Performance management is an approach used to manage performance of an organization. It can play an important role in the success or failure of a business. It can be applied to measure the performance of an organization, a business unit, a single department, a project, an employee, and even the process to build a product or service. It includes activities that will help to ensure goals are consistently being met in an effective manner. Those activities include planning and setting expectations, developing the capacity to perform, continually monitoring performance, periodically rating performance in a summary fashion, and rewarding good performance.
Performance indicators are measurements that define and assess the performance and the success of an organization. They are objectives to be targeted in order to add the most value to a business. They are means to periodically assess the performance of an organization, its departments and the people working there. Performance indicators are developed to impact the entire organization. Accordingly, choosing the right performance indicators relies upon a good understanding of what is important to the organization.
An organization may use performance indicators to assess its success as well as the success of an operational goal or a particular activity. Performance indicators are either result oriented or process oriented. Result oriented indicators focus on the key outputs of a process and related to the critical success factors (e.g. customer complaints from key customers and return on investment). While process oriented indicators focus on the inputs to a process (e.g. time to process customer order and late deliveries to key customers).
Performance Indicators are Used to:
- Help an organization to understand its performance levels and set realistic performance goals.
- Help aligning daily work to the organization’s strategic goals.
- Help an organization monitoring its progress on a real-time basis.
- Help an organization to understand its weaknesses and establish improvement priorities.
- Determine whether an improvement is being made and maintained.
- Help benchmark internally and externally.
- Identify if staff are doing well and to help them if they are not.
- Provide a basis for recognizing team and individual performance.
Selecting the Proper Performance Indicators
Performance indicators are often developed based on the critical success factor. CSFs are the elements that are necessary for a strategy to be successful and for an organization to achieve its mission. CSFs selection is a very subjective exercise and requires active leadership by senior management. Examples of CSFs are: delivery on-time and in-full, providing superior customer service, short time to market new products, management commitment and staff orientation.
For example, if one of your goals is to deliver product on-time in-full, then a performance indicator may be the percentage of deliveries that are received by customers not on-time in-full. By monitoring this, you can improve your delivery performance by directly measure how well your organization is meeting its long-term goal of providing an on-time in-full delivery to customers.
Performance indicators need also to reflect the Voice of the Customer. By understanding the Critical-to-Quality characteristics (CTQs) features of your customer, you can use them as a basis to select your performance indicators. Customer satisfaction level, customer retention rate, the number of key customer visits, and the profitability of customers are among the indicators that may be measured. In order to calculate those performance indicators, raw data needs to be collected from customers.
An ideal situation is where performance indicators cascade down through an organization. A KPI Tree is a visual method of displaying a range of measures in an organization or related to a project. This helps people work in such a way that their activities are aligned with the organization strategy, and helps individual work areas contribute to overall business performance. It helps bringing together a range of measures and provides a visual representation for which measures contribute to other measures.
A successful KPI tree is the one that contains a balance of measures covering efficiency, effectiveness, quality, delivery and cost. You might find that sometimes you have to develop some new measures to achieve this balance. Effectiveness performance indicators measure processes in the eyes of the customer. They measure customer satisfaction such as quality, on-time delivery, cost, accuracy, ease of use, etc. Efficiency performance indicators measure processes from business perspective, and are of interest to the internal customers. They measure the amount of resources used by a process and are thus likely to have close links with the 8 Wastes. Examples are: processing time, waiting time, cycle time, inspection cost, repair cost and material usage.
The following is an example of a KPI Tree that was constructed during the implementation of a customer satisfaction research improvement project.
Characteristics of Effective Performance Indicators
- Reflect the Voice of the Customer.
- Relate to critical success factors.
- Are agreed with and owned by the areas themselves.
- Are well defined and understood by all.
- Are measured regularly and consistently.
- Enable open and transparent communication.
- Are acted upon by the senior management.
- Are used for continuous improvement.