How, after all, to develop a really working KPI system in a company? There are many methods, there are separate examples, but it is practically impossible to find an algorithm for developing a real KPI system. I hope the reader will be interested in the proposed algorithm for developing a KPI system from scratch (when there is nothing yet), ending with the final result - a working system. About this in this article.
"God is not on the side of the big battalions, but on the side of the best shooters."
Voltaire
In this article I will try to give an algorithm for creating a KPI system in the company as a whole. On the example of a design company (IT company) implementing large and technically complex projects.
KPIs - Key Performance Indicators- key performance indicators of the unit, company or enterprise. The Russian abbreviation uses the abbreviation "KPI".
I'll start with the main one. The questions that usually come up are:
- Where can I get these same KPIs, and what should they be? Will these KPIs be achievable, and how to determine this?
- Which KPIs are important and which are not?
- How to use KPIs to link the key areas of the company's activities, so that KPIs for marketing do not contradict KPIs for sales?
- What project implementation methodology should be used? Let's say we chose the Balanced Scorecard (BSC) methodology - Balanced Scorecard. What should be done next?
- How to start such a project, and how should it end? Etc.
Lots of questions. Answers, as usual, many times less.
If a company has a business development strategy, strategic goals are the basis for strategic KPIs, which are easy to decompose into separate company divisions. In this article, we will not consider this case.
Consider the algorithm for creating a KPI system when there is no business development strategy in the company. Step by step.
Step 1. We choose the methodology for implementing the project to create a KPI system. For example, the Balanced Scorecard (BSC) methodology. I wrote about this in the article "How to develop a" Manager's Wheel "", but I repeat. These are the classic 4 "walls". See Fig.1. The gist in short:
A. Finance. Finance in the company is provided, after all, by sales of goods and services.
b. Sales. In order for everything to be normal with sales, technologies / products are needed - those that are in demand by the market and those that can be offered (sold) to the market.
C. Technologies/Products. In order for everything to be normal with technologies / products, specialists are needed - people who create them.
D. People. In order for people (able to do this) to create competitive products, they need to be paid, they need to be trained and developed, and so on. Then they will create products, products will be sold, and the company will have everything in order with finances. Then the company will be able to invest in people again and again to create new technologies / products. Technical specialists (production personnel) implement projects for which customers, in fact, pay money.
Rice. 1. Very simplified the essence of the Balanced Scorecard (BSC) methodology - Balanced Scorecard.
Step 2. We form the structure of the main areas of the company's activities. For example, for a project company, this is:
"Wall" A
A set of more complex macro parameters. Somehow: liquidity ratios, capital structure, business profitability, business activity and others will not be considered in this article.
"Wall" B
2. Sales.
3. Marketing.
"Wall" C
4. Key areas of development(their condition). Let's say this is the modernization and expansion of the product line.
5. Presale.
"Wall" D
6. Production(implementation of projects).
7. HR(personnel Management).
Comment: it is worth noting that many companies add their own “walls” (5th, 6th) to the classic 4th “walls”, which are the most important in the company's activities. For example, the logistics block.
Step 3. Determine the areas that we want to strengthen. Or areas in which we have clear “points of failure”. "Points of failure" are not complete failures in business. This is something that doesn't work, or doesn't work very well. The task is clear - to eliminate the "points of failure". There are such “points of failure” in every company.
Task example. Suppose, in general, everything is more or less normal with us, except for the fact that Industry Segment 1 ceased to be profitable, but we see that it is promising Industry segment 2(or a new promising niche) with which you urgently need to start working.
An example of an action plan.
1. Prepare/adjust the product line for the new Industry Segment 2 (new industry for short - “NO”). This is the "wall"
2. Find a professional sales director for "BUT". This is the "wall" of B and D, since it is a task for the company's sales director and for HR.
a. Develop a customer profile "NO". This is the "wall" B.
b. Develop a profile for the NO director. This is the "wall" B.
c. To develop the main parameters of the motivation of the director of "NO". This is the "wall" B.
d. Develop a motivation sheet for the director of "NO" and agree on it. This is the “wall” D.
e. Carry out a search/hunting for the director of "NO". This is the “wall” D.
3. Form a new sectoral department - for short - "GCD" - (budget, responsibility centers, staffing, etc.). This is the "wall" B.
a. Assign tasks to the director of "NOD". This is wall "B".
b. Develop the main parameters of the motivation of sellers of "NOD". This is the "wall" B.
c. Develop motivational lists for NOD sellers and coordinate them. This is wall "D".
d. Search/hunt sellers in "NOD".
e. Transfer part of the sellers, hire part of the "NOD", part, perhaps, dismiss. This is the "wall" of B and D.
4. Set presale tasks to promote the company's solutions in "NO". This is the “wall” D.
5. Set tasks for marketing to promote the company's solutions in the "BUT". This is the "wall" B.
An example of a goal tree and KPIs.
