using kpis for tracking strategy and driver based budgeting

Using KPIs for Tracking Strategy and Driver Based Budgeting

October 24, 2016 Jim Robertson Matrix – Technology Finance

Agenda •  Decide how your organization will use KPIs •  KPI Design Best Practices •  Successful Implementation •  Integrating KPIs with driver-based planning and

forecasting

Key Performance Indicators Defined

•  Performance measures organizations use to evaluate progress

towards achieving strategic objectives

•  Measures: can be measured

•  Organizations: all sorts

•  Evaluate: reviewed periodically and forms the basis for action

•  Strategic Objectives: not tactical or operational

KPIs Link Strategy to Targets and Performance

•  Strategic management systems provide a coherent framework for executing strategy

•  Facilitates the inclusion of strategy maps and balanced scorecards but other approaches are acceptable

• Emphasizes the process of strategic management not performance measurement

We All Live in a Complex Environments…

KPIs Can Be Organized in Different Frameworks

1903: Dupont Powder Company’s Pyramid of Financial Ratios

1992: Lynch and Cross Performance Pyramid

1996: Kaplan and Norton Balanced Scorecard

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Strategy Maps Organize KPIs into Cause-Effect Relationships


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•  Financial KPIs are generally objective and the measure can be defined and calculated the same way over time,

–  Can be differences of opinion on how specific KPIs are defined and calculated. –  Revenue

•  Finance - after bad debt reserves sourced from G/L •  Sales - Orders received before bad debt reserves sourced from CRM •  Accounting: GAAP/IFRS definitions

•  Non-Financial KPIs can be significantly harder to define and measure –  Market Share –  Customer/Employee Satisfaction –  Strong Leadership

Reaching agreement on the specifics of each KPI may take more time than expected, but is a necessary exercise to ensure alignment.

Principle 1: KPIs are Defined and Agreed On

Increased Productivity

Skills and Training Leadership Capability

High Performing Employees

Improved Cycle Time

Reduced Rework

Reduced Unit Costs Effective/Efficient Business Processes

Satisfied Clients Reduced Cost Per Sale

Increased Sales Improved Margins

Increased Shareholder Returns

Innovation and Learning Perspective

Internal Business Process Perspective

Customer Perspective

Financial Perspective

Employee Innovation Tool Usage

Customer & Market Growth

Improved Profitability & Cash Flow

lead

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lag

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Principle 2: Use Both Leading and Lagging Indicators

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•  Leading indicators (e.g. decrease in customer orders) provide an early warning system and possibly provide enough time for action to be taken.

•  Understanding the relationships between leading and lagging KPIs helps to better understand how to improve business performance and provide an early warning system of how well the company is performing.

Financial KPIs •  Almost all organizations use financial KPIs, but financial performance not always the

top objective.

•  GAAP/IFRS defined: absolute or change in revenue, gross margin, and operating margin

•  Asset-based measures such as ROA, ROI, ROE, EVA, economic value

•  Market-based measures such as EPS, total shareholder return, CFRO

•  All of these measures can also be defined as change from the prior period, or an average growth rate over multiple periods.

•  An advantage of financial KPIs is that they are easily defined and reported on.

•  Can be difficult to understand the relationship between operating activities and financial results.

Non-Financial KPIs

•  Many Fortune 500, FTSE 100, and other equivalent index companies use nonfinancial KPIs, reflecting the great adoption of the principles espoused by Kaplan and Norton.

•  Nonfinancial measures can be used broadly, and can include measures relating to customers, employees, capabilities, processes, suppliers, competitors, technology, and regulators.

Principle 3: Creative Measurability

•  Employee satisfaction

- It is possible to start surveying employees to collect this KPI, but this may not be feasible

for a variety of reasons.

- Senior management can develop a list of criteria by which they can assess employee

satisfaction, and as a group discuss and determine this KPI on a scale of 1 to 5.

•  Market share

- Market share data may not be available for your company.

- One solution is to identify a number of competitors that are publicly traded and use this

group as a surrogate measurement of the market size and growth.

- Subjective assessment of market share or change in market share is the best one

can do.

Principle 4: Update KPIs as Needed •  KPIs need to be regularly reviewed and updated, revised, replaced, or deleted when they

no longer accurately reflect progress towards achievement of a strategic objective.

