Today I’m going to briefly review Key Performance Indicators, 2nd Edition, by David Parmenter, a regular contributor to BetterManagement.com and a big supporter of The Balanced Scorecard by Kaplan and Norton and Stephen Few‘s work on Visual Business Intelligence, highlighted on PerceptualEdge.com.
The book is very informative on the subject and literally presents a step-by-step how-to guide, complete with checklists, surveys, workshop outlines, reporting templates, and key task descriptions that will guide you though a successful project execution. It spends over 50 pages detailing a 12-step model, complete with key tasks that need to be completed at each phase, that, when properly applied, will almost guarantee the success of any KPI project that is appropriately undertaken with the right support. It outlines the critical success factors of any KPI initiative and even provides 23 pages of performance measures that you can review when searching through the right performance metrics for your organization.
But most importantly, it clearly outlines the difference between key performance indicators, performance indicators, results indicators, and key results indicators. Many organizations mix up performance and results indicators, and mixing up key performance indicators with non-key result indicators can do more harm then good. Consider the example of a UK hospital that decided the most important metric was the time between patient registration and patient review by a house doctor. Since the nurses realized they could not stop patients from registering with minor injuries, which did not require immediate treatment, but that they could delay the registration of patients in ambulances, because they were receiving quality care from the paramedics, the nursing staff started asking paramedics to leave the patients in the ambulances until a house doctor could see them, as this improved the “average time to see patients”. It wasn’t long before there was a parking lot full of ambulances, and on some days there were even ambulances circling the hospital because the parking lot was full. This not only created a major problem for the ambulance service, which was unable to deliver an efficient emergency service, but put patients lives at risk, as they couldn’t be effectively triaged until they were registered. In business terms, the classification of a minor result indicator as a key performance indicator put lives at risk!
So what’s the difference? A result indicator tells you what you did while a performance indicator tells you what you should do. Not all results or performance indicators are important. In the case of the hospital, it doesn’t always matter that some patients with minor sports injuries or flus have to wait three hours to see a doctor, it matters that car crash victims, heart attack patients, and patients with other life threatening injuries see a house doctor as fast as possible. While the average wait time should be tracked (because if the average wait time for patients with minor injuries is consistently three hours, it means you probably need more doctors), it’s not critical. On the other hand, the wait times for the top three triage levels (code, critical, and urgent) are critical. Code patients need to be seen immediately, critical patients within a few minutes, and urgent patients within an hour at most. These are critical success factors, and, as such, key performance indicators.
Parmenter provides some easy classifications early on to help you distinguish key & non-key results indicators from key & non-key performance indicators, as well as a hierarchy to help you understand them. KRIs, at the top of the hierarchy, are influenced by RIs and PIs, which are driven by KPIs. Basic classifications include:
Key Result Indicators (KRIs)
- customer satisfaction
- net profit
- customer profitability
- employee satisfaction
- return on capital employed
Result Indicators (RIs)
- net profit on key product lines
- sales made yesterday or last week
- customer complaints from key customers
- hospital bed utilization in a week
Performance Indicators (PIs)
- percentage increase in sales on the top ten percent of customers
- number of employee suggestions implemented in the last thirty days
- sales calls for the next week or two weeks
- late deliveries to customers
Key Performance Indicators (KPIs)
- late planes
- number of trucks leaving not at capacity
- average time to treatment for code, critical, and urgent patients
Basically, as per Parmenter, KPIs must have the following characteristics:
- measured frequently (at least weekly, if not daily or hourly)
- acted on by the CEO
- clearly indicated required action(s)
- tied to a team
- significant impact
- encourage appropriate action
In addition, they must be current- or future-oriented, must make a difference, and must result in the CEO picking up the phone and calling the team leader when performance slips out of the acceptable zone. Finally, there must be no more than 10 of them. While you can have up to 80 performance and results indicators, and up to 10 additional key results indicators, you should never have more than 10 KPIs, many organizations can get away with only 5 KPIs, and some industries can see dramatic performance improvements by focussing on only 1 KPI. And regardless of what KPIs you settle on, make sure they can be understood by a 14-year old. You want them to be abundantly clear to everyone in the organization, and this is the one way that’s guaranteed to achieve that.
Finally, the book presents an expanded balanced scorecard that Parmenter believes is more relevant to the success of a KPI program, which he insists should not be undertaken until you have the support of the C-suite and the CEO who will allocate adequate time and resources to the project.
All-in-all, it’s a very well done and informative book that could easily be used as a text in a University level course. The only bad thing I have to say about it is that parts of it, like the chapters on the KPI Team Resource Kit and the Facilitator’s Resource Kit, are as dry as the desert. Done right, the interesting insights should materialize in the workshops, but the planning for them is probably not going to be very exciting.
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