KPI’s Revisited: Part 1 Key Business Indicators

Photo at blog from Hans van Nes - 26/11/2010 - 18:28

I was asked to produce a presentation on my ideas around KPI’s in general and how these should work for CIO’s. Having written a number of blogs around this topic over time, it was a trigger to re-collect my thoughts and add some new elements. In Part 1 I want to introduce a more business focused notion towards KPI’s.

First of all, I’m a strong advocate of using KPI’s:

  • They can be a powerful management tool
  • But only when relevant to the Key Business Requirements
  • And when applied for all relevant members in the organization
  • If pragmatic, crisp and in an understandable format
  • With a repeating lifecycle (implementation, communication, use, analysis, action, evaluation & adjusting

Why not the traditional KPI’s?
It’s is not the measure that counts but the added value. Look at this example KPI: “Percentage of incidents not handled within set SLA bandwidth. Norm is 95%.” Hurrah for the 99% which is timely tackled! But what is the impact on the business for the one incident which halted the order delivery for a half day?
To measure the contribution to the value chain we need to think in Key Business Indicators (KBI’s).

What are KBI’s?
Key Business Indicators combine the Key Business Requirements (KBR’s) like revenue, profit, customer growth & retention and market share with KPI’s that measure underlying business process output (KBR+KPI=KBI).

An example for a call center which focuses on renewing subscriptions:
KPI 1: Optimize the number of calls handled by the sales desk. Norm: 20 calls per agent per hour. Standalone this triggers a short call behavior, not optimizing customers renewal.
KPI 2: Measure customer retention. Norm: 95%. Standalone this triggers focus on averaging: one customer not renewing, even a big one, has no influence so no trigger to act.

Assuming there is a KBR defined in the business plan: Yearly subscription renewal revenue above 98%. We could combine the above in a KBI: Customer Renewal Value.
A formula could be something like this: “value of renewed subscriptions per made call divided by last year average subscription revenue per customer”. At any given point in time this indicator will show the current contribution of the made calls relative to last year actual, thus how we doing towards our KBR.

The above example can work for all involved employees since it is not about the influence one has on a KPI but about the contribution one makes to the KBI. So one type could fit all but a drill down in scope is logical, providing that all used KPI’s fit in a work-breakdown structure. In this case the sales agent could be measured on the same KBI as the manager but limited to the assigned customers instead of the teams output.

Oversimplified? I think that’s exactly the trick for a good working performance measurement system.

In a next part I will apply the KBI thinking to the world of CIO’s.

As always: comments welcomed.

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