"Wall" C
KPI (Technical Director):
- Prepare/correct product line for NO.
- Set presale tasks to promote the company's solutions in NO.
"Wall" B
KPI (Company Sales Director):
- Develop a customer profile "NO".
- Develop a profile for the NO director.
- To develop the main parameters of the motivation of the director of "NO".
- Form a "GCD" (budget, responsibility centers, staffing, etc.).
- Assign tasks to the director of the "NOD" (after HR finds the director).
- Set tasks for marketing to promote the company's solutions in BUT.
KPI (Director of "NOD"):
- Develop the main parameters of the motivation of sellers of "NOD". Coordinate them with the company's sales director and transfer them to HR.
- Look at sellers (existing and new), make decisions.
"Wall" D
KPI (HR directors):
- Develop a motivation sheet for the director of "NO" and agree it with the Sales Director of the company.
- Search/hunt director "NO" (find a professional sales director).
- Develop motivational lists for NOD sellers and coordinate them with the director of NOD.
- Search/hunt sellers in "NOD".
- Transfer part of the sellers, hire part of the "NOD", part, perhaps, dismiss.
Comment: it is clear that there are tasks for "wall" A - to plan new expenses in the company's budget, etc.
So, we have formed a tree of goals and set goals and objectives that will ensure the creation of a new branch department (SOD).
1. The department will have to be headed by a professional sales director in this industry.
2. We have planned all the necessary actions related to closing or downsizing Industry direction 1 if it can't be closed yet.
3. The technical department, marketing, HR and pre-sales have been assigned the appropriate tasks, which must do their part of the work, according to their profile, and support the new direction “on all fronts”.
Dear reader, for sure, will think: “Easy to say: to hire a professional sales director for a new industry segment!”. Difficult! How did the author do? I formed several lists for HR.
1. List number 1. Large and medium-sized companies where it makes sense to look for a director or deputy director of a similar direction. It doesn't work, then:
2. List number 2. Smaller companies where it makes sense to look for a director. A person will be a little out of step, but he will be inside a more rebuilt company. And for him it will career. It doesn't work, then:
3. List number 1. Look for a strong seller in large and medium-sized companies, not a manager. Also for growth. It doesn't work, then:
4. List number 1. Look for a director who is close in terms of industry, taking into account his ability to master a new industry.
5. Etc. There were other options as well.
By the way, the HR service, having received such lists, could quickly figure out where and whom to look for. As a result, candidates usually found.
"For a man who does not know which harbor he is heading for, no wind will be favorable."
Lucius Annaeus Seneca the Younger
KPI details can be generated using, for example, the well-known S.M.A.R.T. goal setting methodology. That's why,
Step 4. Study the goal setting methodology to be used in goal setting.
For example, the goal setting methodology S.M.A.R.T.
Move on. We have identified areas that we want to strengthen. Or areas in which we definitely have “failure points”. What's next? Next, we develop an action plan (see example above) that will allow us to strengthen these areas and/or eliminate “points of failure”. Without a holistic action plan, it is not realistic to build a KPI system that will unite the work of various company services. Anyway, it's pretty difficult.
Step 5. Develop an action plan.
In Step 3, I showed an example of an action plan, not the most trivial, but which is quite possible to implement, and such action plans are quite often implemented by companies. What is important? - a meaningful approach to problem solving!
Step 6. Check the action plan for feasibility.
Experience shows that most often, it is immediately clear which points of the plan are precisely feasible. The main thing - you need to carefully look at those points that are clearly in doubt. And either, think a little (for example, arrange a “brainstorming”), or involve experts, or, perhaps, go another, simpler, way. But, one should not set clearly impracticable (unattainable) goals and objectives!
Step 7. Building a tree of goals (and tasks).
So, there is a plan of action. There are goals and objectives. It remains to build a tree of goals (and tasks) and appoint those responsible. If new Responsibility Centers appeared - well, these functions did not exist before - then it is necessary to modify according to the new Responsibility Centers organizational structure companies. So, in general, companies grow.
Step 8. Formation of a list of KPIs with the appointment of responsible employees for specific KPIs.
An example of a tree of goals and the formation of a list of KPIs based on an action plan is shown in the example above.
Step 9. Formation of motivational sheets.
Until similar (given above) qualitative goals appear in the motivation lists (and in the example above there is not a single financial goal!), the KPI system will not work! It will remain on paper. What is shown in the example above is what needs to be done urgently! Exactly in order not to "accumulate" a bunch of extra costs, and even worse - losses, and exactly in order to ensure the further growth of the company as quickly as possible. Of course, financial!
“It is impossible to solve the problem at the same level at which it arose.
You need to rise above this problem by rising to the next level.”
Albert Einstein
How to implement such a project?
I often hear "tried - it doesn't work!". There are quite a few reasons why such projects do not reach the stage of operation and the final result.
