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Smart Decisions
The Role of Key Performance Indicators

by David Hatch, Aberdeen GroupTuesday, October 16, 2007

Businesses thrive or fail based on their ability to identify, define, track, and act upon Key Performance Indicators (KPIs). Executives and line of business management are increasingly feeling the pressure to establish the right KPIs to enable timelier and more accurate decisions. The faster and more accurately KPIs can be accessed, reviewed, analyzed, and acted upon, the better the chance an organization has for success. Aberdeen’s new report is a roadmap for business management and decision makers who desire to achieve those goals through Best-in-Class (BIC) use of KPIs.

Best-in-Class (BIC) Performance

Aberdeen used six key performance criteria to distinguish Best-in-Class companies from Industry Average and Laggard organizations. Best-in-Class companies have seen the following mean average performance improvements in the past 12 months:

 

Process and organizational performance improvement:
• 10% improvement in time-to-decision
• 11% improvement in number of decision-makers with visibility to KPIs

Financial performance improvement:
• 9% improvement in profitability
• 9% improvement in revenue growth

Customer performance improvement:
• 9% improvement in net-new customers gained
• 9% improvement in customer satisfaction


Table 1: The Competitive Framework Key

Overview

The Aberdeen Competitive Framework defines enterprises as falling into one of the following three levels of practices and performance:

Best-in-Class (20%) — Practices that are the best currently being employed and significantly superior to the Industry Average, and result in the top industry performance.

Industry Average (50%) — Practices that represent the average or norm, and result in average industry performance.

Laggards (30%) — Practices that are significantly behind the average of the industry, and result in below average performance

In the following categories:

Process — What is the scope of process standardization? What is the efficiency and effectiveness of this process?

Organization — How is your company currently organized to manage and optimize this particular process?

Knowledge — What visibility do you have into key data and intelligence required to manage this process?

Technology — What level of automation have you used to support this process? How is this automation integrated and aligned?

Performance — What do you measure? How frequently? What’s your actual performance?


Research Methodology

Between August and September 2007, Aberdeen Group examined the use of KPIs, the experiences, and intentions of more than 350 enterprises in a diverse set of enterprises.

Respondents completed an online survey that included questions designed to determine the following:

• The degree to which KPI strategies are deployed within enterprise operations and the performance implications of the technologies and capabilities reported
• Pointers towards Best-in-Class strategies and tactics for improving access to and use of key performance metrics for decision-making
• Options and approaches for increasing the accuracy and timeliness of KPI information for improved decision-making
• The benefits, if any, that have been derived from KPI initiatives

Aberdeen supplemented this online survey effort with telephone interviews with select survey respondents, gathering additional information on KPI strategies, experiences, and results.

The study aimed to identify emerging best practices for KPI usage and provide a framework by which readers could assess their own capabilities.

Best-in-Class Approach to KPIs: Aberdeen Analysis

KPIs are at the heart of a performance management initiative, and are meant to provide strategic measures of success (or failure) rather than just measuring non-critical activities and processes. KPIs can provide “business alignment” across all levels of an organization (business units, departments and individuals) with clearly defined and “cascaded targets” and benchmarks to create accountability and track progress. The success of any performance management program is thus dependant on an effective strategy for defining, tracking, and acting upon KPIs.

Business executives have many options for implementing a KPI-based performance program, and Aberdeen research reveals that Best-in-Class companies have implemented KPI strategies, capabilities, and technologies that have delivered positive results toward improving performance:

• 70% of Best-in-Class companies have improved their time-to-decision by greater than 10%; versus 7% of Industry Average and 5% of Laggards.
• 33% of Best-in-Class companies improved market share by greater than 10%; versus 14% of Industry Average and 3% of Laggards.
• 47% of Best-in-Class companies improved profitability and revenue by greater than 10%; versus 22% of Industry Average and 13% of Laggards.

Additionally, business and IT users at Best-in-Class companies have identified several highly critical concerns when considering an investment in technologies and services for the development of KPI-based performance programs (Figure 1).

Figure 1: BIC Highly-Critical Selection Criteria for KPI Solutions

KPI data shown in a Bar Graph
Source: Aberdeen Group, September 2007

Ease of use, compatibility, and scalability were the top concerns reported, signifying the affect that a KPI initiative has throughout an organization. This may partly explain the prolific use of spreadsheets among many respondents due to the relative familiarity that users have with them and the popularity of Windows network environments and operating systems that support them. However, “scalability” points to an issue that is not addressed by spreadsheet methods, and stresses the importance of the IT infrastructure role in a KPI-based initiative.

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