Transcript

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NARRATOR:

Welcome to a typical organisation. Let's call it Furniturecorp and imagine that it's a long-established company that manufactures and market's chairs, tables, and other furniture for end-consumers. The senior management team at Furniturecorp has been on a strategy away day. After a series of workshops facilitated by external consultants, they've come back with a clear strategic direction for the organisation which will require a number of changes to it's traditional practises.

They've also got a plan for consulting the rest of the organisation about the new strategy. Everything's looking good, so far

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But how do they ensure that the organisation as a whole is in tune with this new strategy and that everyone is headed in the same direction?

As the 20th century business leader, John Harvey-Jones once said, ‘The challenge is to get all your ducks in line.’

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Key Performance Indicators, or KPIs, are one popular approach to tackling this issue. According to one of the leading writers on KPIs, David Parmenter, ‘If KPIs are implemented effectively you can encourage the various teams within your organisation to come more closely aligned with other teams, so reinforcing its overall strategic direction.’

A good place to start is the organisation's Critical Success Factors, or CSFs. These are the things that the organisation needs to do particularly well in order to achieve its goals. For example, Furniturecorp might have CSFs such as designing robust products that customers can rely on. Or manufacturing in sufficient volumes to meet the demand of large retailers.

But CSFs can change over time, perhaps due to technological changes, or because the business is competing in a different kind of market. For example, Furniturecorp's new CSFs might include responding quickly to the latest fashion, providing an effective online ordering facility for end-consumers, or being able to demonstrate that all their raw materials are from environmentally sustainable sources. So Furniturecorp might run some workshops to identify a relatively small number of CSFs – perhaps five or six – and distinguish them from a larger number of general success factors.

Next, the KPI team needs to find a set of measures that will help to drive the kind of behaviour that is needed in order for these CSFs to be realised. Staff consultation is needed over these measures to ensure they're based on a realistic assessment of the organisation's activities and the constraints within which its people are operating.

As David Parmenter emphasises, it's essential to put the right measures in place. Amongst other things, KPIs should be nonfinancial. They should be measured frequently and linked to a particular group or team within the organisation. They also need to be clearly understood by the people involved and capable of acting as a trigger for corrective action.

For example, in order to promote this new CSF of effective online ordering, Furniturecorp might develop a KPI related to the speed with which online furniture orders are processed and dispatched to their customers. They'll also need to be careful to avoid what Parmenter describes as the dark side of performance measurements. For example, ‘Where a badly implemented set of measures distorts behaviour as people become cynical and try to 'game' the system.’

It's important to distinguish KPIs from what Parmenter calls Key Results Indicators, or KRIs, These are also important measures, but they are summaries or overviews of past performance, and they're based on the combined activities of many different teams. For example, Furniturecorp's sales turnover, its net profits, or its market share, are all KRIs.

They are important measures, but they're not the kind of indicator that people in the organisation can use to monitor and improve their day to day activities. For David Parmenter, ‘KPIs are the only things that truly link day-to-day performance in the workplace to the organisation's critical success factors.’

But it's important that these performance measures are not simply a way of exercising top-down control.

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Instead, they communicate what needs to be done and they help staff to understand what's required. So at Furniturecorp, the leadership can use their KPIs to help people in the organisation to understand the general direction of travel with their new strategy, and let them use these measures to guide their daily decision making.

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