Managing with KPIs and KRIs

Prepared  for:  

StratexSystems  Webinar  Series  1  November  2012  

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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

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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.  

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

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Firms need to take an integrated approach which enables sustainable strategy execution

Performance  Management  

 

Risk  Management  

 

Strategy  Management  

   

AppeEte        

What  are  we  trying  to  achieve?    

Are  we  on  track?  

What  is  our  Risk  AppeEte?  

Are  we  operaEng  within  appeEte?  

Governance  &  CommunicaEons  

Culture  

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Such an approach must be underpinned by a ‘conceptually sound’ data model

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ObjecEves  

KPIs   AcEons   Key  Risks  

KRIs   AcEons   Assessment   Key  Controls  

KCIs   AcEons   Assessment  

Events  

CerEficaEon  

Risk  AppeEte  

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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

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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

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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’? ”

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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.

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

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A simple example of reuse of indicators across indicator types

Defining Indicators

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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.

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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?

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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.

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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  AcEonable  &  Aligned  RealisEc  Time  framed  

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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.

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Defining an indicator… capture key data

Governance  and  ownership  

Meta  data  about  the  indicator  

Baseline  and  Thresholds  

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Indicators are scored using a simple, 3 colour RAGAR approach

Out  of  control.    Take  acEon  now!    Out  of  tolerance.  Monitor  ,  acEon  may  be  required.  

Within  tolerance.  Learn  the  lessons  and  disseminate  

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The different indicators types enhance the ‘standard’ Strategy Map

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Risk Maps and other high level visualisations of data are important

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Each of the indicator types can be included within a separate scorecard

Strategy  Scorecard  

Risk    Scorecard  

Control  Scorecard  

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Example Front-page for a board report

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Example Indicator Dashboard

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Example Indicator Accountable Dashboard

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Example Detail Indicator Dashboard (via SharePoint)

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Exmaple Indicator Healthcheck

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Q&A

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About StratexSystems

“StratexPoint  enabled  us  to  reduce  the  value  of  our  opera<onal  losses  by  94%,  the  volume  by  63%  and  our  economic  capital  provision  by  23%”    -­‐  Head  of  OperaEonal  Risk,  HML  -­‐  Skipton  group  

Our  mission  To  provide  an  integrated  strategy  and  risk  management  soluHons  which  enhances  strategy  execuEon,  enhance  capital  efficiency  by  15%  and  reduce  operaEonal  losses  25%  while  providing  100%  confidence  that  your  business  is  operaEng  within  appeEte.  

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

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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  

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End

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Additional Slides

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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.

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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.

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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!

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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

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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)

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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.