We often forget that man is not a machine. Therefore, based on my own experience, I would recommend the following:
1. Start with small pilot projects, limited by the scope of the company and the range of tasks. The goal is simple - to quickly develop a skill. It is not necessary to put developments into action immediately. You can simulate the situation (see item 3).
It is far from always effective to launch a large and complex project.
Example. Motivation systems in large companies, as a rule, are honed 2-3 years. In one of the companies in which I worked, to a balanced new system motivation we came only after 3 years. At the same time, a fairly good and correct system of motivation was developed already in the first year. In the second year we had to make it more aggressive. In the third year, the motivation system was already balanced, including by the market, and tested in practice for 2 years. Of course, subsequently the motivation system was adjusted every year.
2. Small pilot projects are best done in the simplest and most understandable means (for example, in Word or Excel). To start. The main thing is that this is the substantive part of such projects, “put on paper”. When implementing a very small task, the mistakes made (and they will be!) Can be quickly corrected.
3. Carry out a full cycle of modeling - from solving some small problem, to the formation of KPI with the conditional "appointment" of responsible persons and the formation of conditional motivational sheets.
Example. Suppose the company does not have motivational sheets (yet), there is no KPI system (yet), and the company has not implemented this project before. How to simulate a situation? Run steps 1-3. Do not assign KPIs (!), and “do not hand over” motivational sheets (!). Just entrust the responsible manager with what is written for him. And then compare what was planned and what really happened.
It is extremely important to try to avoid "classic" mistakes. To do this, do the following:
1. Be sure to form the final goals of the project to create a KPI system. The goal - "to set KPI" - is "understandable". But this is the same as “increasing the efficiency of the business”, “ensuring the further growth of the company”, etc.
I will give an example of a range of practical goals for creating a KPI system:
a. Goal 1.1: Testing the competencies of managers and key employees in order to identify “points of failure” (incompetent employees) and promising employees (able to grow). Still, key performance indicators should show (and show!) Efficiency and inefficiency.
b. Goal 1.2: checking the effectiveness of the company's business areas (sales, production, presale, marketing, etc.) with the same goal.
c. Goal 1.3: Checking the effectiveness of business processes and communications in the company. Most of the major goals and objectives are implemented by various departments. The growth of the company depends on the coherence of their work. No more and no less! This is the very efficiency that we often talk about.
2. The action plan must be checked for feasibility. So that it does not have unattainable goals (and tasks).
3. Be sure to appoint responsible for specific KPIs. At least simulate it (for starters). So that it does not turn out that no one is really responsible for specific KPIs.
"What is everyone's business is nobody's business» .
Isaac Walton
4. The project to create a KPI system must be completed with motivational sheets. So that the formed KPIs do not turn out to be “outlaws”. If this is a pilot project, let it be several KPIs for a period of 2-3-4 months. This is also correct.
A practical example based on the Balanced Scorecard (BSC) methodology.
I will give an example based on the above, taking into account the mentioned methodology and in the form of a sequence of practical actions. Let's say you start at the top "Finance" and you are concerned about the "marginality" indicator. It is clear that there are a lot of ways to increase the marginality of projects, so it makes no sense to list all these methods. You need to choose the methods inherent in your company, as well as identify the reasons for insufficient margins.
So, a very conditional plan - just for example.
1.KPI-1. Increase the marginality of projects by at least 7% over a period of time not exceeding 6 months.
Suppose the key reasons for insufficient marginality of projects are the following (conditionally):
- High project costs due to failure to complete projects on time.
- Most projects by themselves do not have sufficient marginality. Further - we often “fly out” of the deadlines and budget, and the marginality becomes even less.
- No choice over profitable projects from a portfolio of projects. There are so few projects, and there is almost no portfolio of potential projects.
- The high cost of purchasing equipment for projects, which does not add marginality.
- There are no unique (almost unique or high-quality) services due to which the company can "charge" extra money for projects.
- Etc.
From here, KPIs of the next level “grow” for a number of company services. Namely (again - conditionally):
2. KPI-1-1(for the Technical Directorate and Project Managers (RP)): the implementation of projects on time and within the budget of the project. The KPI for the project was fulfilled - the RP received a bonus. No - you need to figure out why, and, possibly, change the RP.
3. KPI-1-2(for the Marketing Block): identify industries, segments, and niches that are more solvent than those that the company currently operates in. Prepare a presentation and justify your proposals. During<такого-то срока>.
4. KPI-1-3(for the Sales Block): to form a portfolio of projects with a volume of at least<такого-то>, for at least<такого-то срока>(in close interaction with marketing, so as not to waste time). To be able to select projects for implementation.
5. KPI-1-4(for the Procurement Block) not yet. Initially, you can set the task - to work out and give suggestions on how to reduce the cost of purchased equipment for projects.
Measuring performance is a must. After all, how to understand - is it good or still needs to be tightened up? Let's try to tell what kind of phenomenon it is.
