Developing Metrics and KPI (Key Performance Indicators

Developing Performance Metrics that
Drive Decision Making

Performance Measurements and
Metrics…

A performance measurement is a
comparison of actual returns against a pre-
specified benchmark.

A performance metric is a type of
measurement used to quantify the
performance of some component of an
organization.
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3 Types of Performance Measures…

1. Key Result Indicators

3. Performance Indicators

5. Key Performance Indicators

KPIs versus Metrics…

• A KPI is a metric, but a metric is not
always a KPI

• Metrics are the detailed measures that
feed and augment the KPIs

• KPIs reflect strategic value drivers
while metrics may represent anything
that is measurable

KPI Metric Flow…

Overall Business Strategy
What is the organization trying to accomplish?

Goals and Objectives
What are the short and long term objectives to achieve the strategy?

Key Business Objectives
What are the important actionable steps to meet the goals and objectives?

Key Performance Indicators
What measures of success are tied to the drivers?

Supporting Metrics
What are the detailed measures that feed and augment the KPIs?

10 Characteristics of a Good KPI…

• Reflect strategic value drivers
• Defined by Executives
• Cascades throughout organization
• Based on organizational standards
• Based on valid data
• Easy to comprehend
• Must be relevant
• Provide thresholds, targets and benchmarks
• Empower users
• Lead to positive action

Common Executive KPIs…

Sales by Product Sales Expenses
Total Sales Marketing Expenses
Total Sales Budget Over/Under Research & Development Expenses
Cost of Goods Sold EBIT (earnings before interest and taxes)
Materials Interest income (expense)
Labor Other income (expense)
Overhead Total Non-operating Income (expense)
Operating Expenses Income (Loss) Before Taxes
G&A Expenses Income Taxes
Payroll Salaries Net Income (Loss)
Budget Cumulative Net Income (Loss)

Industry Standard Metrics

Industry standard metrics are common
measurements that are deemed to be
valuable within an industry.

They are metrics an organization typically
implements in order to see how they compare
to organizations with similar service offerings.


How to Know What to Measure

1. Measure what your customers say is
important

3. Measure areas where there are problems
you’d like to solve

5. Measure the business objectives you are
aiming to achieve


Basic Rules for Developing Metrics

• Focus on desired outcomes
• Keep the metrics simple
• Involve all of the participants
• Base metrics on organizational objectives
and key processes
• Challenge employees to act immediately

SMART Metrics

• Specific
• Measurable
• Actionable
• Relevant
• Timely

SMART Metrics Table


Common Financial Performance Metrics

• Return on Net Assets Ratio
• Net Operating Revenues Ratio
• Viability Ratio
• Debt Burden Ratio
• Primary Reserve Ratio
• Customer profitability metrics

Additional Financial Metrics –
Financial Performance Ratios

Financial Performance Ratios

Return on Net Assets = Change in Net Assets / Total Beginning Net
Assets
Net Operating Revenues Ratio = Income before Other Items /
Adjusted Net Operating Revenues
Viability Ratio = Expendable Net Assets / Total Debt
Debt Burden Ratio = Debt Service / Total Expenses
Primary Reserve Ratio = Expendable net assets / Total Expenses

Return on Net Assets = Change in Net Assets / Total Beginning Net
Assets
Net Operating Revenues Ratio Metrics –
Additional Financial = Income before Other Items /
Liquidity Ratios
Adjusted Net Operating Revenues
Viability Ratio = Expendable Net Assets / Total Debt
Debt Burden Ratio = Debt Service / Total Expenses

Liquidity Ratios

Current Ratio = Current Assets / Current Liabilities
Quick Ratio = (Current Assets – Inventory) / Current Liabilities
Cash Ratio = Cash & Equivalents / Liabilities

Activity Ratios


Liquidity Ratios
Additional Financial Metrics – Activity
Current Ratio = Current Assets / Current Liabilities
Ratios
Quick Ratio = (Current Assets – Inventory) / Current Liabilities
Cash Ratio = Cash & Equivalents / Liabilities

Activity Ratios

Total Asset Turnover = Sales / Total Assets
Fixed Asset Turnover = Sales / (Net, Plant, Property, Equip)
Capital Turnover = Sales / (Interest Bearing Debt + Stockholder’s
Equity)
Accts Receivable Turnover = Sales / Accounts Receivable
Accts Receivable Days Outstanding = 365 days / (Accts Receivable
Turnover)
Inventory Turnover = Cost of Goods Sold / Inventory
Inventory Days Outstanding = 365 days / Inventory Turnover

