet to try something different with the business across the street because you didn't introduce what looked like an innocuous feature at the time? You failed to spend some time looking at the more qualitative barometers, the 'intangible assets'. What if you don't make those small operational changes that enhance your workforce's day just one little iota? Could it be the difference between high and low staff turnover over the long run? Financial evaluation systems generally focus on annual or short-term performance against accounting yardsticks. They don't tend to deal with progress relative to customer needs or competitors, or other non-financial objectives that may be important in achieving profitability, competitive strength and longer-term strategic goals. Indeed a raft of non-financial KPIs can be better indicators of future financial performance. Even when the ultimate goal maybe maximizing financial performance, current financial measures may not capture long-term benefits from decisions made now. For that you look to those intangible assets, your non-financial KPIs .