Table of contents:
About history
The appearance of the KPI tool is due to the methodology of management by objectives (management by objective, MBO for short). These terms were first introduced by Peter Drucker in 1954.
This methodology allows assessing the achievements of the organization according to the criteria for achieving the goals.
That is, for correct use key performance indicators you need to understand (or at least get acquainted with) the methodology of "Management by objectives".
Initially, KPIs were interpreted only in terms of attainability. In other words, the orientation in the KPI was only - "achieved or did not achieve the goal." Gradually, such an unequivocal campaign softened. Percentages, weights appeared ... The Balanced Scored Card technology (English BSC or Russian abbreviation SSP). Later, KPIs for OEE equipment appeared.
It should be added that KPIs are used in various areas of management, but globally it is still: strategic management (to a lesser extent) and to a greater extent it is about business processes.
In other, and especially in applied (the same), disciplines, KPIs are also being implemented, but they are far from their original meaning, as they are already very “break away” from the strategy and goals.
KPI system
So let's start with a definition.
KPI - indicators of the effectiveness and efficiency of achieving the goals of the organization, which are for its individual structural units.
In previous articles, it was written about what caused the development of management. So KPI is nothing but the term efficiency close to us. He comes from the intersection of exact sciences and engineering.
Please note that KPIs are called key because they focus on strategic and tactical goals. That is, everything else is not KPI, the maximum is just indicators.
Rice. KPI system
As a result, the KPI system can be described by two key points:
1. Linking KPIs to goals
2. KPIs consist of performance and efficiency.
KPI and KFU are there any differences
Key Success Factors, they are also called critical success factors (KSF or CSF) are considered a different phenomenon from KPI. Some experts explain this by saying that KPIs show the achievement of existing resources, while KSFs show the emergence of resources in general.
Or easier:
CSF - acquisition of a new machine
KPI - production of 20 parts per shift by this machine
We think that the separation is a little overdone. At least, small and medium-sized businesses (more in detail) do not need such theoretical jungle.
KPI calculation
For correct calculations, first of all, you need to use goals, and not indicators invented “by eye”. Only in this case can we talk about KPI, in other cases it is still just a “wishlist” of management. In fairness, it must be said that the second option is now very common in practice. Such unreasonable desires are recognized simply by two or three questions:
- What are these indicators based on?
- What makes you think that these grounds are correct?
If there is no intelligible answer, then this, alas, is not a KPI, but simply “cheek puffing”. You can, of course, but it can no longer be called management by objectives (MBO) with all the ensuing consequences.
Let's get back to the right methodology... First you need to understand the goals, namely why the KPI calculation is necessary:
1. For prompt adjustment of actions;
2. To calculate motivational decisions - bonuses, rewards, as well as fines (if such are practiced).
The setup process looks like this:
1. KPI setting itself (depending on goals)
2. Calculations for calculating various rewards
KPI setting
Norton and Kaplan recommend setting no more than 20 KPIs, and these are numbers for fairly large organizations. For small commercial and non-commercial entities, there should be no more than 10.
If you look at the goal tree, then, as a rule, KPIs are set as a last resort at the second or, certainly, the third level of the tree. That is, where KPI can be "tied" to a separate position.
Rice. Goal Tree Levels for Metrics
For calculations you will need:
Possible deviations;
KPI weights for bonus calculations.
Let's move on to practice:
Examples of KPIs
It looks something like this:
These data are taken as a basis (or the so-called normalization). Further, these norms apply to employees of departments and / or participants in the process (depending on how the management is built).
Of course, it is difficult to imagine that representatives of small business will be involved in this complex of works. Only if such an organization has a need to establish management by goals, then there should not be a question about the KPI complex.
Weight is calculated as follows:
We are interested in a plan for parts of 100 pieces and a defect level of no more than 2 pieces out of these hundred. So, which indicator is more significant, the first or the second? Of course, everything depends on the goals, and in this example we see the ratio of effectiveness and efficiency, where the price of the result is 2%. The important point is that in this case, when calculating the bonus, you need to take into account the observance of two KPIs at once, so it is logical to distribute the weights equally.
Balancing or BSC
There is an opinion that KPI and BSC are identical terms. Nothing like this. These are two different technologies, which can be referred to as management indicators. This group also includes the research of Hubert K. Rampersad with his USPD, which cover, among other things, the effectiveness of a single person.
That is, we see that yes, they are similar and intersect somewhere, but BSC stands apart, since it is it that relates to the strategy the most. However, KPI is still the progenitor of all these tools - where measurements in organizations are the basis. Today, KPIs are commonly referred to as tools for working with business processes.
The topic of BSC requires a separate article and may be more than one.