Capital Turnover = Sales / (Interest Bearing Debt + Stockholder’s
Equity) H
Accts Receivable Turnover = Sales / Accounts Receivable H
Additional Days OutstandingMetrics/ – Receivable
Accts Receivable
Financial = 365 days (Accts
Leverage Ratios
Turnover) L
Inventory Turnover = Cost of Goods Sold / Inventory H
Inventory Days Outstanding = 365 days / Inventory Turnover L

Leverage Ratios

Debt to Equity = Total Liabilities / Stockholder’s Equity L
Financial Leverage = Total Assets / Stockholder’s Equity L
Capitalization Ratio = (STD + CPLTD + LTD) / (Interest Bearing
Debt + Stockholder’s Equity) L
Interest Coverage = (PTI + Interest Expense) / Interest Expense H

Profitability Ratios

Additional Financial Metrics –


Net Margin = Net Income / Sales
Pre-tax Margin = Pre-Tax Income / Sales
Operating Margin = Earnings Before Interest and Taxes / Sales
Gross Margin = (Sales – COGS) / Sales
Return on Assets = Net Income / Total Assets
Return on Net Assets = Net Income / Net Assets
Return on Capital = Net Income / (Interest Bearing Debt +
Stockholders’ Equity)
Return on Equity = Net Income / Stockholders’ Equity

Additional Financial Metrics

Market Ratios

Price Earnings = Stock Price / EPS
Market to Book = Market Capitalization / Stockholder’s Equity
Dividend Yield = Dividend / Stock Price
t (t-1) (t-1)
Shareholder Return = ((P - P ) + D) / P


5 Steps for Identifying Data Quality
Metrics
• Identify the key data assertions associated with business
policies
• Determine how those data assertions relate to
quantifiable business impact
• Evaluate how the identified data flaws are categorized
within a set of data quality dimensions and specify the
data rules that measure their occurrence
• Quantify the contribution of each flaw to conformance
with each business policy
• Articulate and implement the data rules within a drillable
reporting framework

Data Quality Metrics

• Accuracy/precision
• Completeness
• Reliability
• Availability
• Timeliness
• Consistency

The Performance Lifecycle


Linking Corporate Strategy to Executive,
Managerial, and Individual Goals


Aligning Business Units to Organizational
Objectives
Define organizational goals Organizational Mission & Goals

Identify how each business unit
contributes toward reaching
organizational goals
Information Other Business
Human Resources Accounting
Develop strategy to achieve goals Technology Units
within each business unit

Identify bottlenecks and improve
inter-connected processes among Processes Processes Processes
business units

Align employee performance to
maximize business unit support in
reaching organizational goals

Ensure that technology investments
support organizational goals Technology

Optimize system performance,
utilize business intelligence,
automate reporting capabilities
Group

Server

Develop performance measures Decisions
that drive decision making and Knowledge
Performance
Reports
progress toward organizational Mgmt

goals

Aligning Workforce Performance to
Organizational Objectives
Functions within workforce performance
management include:
• Recruit and Hire Management
• Compensation Management
• Incentive Management
• Goals Management
• Learning Management
• Competency Management
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Performance Measurement

Aligning Workforce Performance to
Organizational Objectives (cont)


Aligning Financial Performance to

Steps to Maximize Financial Performance:
3.Identify which divisions within your organization are most
responsible for carrying out the success of each metric.
4.Examine the processes for each those divisions
5.Redefine the processes that are out of date, or those which
tools exist for automation or process improvement
6.Baseline the performance for the processes that have the
most effect on the outcome of the financial metric
7.Set performance measures for those processes and
monitor how the improvement of those processes affects the
overall financial metric over time

Aligning Financial Performance to

Common Financial Metrics
• Return on Net Assets Ratio
• Net Operating Revenues Ratio
• Viability Ratio
• Debt Burden Ratio
• Primary Reserve Ratio
• Customer Profitability Metrics

Aligning IT/Systems to Organizational
Objectives


Questions to Ask Regarding IT Strategic
Alignment

• Which of your business unit’s processes support the
organization’s mission the most? Do the metrics we
report on drive those processes?
• Are you satisfied with the current performance
throughout your organization?
• Do our metrics address the company's critical needs?
• Do our reports provide the required information to
make business decisions? Do they identify areas of
misalignment?
• Do IT initiatives appear to be prioritized appropriately?

Common Pitfalls to Avoid When
Aligning Performance to Strategy

• Inflexibility

• Insufficient vertical alignment

• Insufficient horizontal alignment


Developing Metrics and KPI (Key Performance Indicators

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