Developing Metrics and KPI (Key Performance Indicators
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The document outlines various aspects of developing and implementing performance metrics that guide decision-making within organizations. It distinguishes between key performance indicators (KPIs) and general metrics, emphasizing the importance of aligning metrics with organizational goals and identifying relevant financial performance measures. Additionally, it provides guidelines for creating effective metrics, ensuring data quality, and avoiding common pitfalls in performance alignment.
Developing Metrics and KPI (Key Performance Indicators
- 1. Developing Performance Metrics that Drive Decision Making
- 2. Performance Measurements and Metrics… A performance measurement is a comparison of actual returns against a pre- specified benchmark. A performance metric is a type of measurement used to quantify the performance of some component of an organization. FREE Performance Management Kit at www.performance-success.com
- 3. 3 Types of Performance Measures… 1. Key Result Indicators 3. Performance Indicators 5. Key Performance Indicators FREE Performance Management Kit at www.performance-success.com
- 4. KPIs versus Metrics… • A KPI is a metric, but a metric is not always a KPI • Metrics are the detailed measures that feed and augment the KPIs • KPIs reflect strategic value drivers while metrics may represent anything that is measurable FREE Performance Management Kit at www.performance-success.com
- 5. KPI Metric Flow… Overall Business Strategy What is the organization trying to accomplish? Goals and Objectives What are the short and long term objectives to achieve the strategy? Key Business Objectives What are the important actionable steps to meet the goals and objectives? Key Performance Indicators What measures of success are tied to the drivers? Supporting Metrics What are the detailed measures that feed and augment the KPIs? FREE Performance Management Kit at www.performance-success.com
- 6. 10 Characteristics of a Good KPI… • Reflect strategic value drivers • Defined by Executives • Cascades throughout organization • Based on organizational standards • Based on valid data • Easy to comprehend • Must be relevant • Provide thresholds, targets and benchmarks • Empower users • Lead to positive action FREE Performance Management Kit at www.performance-success.com
- 7. Common Executive KPIs… Sales by Product Sales Expenses Total Sales Marketing Expenses Total Sales Budget Over/Under Research & Development Expenses Cost of Goods Sold EBIT (earnings before interest and taxes) Materials Interest income (expense) Labor Other income (expense) Overhead Total Non-operating Income (expense) Operating Expenses Income (Loss) Before Taxes G&A Expenses Income Taxes Payroll Salaries Net Income (Loss) Budget Cumulative Net Income (Loss) FREE Performance Management Kit at www.performance-success.com
- 8. Industry Standard Metrics Industry standard metrics are common measurements that are deemed to be valuable within an industry. They are metrics an organization typically implements in order to see how they compare to organizations with similar service offerings. FREE Performance Management Kit at www.performance-success.com
- 9. How to Know What to Measure 1. Measure what your customers say is important 3. Measure areas where there are problems you’d like to solve 5. Measure the business objectives you are aiming to achieve FREE Performance Management Kit at www.performance-success.com
- 10. Basic Rules for Developing Metrics • Focus on desired outcomes • Keep the metrics simple • Involve all of the participants • Base metrics on organizational objectives and key processes • Challenge employees to act immediately FREE Performance Management Kit at www.performance-success.com
- 11. SMART Metrics • Specific • Measurable • Actionable • Relevant • Timely FREE Performance Management Kit at www.performance-success.com
- 12. SMART Metrics Table FREE Performance Management Kit at www.performance-success.com
- 13. Common Financial Performance Metrics • Return on Net Assets Ratio • Net Operating Revenues Ratio • Viability Ratio • Debt Burden Ratio • Primary Reserve Ratio • Customer profitability metrics FREE Performance Management Kit at www.performance-success.com
- 14. Additional Financial Metrics – Financial Performance Ratios Financial Performance Ratios Return on Net Assets = Change in Net Assets / Total Beginning Net Assets Net Operating Revenues Ratio = Income before Other Items / Adjusted Net Operating Revenues Viability Ratio = Expendable Net Assets / Total Debt Debt Burden Ratio = Debt Service / Total Expenses Primary Reserve Ratio = Expendable net assets / Total Expenses FREE Performance Management Kit at www.performance-success.com
- 15. Return on Net Assets = Change in Net Assets / Total Beginning Net Assets Net Operating Revenues Ratio Metrics – Additional Financial = Income before Other Items / Liquidity Ratios Adjusted Net Operating Revenues Viability Ratio = Expendable Net Assets / Total Debt Debt Burden Ratio = Debt Service / Total Expenses Primary Reserve Ratio = Expendable net assets / Total Expenses Liquidity Ratios Current Ratio = Current Assets / Current Liabilities Quick Ratio = (Current Assets – Inventory) / Current Liabilities Cash Ratio = Cash & Equivalents / Liabilities Activity Ratios FREE Performance Management Kit at www.performance-success.com