Regulatory regulation of KPIs
In the legislation of the Russian Federation there are no norms that regulate KPI. However, as there are no norms for MBO (management by objectives). All this is the domain of local rule-making. That is, in some “regulation on key performance indicators for …. year" certain numbers can be fixed. It would be useful to work with this tool and capture the numbers in real documents. There are precedents for this. This is what some medium and large companies do, where along with the annual budget, KPIs are made up. This is done mostly to regulate the remuneration calculation system. That is, in this case, KPIs are closely related to the system of material motivation.
Books, articles and websites
Peter Drucker The Practice of Management, 2007 (English 1954)
David Parmenter, Key Performance Indicators, 2015
Robert S. Kaplan, David P. Norton, Balanced Scorecard. From strategy to action, 2014
Hubert C. Rampersad, Universal Performance Scorecard, 2004
Arkady Prigozhin, Goals and Values. New methods of working with the future, 2010
www.balancedscorecard.org BSC Institute
www.oee.com Equipment KPI website
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Key Performance Indicators or Key Performance Indicators is an evaluation system for determining the achievement of the operational and strategic goals of an enterprise. KPI helps a company assess its current state and improve the efficiency of its own development strategy.
Very often the technique KPI used to evaluate and control the activities and activity of employees of the enterprise. In Russia and the CIS countries, the term "Key Performance Indicators" is often used, as a translation from the English term "Key Performance Indicator" (KPI). However, this translation cannot be considered accurate enough.
If the translation of the word "key" as a key (essential for achieving the goal) and the word "indicator" as an indicator (indicator) can be considered sufficiently accurate, then there are difficulties with the translation of the word "perfomance". According to the ISO 9000:2008 standard, the word "perfomance" can be divided into two terms - efficiency and effectiveness. According to the standard, performance refers to the degree to which planned results are achieved and the ability to focus on results. Efficiency, according to the standard, means the ratio between the result and the costs (monetary, quantitative, time and others) to achieve it. Taking into account the fact that performance combines both effectiveness and efficiency, it is more accurate to translate KPI as “Key Performance Indicators”, since the result also includes the costs of obtaining it.
KPI is an excellent tool for measuring the degree to which certain goals are being achieved. In the actual activity of the enterprise, it is necessary to use only those indicators that are related to the goals of the enterprise.
Today, enterprise goal management or management by enterprise goals is one of the foundations modern concepts enterprise management. This concept provides for the ability to anticipate the results of activities and plan ways to achieve them.
The concept of management by objectives began its development with the work of Peter Drucker in the 20th century. According to his work, managers should avoid focusing on day-to-day routine tasks instead, they should focus on achieving the goals set for the enterprise (department). Today, the KPI system includes this concept, supplemented by others. modern methods and automated software.
According to various estimates, today enterprises have significant problems with setting the right goals and a system for evaluating results. According to surveys of company executives in the United States, it turned out that more than 60% of managers are dissatisfied with the system for evaluating the results of an enterprise. In Russia, dissatisfaction is even greater - more than 80%.
KPI and the system of motivation of employees of the enterprise are very closely related things, with the help of KPI, you can prepare and implement a highly effective system for stimulating the personnel of the enterprise.
There are many more key indicators. The set of indicators depends on the area of their application; they are often used to evaluate the result of the work of enterprise managers.
Key indicators of the enterprise can be divided into the following types:
- Lagging KPIs - show the results of the enterprise after the end of the period
- Leading KPIs - allow you to quickly manage the situation within a given period to achieve the desired results after its expiration
Financial performance is usually driven by lagging KPIs. Despite the fact that financial indicators are used by the owners of the enterprise to assess the ability of the enterprise to generate cash flows, financial indicators, due to the fact that they are lagging, cannot show the current performance of the departments and the enterprise as a whole.
Leading (operational) KPIs tell about the current activities of the enterprise. These indicators can often provide indirect information about planned cash flows. In addition, when properly configured, they evaluate the quality of the enterprise's business processes, the quality of products and customer satisfaction.
The set of enterprise KPIs is part of a balanced scorecard that defines cause-and-effect relationships between indicators and goals. Such connections make it possible to see patterns and factors of mutual influence of the results of some processes on others.
KPI system development
When developing a system of key indicators, several stages can be distinguished:
- Pre-project work. Such work usually includes the creation of a project team and a pre-project survey. It is also important at this stage to obtain the approval and support of volume managers.
- Development of KPI methodology. At this stage, the optimization of the org. enterprise structure, development of a methodology and a set of indicators, development of management mechanisms based on KPI, preparation of a set of documentation.
- Training software to manage KPIs. Development in progress terms of reference to make changes to the software. Direct programming of the system, user training and pilot operation of the system. An example of a program based on "1C" for KPI
- Completion of the project. On the final stage the KPI system (and methodology and software) is being put into commercial operation.
- Explaining to staff the benefits of using KPIs
- Determination of strategic indicators for the entire company
- Development of mechanisms for operational monitoring of indicators
- The need for further continuous improvement of the set of KPIs to support the development of the organization.
