Key Performance Indicators

We accountants work in and support a wide array of industries and sizes of organisation. To that end we come across a vast range of metrics that will mean different things to different companies and management teams. These key performance indicators, or KPI’s, are used to highlight the performance of the business quickly and can be used to indicate where things may be going well and not so well. KPI’s, however, must not be taken in isolation as they are just an indication of where further investigation may be required to better understand why a certain level of performance is occurring, whether it be above or below the level of performance expected.

Many times, I have seen organisations take the KPI’s on board and do absolutely nothing to understand what the drivers are which have led to the result. In the case of lower than expected performance it is a missed opportunity to determine why. Is there a flaw in the production process which is leading to adverse material variances? Has the price of labour increased unexpectedly and led to higher labour costs to the organisation? Conversely, have sales volumes increased, leading to higher than expected revenue numbers? If we don’t look further than the numbers, then we don’t truly understand our business and are not fully in control. Did the sales revenue increase occur because a sales rep offered a larger than planned discount and therefore made those sales unprofitable?

Key Performance indicators are just that, indicators. They are only there to highlight areas where further investigation may be required, but too often business owners stop at the point of noting the number without taking it a step further in order to truly understand the drivers behind it. In addition, the same KPI can mean different things to different organisations. For example, an organisation’s sigma score can be used to measure the number of errors per million opportunities. If a financial services organisation maintains a score which equates to 10,000 errors, it may be inconvenient to customers. However, what if it is a pharmaceutical company producing medicines and those 10,000 errors lead to patient deaths?

Key Performance Indicators need to not only be relevant to the organisation, but also be used to drive improvements in performance in the operational aspects of the business or there is very little point in reporting on them in the first place.