- 16. Primary Reserve Ratio = Expendable net assets / Total Expenses Liquidity Ratios Additional Financial Metrics – Activity Current Ratio = Current Assets / Current Liabilities Ratios Quick Ratio = (Current Assets – Inventory) / Current Liabilities Cash Ratio = Cash & Equivalents / Liabilities Activity Ratios Total Asset Turnover = Sales / Total Assets Fixed Asset Turnover = Sales / (Net, Plant, Property, Equip) Capital Turnover = Sales / (Interest Bearing Debt + Stockholder’s Equity) Accts Receivable Turnover = Sales / Accounts Receivable Accts Receivable Days Outstanding = 365 days / (Accts Receivable Turnover) Inventory Turnover = Cost of Goods Sold / Inventory Inventory Days Outstanding = 365 days / Inventory Turnover FREE Performance Management Kit at www.performance-success.com
- 17. Capital Turnover = Sales / (Interest Bearing Debt + Stockholder’s Equity) H Accts Receivable Turnover = Sales / Accounts Receivable H Additional Days OutstandingMetrics/ – Receivable Accts Receivable Financial = 365 days (Accts Leverage Ratios Turnover) L Inventory Turnover = Cost of Goods Sold / Inventory H Inventory Days Outstanding = 365 days / Inventory Turnover L Leverage Ratios Debt to Equity = Total Liabilities / Stockholder’s Equity L Financial Leverage = Total Assets / Stockholder’s Equity L Capitalization Ratio = (STD + CPLTD + LTD) / (Interest Bearing Debt + Stockholder’s Equity) L Interest Coverage = (PTI + Interest Expense) / Interest Expense H Profitability Ratios FREE Performance Management Kit at www.performance-success.com
- 18. Additional Financial Metrics – Profitability Ratios Profitability Ratios Net Margin = Net Income / Sales Pre-tax Margin = Pre-Tax Income / Sales Operating Margin = Earnings Before Interest and Taxes / Sales Gross Margin = (Sales – COGS) / Sales Return on Assets = Net Income / Total Assets Return on Net Assets = Net Income / Net Assets Return on Capital = Net Income / (Interest Bearing Debt + Stockholders’ Equity) Return on Equity = Net Income / Stockholders’ Equity FREE Performance Management Kit at www.performance-success.com
- 19. Additional Financial Metrics Market Ratios Price Earnings = Stock Price / EPS Market to Book = Market Capitalization / Stockholder’s Equity Dividend Yield = Dividend / Stock Price t (t-1) (t-1) Shareholder Return = ((P - P ) + D) / P FREE Performance Management Kit at www.performance-success.com
- 20. 5 Steps for Identifying Data Quality Metrics • Identify the key data assertions associated with business policies • Determine how those data assertions relate to quantifiable business impact • Evaluate how the identified data flaws are categorized within a set of data quality dimensions and specify the data rules that measure their occurrence • Quantify the contribution of each flaw to conformance with each business policy • Articulate and implement the data rules within a drillable reporting framework FREE Performance Management Kit at www.performance-success.com
- 21. Data Quality Metrics • Accuracy/precision • Completeness • Reliability • Availability • Timeliness • Consistency FREE Performance Management Kit at www.performance-success.com
- 22. Basic Rules for Developing Metrics • Focus on desired outcomes • Keep the metrics simple • Involve all of the participants • Base metrics on organizational objectives and key processes • Challenge employees to act immediately FREE Performance Management Kit at www.performance-success.com
- 23. The Performance Lifecycle FREE Performance Management Kit at www.performance-success.com
- 24. Linking Corporate Strategy to Executive, Managerial, and Individual Goals FREE Performance Management Kit at www.performance-success.com
- 25. Aligning Business Units to Organizational Objectives Define organizational goals Organizational Mission & Goals Identify how each business unit contributes toward reaching organizational goals Information Other Business Human Resources Accounting Develop strategy to achieve goals Technology Units within each business unit Identify bottlenecks and improve inter-connected processes among Processes Processes Processes business units Align employee performance to maximize business unit support in reaching organizational goals Ensure that technology investments support organizational goals Technology Optimize system performance, utilize business intelligence, automate reporting capabilities Group Server Develop performance measures Decisions that drive decision making and Knowledge Performance Reports progress toward organizational Mgmt FREE Performance Management Kit at www.performance-success.com goals
- 26. Aligning Workforce Performance to Organizational Objectives Functions within workforce performance management include: • Recruit and Hire Management • Compensation Management • Incentive Management • Goals Management • Learning Management • Competency Management • FREE Performance Management Kit at www.performance-success.com Performance Measurement
- 27. Aligning Workforce Performance to Organizational Objectives (cont) FREE Performance Management Kit at www.performance-success.com