Rules and principles of KPI implementation
There are various assessments of the need and sufficiency of the number of key performance indicators. Norton and Coplan once suggested using no more than 20 KPIs.
Fraser and Hope recommend using no more than 10.
The most successful current practice is to use the 10/80/10 rule.
This rule means that an enterprise should use about 10 key performance indicators, about 80 indicators related to operational (for example, production) activities and about 10 key performance indicators.
very important in implementation of KPI is the principle of manageability and controllability. This principle states that the department or individual responsible for the result of the indicator should be allocated all the resources to manage it, and the result should be measurable and controllable (including by them).
There are other principles for building a KPI system:
- The principle of partnership - in order to successfully increase efficiency, it is necessary to seek partnership between all interested subjects of the company. Partnerships should start with building the system and continue as the system progresses.
- The principle of transferring efforts to the main areas - increasing efficiency may require a significant expansion of the powers of certain employees of the enterprise. Often these are employees working on the front line. They may also need to upgrade their skills, conduct trainings and include them in the development of KPIs relevant to their activities. It is also necessary to improve communication between different departments and employees.
- The principle of integrated performance evaluation, reporting and performance improvement. Created in the enterprise should encourage employees to take responsibility and specific solutions. It is also necessary to provide employees with all the reporting they need in their work.
- The principle of coordinating operational indicators with the strategy. All indicators should be aimed at achieving the stated goals of the enterprise. It is necessary to constantly analyze and optimize key indicators. In the work of the enterprise there should not be indicators that are not consistent with the strategic goals of the enterprise.
Applying these principles will allow you to build effective mechanism enterprise management.
Any company is interested in improving the efficiency of business and work of staff. The achievement of these goals is largely facilitated by the introduction of quantitatively measurable and reliable indicators in the assessment - KPI (Key performance indicators).
The main advantage of a system built on the basis of key indicators is its versatility. It is also aimed at increasing the interest of staff in the results of the company's activities. When developing KPIs, the specifics of the organization's activities are taken into account. KPI can be used both to evaluate the work of the entire company, its individual departments, and specific employees. In addition, the KPI system allows you to compare homogeneous processes that occur in different conditions. It also makes it possible to compare performance across multiple departments over the same period.
The main advantage of KPI systems is that the decision-making process is reduced to the analysis of data that is available at any time and presented in a pre-approved format.
Calculations and application of KPI
The most effective use of KPI in large companies retail that have an extensive network. In this business, each outlet generates the same business processes. This enables the top management of the head office, through the development of simple indicators, to see differences in the work of branches and predict difficulties. Moreover, on the basis of these indicators it is quite possible to build a system of staff motivation. In addition, constantly comparing and analyzing the performance of each of the divisions, with a high degree of probability, it is possible to predict the development trends of the business as a whole.
Simplicity of calculations of financial indicators is ensured by a transparent form of presentation of financial or management reporting. All the necessary data is contained in the balance sheet and income statement. Management can obtain information for any period as quickly as the accounting system in use allows. In practice, this time ranges from three to five days to 20. Such a period is quite acceptable in order to timely implement managerial influence.
The development and comparison of indicators should be carried out by an internal business analyst, due to the need to provide accurate data. He should clearly present all the pros and cons of each of them. After all, indicators that are applicable to evaluate a top manager and a business as a whole often cannot be used to evaluate any department. This is due to the specifics of the work of each structural unit. For example, to evaluate the head of the responsibility center, the indicator of profit remaining at the disposal of the organization before taxes and interest (EBIT - earnings before interest and tax) is suitable. However, this indicator is completely inapplicable for evaluating the work of the account manager. The fact is that EBIT is a purely financial indicator. It characterizes the efficiency of doing business, that is, it directly depends on the income and expenses of the company. The account manager does not directly influence these figures. Another, non-financial indicator should serve as an assessment of his work. For example, the number of customer claims resolved, or the percentage of that number to the total number of claims.
Basic requirements for KPI
The value of a scorecard is not in monitoring data on a “count-compare-forget” basis. The main thing is that it allows you to identify patterns in the development of a business as a whole or individual business processes. In addition, KPIs are used in short-term and long-term budgeting. After all, the budget is essentially a set of financial indicators that lead the company to the fulfillment of predetermined strategic and tactical goals. Moreover, usually the main one is making a profit, the same EBIT, in accordance with which the work of a top manager is evaluated. This is the relationship between the KPI system and budgeting. But the system of key indicators is not limited to the binding function of budget support. In addition, KPIs perform other functions, for example:
When developing a KPI system, certain requirements that apply to each of the coefficients should be taken into account:
Each coefficient must be clearly defined, then any user can measure it. Including the employee whose results are evaluated by this indicator. For example, the organization of the simplest accounting at the workplace of an account manager contributes to the fact that he can easily calculate "his" KPI using data that is always at hand.