•  There are straightforward situations when a KPI should be deleted –  After a strategic objective is achieved it is no longer necessary to use a KPI to measure its

attainment. –  Efforts to obtain the KPI are no longer considered worth the effort.

•  Time spent on research and use of timecards

•  KPIs may also need to be replaced when they are no longer critical. –  ROA may be replaced by EVA, another asset-based measure. –  Focus of the company shifts.

•  For example, RFIs replaced by new customer RFPs when the company’s focus on its sales pipeline shifts.

•  Adhere to a set of KPIs for at least a year so that performance can be evaluated consistently.


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Changing the Culture: Becoming a High Performance Organization

•  Reward people who get things done

•  Face the brutal facts honestly

•  Reward cooperation

•  Clarify ownership and accountability

Encourage the Use of KPIs

•  Introducing KPIs can be a new process for a company, and it can be expected that there will be some who may resist the change.

•  KPIs can be seen as threatening, and managers need to be reassured that using KPIs is a good thing for the business. –  KPIs should help them make better decisions, not get in the way of

them.

•  Actively engage managers in the design, implementation, planning, and execution of KPIs.

•  Transfer or termination may needed if key employees don’t get on board or become passive-aggressive.

Use IT to Help Implementation •  IT is critical to accessing data and staging/loading into the reporting

and analysis front-ends

•  Enterprise-wide financial KPIs can be challenging to acquire: –  Multiple financial systems, currencies –  Multiple vendors –  Consolidating entries remaining at a parent level and not pushed down –  Manual consolidation using trial balances

•  Nonfinancial KPIs –  No statutory reporting requirements for non-financial measures –  Multiple operational and transactional systems— in some cases in the

hundreds –  Collecting and calculating KPIs from systems with different data

structures requires strong data governance

Don’t Wait for Perfection, Just Start!

•  Begin reporting and using KPIs

–  Work out problems as you go along

–  Process will identify issues you weren’t aware of before you started

–  80/20 rule and the value of perfect information

•  Triage using a matrix

Leading/Input M

easures Lagging/O

utput M

easures

Strategy Map Objectives and Underlying KPIs Mapped to Executives for Accountability

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D x V x S x A > Resistance to Change

•  Dissatisfaction with Status Quo –  Burning issue helps

•  Vision of Future State –  Somebody has to know what a better world looks like and how to move an organization there –  Right tools and processes in the right place at the right time

•  Status of 1st Steps towards change –  Something has started

•  Ability to Change –  Sponsor team

•  Process and change management skills •  Vanguard of the revolutionary movement

–  Company – how used is it to change? –  Top Mgmt support – great if it’s there, but you can structure an approach which includes

winning their confidence by demonstrating how planning helps makes better decisions.


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What is Driver Based Planning? •  Method of planning/forecasting financial performance based on

what drives the business forward –  Leading KPIs as predictors – “if it’s raining the creek will rise” –  Looks forwards not backwards –  Drivers are linked to strategic objectives

•  Pick the right drivers –  Selected carefully so that the organization focuses on the right

thing –  Cascade from strategy to operations –  Measurable and obtainable on a periodic basis

Strategy Map Forms the Basis for Driver Based Budgeting

Leading/Input M

easures Lagging/O

utput M

easures

Financial Perspective

Customer Perspective

Learning and Growth Perspective

Building KPIs into Driver-Based Model

Operating Income

Revenue Labor Billed

Utilization

New Projects

Proposal Win Rate

Backlog

Service Cross-sell/Up-sell Rate

Hold

Expense

COGS

Labor Hours

Available

Recruit Critical Skills G&A

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Using KPIs to Tighten Linkages between Strategy and Budgeting

•  “Strategies without tracking and accountability are just hot air”

•  Opportunities to improve regardless of where you are now –  Organizing KPIs –  Linking KPIs to strategy and integrating into quarterly operating reviews –  Developing budgets based on strategic KPI drivers –  Use KPIs and organizing frameworks for alignments

•  Integrated processes make sure nothing (well, as little as possible) falls between the cracks

Strategic Plan (3+ years) Strategy Maps and KPIs (1-3 years) Strategic Initiatives and Budget (1 year) Quarterly Reviews and Adjusting

•  Tools can help, but introducing or using a tool at the wrong time will wreak havoc – start manually and then automate

•  Start!

Contact Info •  [email protected] •  www.jarobertson2.com •  713.725.9352

using kpis for tracking strategy and driver based budgeting

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