SECONDARY BUSINESS STUDIES & ACCOUNTING PROFESSIONAL DEVELOPMENT AND NETWORKING DAY SESSION 3: KEY PERFORMANCE INDICATORS Presented by: Evelyn Hogg, Senior Lecturer, Notre Dame School of Business KPIs – syllabus areas  Accounting & Finance: ◦ Predominantly unit 3B: Evaluating financial information for planning, coordinating, controlling and investing ◦ Also relevant to others:  Unit 1A: Personal financial planning  Unit 1B: Evaluating business performance from a cash perspective  Unit 2A: Measuring effectiveness of internal controls  Unit 3A: Purpose & functions of performance reports, and business planning  Business Management and Enterprise ◦ Unit 1A: Strategies & processes: the manager’s role: planning, organising, leading, controlling ◦ Unit 1B: Strategies & processes: human resources: the value of performance management ◦ Unit 1C: Strategies & processes: management: responsibility and accountability ◦ Unit 1D: Strategies & processes: management: evaluating and improving efficiency of internal business activities  Business Management and Enterprise ◦ Unit 2A: Strategies & processes: management: monitoring success through regular reviews ◦ Unit 2B: Strategies & processes: management: introduction to key performance indicators ◦ Unit 3A: Strategies & processes: operations: financial management and control ◦ Unit 3B: Strategies & processes: management: the concept of a balanced scorecard, and operations: overview of financial and nonfinancial key performance indicators Why do we need performance measurement?  Planning is an important function of business managers ◦ Strategic ◦ Budgeting and forecasting  How do they know they are achieving their goals?  Goal congruence  Incentives  Organisational objectives: ◦ Financial  Popular with accountants ◦ Non-financial  May be more timely and involve people involved at the point of production or rendering of service What are performance measures or indicators?  Measure progress towards goals  Measure how organisation and individuals within the organisation are performing relative to their targets  Can be hundreds of these measures How does an organisation decide which ones to measure?  Must select those measures that are critical to the achievement of their most significant goals ◦ Hence the name “key performance indicators”  Are usually long term  Must be quantifiable SMART KPIs  Specific  Measurable  Achievable  Relevant  Timely How many KPIs?  Limit them to factors essential to meeting its goals ◦ At organisational level, should not be more than 3 or 4 ◦ At business unit level, have 3 or 4 that support the overall organisational KPIs and can be “rolled up” into them  Example 1 Good and Bad KPIs  Examples: ◦ Title of KPI: Employee turnover ◦ Defined: (Total number of employees that resign plus number of employees terminated) divided by number of employees at start of year ◦ Measured: Data as gathered by HR department of employees leaving ◦ Target: Reduce employee turnover by 5% per year ◦ Is this a good or bad KPI?  Examples: ◦ Title of KPI: Increase Sales ◦ Defined: Change in sales volume from month to month ◦ Measured: Total of sales by region for all regions ◦ Target: Increase each month ◦ Is this a good or bad KPI? Quiz: Good or bad KPIs?  Based on Teen Teez information, decide whether the following are good or bad KPIs: ◦ The production team should achieve a 10% reduction in re-work in 6 months ◦ We will grow our market share ◦ We want to reduce our transport costs ◦ We want to increase market share in 2010 by 3% over the 2009 level Business aspects that require KPIs  Customer satisfaction  Employee satisfaction  Staff turnover  Absenteeism  Department / division-specific measures  Triple bottom line: financial, environmental & social reposnsibility  Revenue and costs  OHS reporting including incidents and related costs  Equipment usage  Maintenance costs and effectiveness  New product development and innovation  Lead times and down times  Quality KPI components  KPIs should identify the required outcomes, for example: ◦ The minimum acceptable performance level ◦ Target performance  KPIs should not measure performance in isolation ◦ Can have adverse behavioural effects  Example 2 Data collection for KPIs  Answer three questions first: ◦ What is the purpose of collecting this data? ◦ Will this data tell us what we want to know? ◦ Will we be able to act on the data we collect?  Questions to answer when setting up a data system for KPIs: ◦ What type of metric is it (financial, behavioural or core process) ◦ Why was it selected? ◦ Where will the data be collected from? ◦ How will the data be collected? ◦ How often will the results of the data collected be made known? ◦ Who will use the information? Financial vs. Non-Financial KPIs  Financial ◦ Are important, because focus of shareholder value ◦ Could be absolute $ amounts ◦ Could be ratios ◦ Eg. Contribution margin, GP%, current ratio, etc  Non-Financial ◦ Often reflect the drivers of future financial performance (eg. improved quality) ◦ Tend to be more actionable ◦ Tend to be easier to understand and relate to (eg. “Number of rejects per 1000” as opposed to “variable overhead efficiency variance”)  Example 3 THE END QUESTIONS?