Approved indicators and standards must be achievable. The goal should be realistic, but at the same time be an incentive.
Each of the indicators should be the responsibility of those people who are being evaluated.
Indicators should contribute to the motivation and growth of staff efficiency, and this is directly related to setting goals. So, when the sales department fulfills the plan to attract new customers (KPI - the number of new customers attracted over the period), the department can count on an additional bonus. If the plan is not fulfilled, on the contrary, the bonus is not paid.
The indicators should also be comparable, that is, the same indicators can be compared in two similar situations. For example, average check(KPI - the ratio of average daily revenue to the number of checks per day) cannot be compared in a store located in a city of a regional scale, and a store of the same format, but located in the "outback".
The dynamics of the coefficient change should be able to be presented visually (graphically) so that conclusions and decisions can be made based on the results.
And, finally, each indicator should carry meaning and be the basis for analysis. At first glance, the principle is banal, but it is fundamental. For example, let's take such a KPI as the ratio of the amount of expenses for the maintenance of the administrative apparatus to the total mass of profit. Formally, oddly enough, such an indicator satisfies all of the above characteristics: it can be quantitatively measured, can be normalized, presented graphically, shows dynamics, and so on. But let's think for a second, what is its meaning and what does such a coefficient show? Of course, given example in a grotesque form shows the operation of the principle of conformity of form to content. However, in practice, when developing KPIs, such incidents can occur. Particular attention should be paid to the introduction of new indicators, involving experts in the analysis process. They can be managers, as well as the most trained specialists in the financial and commercial structures of enterprises.
Examples of using indicators
In addition to generally accepted indicators (usually financial ones), each company will also have to develop its own. This is due to the fact that there are different specifics of business and various purposes determined by the owner. So, a growing business can be valued by the already mentioned EBIT ratio. But a company that has already passed the period of its formation can be evaluated by the level of gross profit (Gross profit) or, alternatively, by the level of profitability (Gross Margin). At the same time, of course, other “related” components of the activity are also analyzed: administrative, general, marketing expenses, etc.
In conclusion, it makes sense to give a few of the most common KPIs (see table). They can be used to evaluate a particular manager or department. By filling out a similar table for each of the indicators being developed, a manager of any level will be able to find an answer to the question of what he wants to improve in his work or how to use existing resources more efficiently.
Examples of performance measures
| Indicator | What does | Who is assessed | Possible frequency of calculation | What can be used for |
| EBIT, profit remaining after taxes, interest and dividends | Profit remaining after taxes, which is affected by the levels of income, expenses, investments (depreciation) | CEO, branch directors responsible for the revenue and expenditure side of their budget | Calculation of bonuses, self-financing reserve, obtaining loans, evaluating the return on investment, etc. | |
| Gross Margin , profitability level (usually as a percentage) | The ratio of gross profit to revenue (total sales) | Heads of departments, business lines developing a product or service | Annually, monthly, and also up to the product or technologically completed process | To assess the prospects for product development, the impact of demand for a product or service, the impact of competition |
| Turnover ratio, frame rotation | Attitude total number dismissed for the period to average headcount employed in the same period | HR Director, heads of structural divisions of the company with a separate staffing table | monthly, quarterly annually | To assess the impact of staff turnover on business results, predict the periods of the most active search for personnel, determine the loyalty of each category of employees, to identify hidden savings reserves, evaluate the effectiveness of the personnel apparatus |
| Average sales | Sales volume (in pieces, monetary units) that each seller brings | Sales department, sales manager | Daily, weekly, monthly, quarterly, yearly | Planning the revenue side of the subdivision budget, measuring the performance of each person or department and, as a result, distributing the bonus fund, identifying seasonality |
| The ratio of the periods of turnover of receivables and payables (as well as each of the periods separately) | The ratio of the average payment period for buyers to the average payment period for suppliers |
customer service department, financial department, commercial department, sales department |
Monthly, quarterly, yearly | Planning cash flows and cash gaps, obtaining loans, calculating deferrals of payments under contracts, setting discounts for early payment, identifying internal sources of financing |
Motivation of employees based on the results of work
With the help of key indicators, you can evaluate the effectiveness of each employee - from a cleaner to a top manager - and calculate their bonus accordingly. This contributes to the development of motivation among employees, because they understand that the size of the bonus depends on their efforts. However, when implementing KPIs, or rather, when determining key performance indicators, you may encounter some difficulties. It is not easy to single out the parameter of success "in its purest form", and the higher the position of an employee, the more difficult it is to separate the factors that depend only on him. Then, each parameter must be valued in terms of money.
The contract system in the field of procurement is a large-scale state project which is constantly evolving. In addition to new requirements for customers and suppliers in the field of transparency of all ongoing tenders, creating equal conditions and preventing anti-competitive agreements, the authorities intend to increase the efficiency of state and municipal procurement. True, the current legislation governing the conduct of competitions and tenders, in particular laws No. 44-FZ and No. 223-FZ, do not contain a clear concept of efficiency and KPI.
