The increasing expectations of board oversight to cover a wider range of issues has placed a greater demand on key performance indicators (KPIs) to be as comprehensive as possible. The need for KPIs is widely accepted particularly in view of the requirement in the Companies Act 2006 (Strategic Report and Directors’ Report) for relevant companies as outlined as follows
“……….414C Contents of strategic report
(1) The purpose of the strategic report is to inform members of the company and help them assess how the directors have performed their duty under section 172 (duty to promote the success of the company).
(2) The strategic report must contain—
(a)a fair review of the company’s business, and
(b)a description of the principal risks and uncertainties facing the company.
(3) The review required is a balanced and comprehensive analysis of—
(a)the development and performance of the company’s business during the financial year, and
(b)the position of the company’s business at the end of that year,
consistent with the size and complexity of the business.
(4) The review must, to the extent necessary for an understanding of the development, performance or position of the company’s business, include—
(a)analysis using financial key performance indicators, and
(b)where appropriate, analysis using other key performance indicators, including information relating to environmental matters and employee matters.
(5) In subsection (4), “key performance indicators” means factors by reference to which the development, performance or position of the company’s business can be measured effectively……….”
That requirement in relation to KPIs has also been adopted as good practice in other sectors including not for profit and public sectors.
Nevertheless, the continuing challenge for boards is to determine whether the set of adopted KPIs are right for their respective organisations. Selecting meaningful KPIs can be fraught with difficulty particularly with the pressure of ‘KPI creep’. Boards have to avoid the unintended outcome of a plethora of performance information that are not insightful particularly in view of the commonly cited phrase by William Bruce Cameron which states that “Not everything that can be counted counts, and not everything that counts can be counted”.
What are KPIs
A simple way to determine a workable definition of KPIs is to define each word in the phrase as follows:
- Key – issues of crucial/critical importance
- Performance – an organisation’s accomplishments/achievements
- Indicators – signals/metrics/measures that track the current position and monitor change
Consequently, KPIs can be defined as measures that track and monitor change in relation to critical organisational achievements.
Purpose of KPIs
The purpose of KPIs are likely to be specific to each organisation but might include the following:
- To provide clarity on the key priorities in the organisation;
- To enable coherent performance across other supporting performance indicators;
- To foster internal organisational alignment including vertical and cross-functional alignment and between the critical enablers of success;
- To provide direction to foster coordination of behaviours and activities in the organisation;
- To assess and monitor organisational performance in relation to progress against the strategic objectives, purpose and vision;
- To demonstrate accountability and progress to the relevant key stakeholders.
Attributes of Effective KPIs
As highlighted above, effective KPIs are likely to be context specific and some of the attributes of such KPIs include the following:
- KPIs should be aligned to the organisation’s vision, purpose, objectives and strategic plan;
- KPIs should not be excessive in number as they can become counterproductive, unwieldy and unmanageable;
- KPIs should not primarily be set because they are easily measurable;
- KPIs should ideally be balanced between lagging (backward looking) and leading (forward looking) indicators;
- KPIs should measure what matters;
- KPIs should be relevant and cover all the critical aspects of organisational performance;
- KPIs should preferably primarily focus on results or outcomes and not just outputs or activities;
- KPIs should be reliable and not necessarily perfect and the board should be able to trust the performance information;
- KPIs should be timely and sufficiently up to date;
- KPIs should be within the control of the organisation in order to enable the organisation to take appropriate corrective action to improve performance;
- KPIs should be relatively easy to disaggregate in order to identify the relevant underlying drivers of performance.
Questions for boards to consider
In view of the winds of change of volatility, uncertainty, ambiguity and complexity that are likely to impact organisational performance. It is prudent that boards should periodically review its approach to KPIs and assess whether they remain fit for the future. Some of the issues that boards should consider are as follows:
- Do we adopt a superficial approach to KPIs?
- Do we use KPIs only to manage past performance of the organisation?
- Do we use KPIs to effectively lead the organisation toward the desired future?
- Do we use KPIs to transform the organisation?
- Do we regularly identify and remove meaningless KPIs?
- Do we use our KPIs to reflect the issues that are likely to make a big difference to the organisation and key stakeholders?
- Are the current KPIs truly key to the performance of the organisation?
- Do we have too many irrelevant KPIs?
- Do our KPIs collectively provide meaningful insight and foresight?
- Are our KPIs in alignment with our values?
- Do our KPIs provide critical business insights and highlight opportunities for better performance?
- Do our KPIs help to identify corrective action to address underperformance in relation to the KPIs?