- 28. Aligning Financial Performance to Organizational Objectives Steps to Maximize Financial Performance: 3.Identify which divisions within your organization are most responsible for carrying out the success of each metric. 4.Examine the processes for each those divisions 5.Redefine the processes that are out of date, or those which tools exist for automation or process improvement 6.Baseline the performance for the processes that have the most effect on the outcome of the financial metric 7.Set performance measures for those processes and monitor how the improvement of those processes affects the overall financial metric over time FREE Performance Management Kit at www.performance-success.com
- 29. Aligning Financial Performance to Organizational Objectives Common Financial Metrics • Return on Net Assets Ratio • Net Operating Revenues Ratio • Viability Ratio • Debt Burden Ratio • Primary Reserve Ratio • Customer Profitability Metrics FREE Performance Management Kit at www.performance-success.com
- 30. Additional Financial Metrics – Financial Performance Ratios Financial Performance Ratios Return on Net Assets = Change in Net Assets / Total Beginning Net Assets Net Operating Revenues Ratio = Income before Other Items / Adjusted Net Operating Revenues Viability Ratio = Expendable Net Assets / Total Debt Debt Burden Ratio = Debt Service / Total Expenses Primary Reserve Ratio = Expendable net assets / Total Expenses FREE Performance Management Kit at www.performance-success.com
- 31. Return on Net Assets = Change in Net Assets / Total Beginning Net Assets Net Operating Revenues Ratio Metrics – Additional Financial = Income before Other Items / Liquidity Ratios Adjusted Net Operating Revenues Viability Ratio = Expendable Net Assets / Total Debt Debt Burden Ratio = Debt Service / Total Expenses Primary Reserve Ratio = Expendable net assets / Total Expenses Liquidity Ratios Current Ratio = Current Assets / Current Liabilities Quick Ratio = (Current Assets – Inventory) / Current Liabilities Cash Ratio = Cash & Equivalents / Liabilities Activity Ratios FREE Performance Management Kit at www.performance-success.com
- 32. Primary Reserve Ratio = Expendable net assets / Total Expenses Liquidity Ratios Additional Financial Metrics – Activity Current Ratio = Current Assets / Current Liabilities Ratios Quick Ratio = (Current Assets – Inventory) / Current Liabilities Cash Ratio = Cash & Equivalents / Liabilities Activity Ratios Total Asset Turnover = Sales / Total Assets Fixed Asset Turnover = Sales / (Net, Plant, Property, Equip) Capital Turnover = Sales / (Interest Bearing Debt + Stockholder’s Equity) Accts Receivable Turnover = Sales / Accounts Receivable Accts Receivable Days Outstanding = 365 days / (Accts Receivable Turnover) Inventory Turnover = Cost of Goods Sold / Inventory Inventory Days Outstanding = 365 days / Inventory Turnover FREE Performance Management Kit at www.performance-success.com
- 33. Capital Turnover = Sales / (Interest Bearing Debt + Stockholder’s Equity) H Accts Receivable Turnover = Sales / Accounts Receivable H Additional Days OutstandingMetrics/ – Receivable Accts Receivable Financial = 365 days (Accts Leverage Ratios Turnover) L Inventory Turnover = Cost of Goods Sold / Inventory H Inventory Days Outstanding = 365 days / Inventory Turnover L Leverage Ratios Debt to Equity = Total Liabilities / Stockholder’s Equity L Financial Leverage = Total Assets / Stockholder’s Equity L Capitalization Ratio = (STD + CPLTD + LTD) / (Interest Bearing Debt + Stockholder’s Equity) L Interest Coverage = (PTI + Interest Expense) / Interest Expense H Profitability Ratios FREE Performance Management Kit at www.performance-success.com
- 34. Additional Financial Metrics – Profitability Ratios Profitability Ratios Net Margin = Net Income / Sales Pre-tax Margin = Pre-Tax Income / Sales Operating Margin = Earnings Before Interest and Taxes / Sales Gross Margin = (Sales – COGS) / Sales Return on Assets = Net Income / Total Assets Return on Net Assets = Net Income / Net Assets Return on Capital = Net Income / (Interest Bearing Debt + Stockholders’ Equity) Return on Equity = Net Income / Stockholders’ Equity FREE Performance Management Kit at www.performance-success.com
- 35. Additional Financial Metrics Market Ratios Price Earnings = Stock Price / EPS Market to Book = Market Capitalization / Stockholder’s Equity Dividend Yield = Dividend / Stock Price t (t-1) (t-1) Shareholder Return = ((P - P ) + D) / P FREE Performance Management Kit at www.performance-success.com
- 36. Aligning IT/Systems to Organizational Objectives FREE Performance Management Kit at www.performance-success.com
- 37. Questions to Ask Regarding IT Strategic Alignment • Which of your business unit’s processes support the organization’s mission the most? Do the metrics we report on drive those processes? • Are you satisfied with the current performance throughout your organization? • Do our metrics address the company's critical needs? • Do our reports provide the required information to make business decisions? Do they identify areas of misalignment? • Do IT initiatives appear to be prioritized appropriately? FREE Performance Management Kit at www.performance-success.com
- 38. Common Pitfalls to Avoid When Aligning Performance to Strategy • Inflexibility • Insufficient vertical alignment • Insufficient horizontal alignment FREE Performance Management Kit at www.performance-success.com