The authorities decided to correct this on the basis of the Decree of the President of the Russian Federation “On the main directions public policy on the Development of Competition” and the National Plan for the Development of Competition for 2019-2020, signed by the head of state at the end of 2017. It is these documents that instructed officials to develop and put into practice key parameters for the effectiveness of where and how to develop the procurement sector in the country.
Such KPIs for civil servants (we give an example below) should relate to improving the quality of tender management, as well as improving the skills of buyers and participants. Initially, officials want to extend the mandatory requirements for key performance criteria not to the entire procurement system in Russia, but only to the largest organizations, tendering in which is regulated by Law No. 223-FZ. These include, in particular, state-owned companies and natural monopolies (SEM) with revenues of 10 billion rubles or assets of 7 billion rubles. After the "run-in" of the system on large customers, it will be extended to the entire procurement sector and its participants. So you need to prepare for this and know how to calculate the KPI of procurement activities now.
What is KPI
The system of balanced performance indicators KPI is a numerical value defined in the framework of the so-called goal-setting or the definition of strategic development goals in any direction. When it comes to holding tenders, we can distinguish such KPIs of the procurement department as:
- observance of delivery terms;
- saving;
- stocks of products;
- product quality;
- efficiency of the staff;
- document flow.
Each of these areas can, and most importantly, need to be measured and evaluated for effective management supply organization. In other words, the analysis of KPI indicators allows you to set certain indicators in the company, thanks to which you can understand what other actions need to be taken to improve efficiency. At the same time, the effectiveness of procurement itself is not only certain manipulations carried out over a certain period of time, but also the benefits that the company received from them.
Types of KPI indicators
The library of KPI indicators includes two large groups:
- KPI criteria for the work of the organization.
- KPI indicators for personnel.
In an organization this may be technical support tenders, document management, deadlines and quality requirements, logistics criteria. The staff, in turn, performs the following functions:
- procurement planning;
- holding tenders;
- choice of suppliers,
- conclusion and maintenance of contracts with suppliers;
- warehouse operations management;
- logistics.
Separately, it is necessary to control, analyze and optimize processes, usually this is included in the KPI indicators for the head of the procurement activities of a state corporation or the only specialist in the tender department in the organization.
What are KPIs used for?
Analysis and achievement of KPI indicators are necessary in order to ensure the flexibility of the functioning of the company's public procurement system in constantly changing legislative and economic conditions. The organization of control necessarily requires regulation, so the organization must independently determine the performance criteria both for the entire procurement system as a whole and for the company's employees in accordance with the staffing table and job descriptions. Based on the fulfillment of these criteria, it is possible to evaluate the productivity of work, identify errors and shortcomings and promptly eliminate them.
There cannot be many criteria for the effectiveness of the work of each specialist. Usually, 5 to 10 clearly defined and understandable indicators are set in front of the staff. The main thing is that management can easily and quickly evaluate and measure them at any time. Here are the main priorities for using the Key Performance Indicators system, which Western developed countries have been using for over 40 years, and in Russia they began to use it about 15 years ago:
- Employee motivation. After all, people can get more if they show a high level of performance of the required indicators.
- A clear statement of priorities and objectives of the organization. The staff knows exactly the tasks set and the procedure for achieving them.
- Constant monitoring of work. The use of a performance evaluation system allows you to constantly monitor how things are going in the company at any stage of the work of any employee. Therefore, all possible failures can be prevented, rather than eliminated their consequences.
- Attracting professionals. Clear criteria for evaluating work make it possible to establish fair remuneration, depending on the personal achievements of each employee. The one who knows and can do more will be able to achieve high level and therefore get more.
- Saving company money.
With proper work setting, KPI performance indicators are achieved. Therefore, all specialists whose activities are interconnected should know what it is. Thus, there is a close interweaving of the personal responsibilities of each employee with the strategic goals of the company.
Examples for the tender department
Each department of the company can apply its own KPI performance indicators, examples of them are quite simple:
- What indicators can be calculated in the tender department? For a procurer, this can be the number of changes made to the public procurement plan and the public procurement schedule, the number of successfully completed tenders, the percentage of failed procedures in the total volume of competitive procurement, the number of competitive procurements in which only one application was submitted and it was recognized appropriate, and so on.
- In the work of a manager, you can evaluate the amount of the average check, sales volume; the number of regular customers that were attracted, etc.
- For an accountant, it is important that there are no fines from inspection bodies, timely submission of reports; the number of data updates, the absence of comments during the audit or inspections.
The list is endless. It is important to remember one thing: in order to be able to evaluate the compliance of the work with the given criteria, it is necessary to carefully document each step and action of the employee. Any missing link can easily bring down the entire well-established system.