Key Performance Indicators and critical success factors

KPI’s measure the realized performance of the organization while CSFs are the performance drivers (that which can boost the performance). Furthermore, KPIs are linked together and among the four perspectives of the Balanced scorecard. At the end of the chain of linkages there is for example the objective to improve revenue growth (financial). This can be backtracked to the objective of increasing market share (customer).

In order to accomplish this, higher customer retention is required. Having a good customer satisfaction rating helps toward this goal and can have a positive effect on cross selling rations (internal).

To improve customer satisfaction, we probably need to spend more time talking and listening to our customers. More face to face time with our customers starts the whole process. It is even thinkable that the quality of face to face communication is increased by better employee satisfaction and soft communication skills (learning/innovation).

Negative and positive relationships

The negative or positive relationship between measures should also be part of the model. An indicator that performs badly and has a relatively low importance which is linked to an indicator that performs very well and has a relatively high importance should be more effective encoded than when it is linked to an indicator that performs very well and has a relatively low importance.

The problem of such a rule is that the relationship between indicators and the relative importance of a measure could possibly change quickly and regularly over time. In addition, it depends maybe on the success of other measures. This, not yet well-researched area should be further investigated in order to find out whether causal relations between indicators can quickly change or not.

It should be known if an increase will be beneficial

For each KPI or CSF it should be known if an increase of the indicator will be beneficial or adverse, also referred to as the polarity of the measure or indicator. A beneficial indicator that increases can be communicated to the managers as positive (for example displays them in green). Adverse indicators that increase can be communicated as negative (for example a light colors red).

Lead indicators are the levers for the lag indicators

Furthermore, beneficial increasing lag indicators are relatively less important then beneficial increasing lead indicators since the latter can boost the lag indicators. Lead indicators are the levers for the lag indicators and are more long-term oriented, which fits the senior management level better. However, short-term problems should be dealt with first.

An adverse lag indicator might increase significantly (for example production costs). It is not straightforward that the system can then transmit a firm negative signal. If in the same period, the production has increased with almost the same percentage, a firm negative signal should be avoided.

At least two previous periods should be considered

To determine the decrease or increase of the growth of a particular measure, at least two previous periods (of the same level) should be considered. The increase or decrease of the growth is important to weaken firm positive or negative signals in an effort to communicate subtle differences to the manager. Below is a table of sales figures of an organization. Until July the sales are increasing. This seems to be quite positive but at the same time the growth decreases. When a particular beneficial measure increases and the growth of the measure is decreasing, a moderate positive or perhaps a neutral signal should be communicated instead of transmitting a sole positive signal.

Table 6: Sales, absolute growth and in terms of percentage

Month	Sales	Absolute growth	Growth percentage	In- or decrease of growth
Jan	300		yet unknown	yet unknown
Feb	400	+100	25%	yet unknown
Mar	450	+50	11%	-14%
Apr	460	+10	2%	-9%
May	470	+10	2%	0%
June	480	+10	2%	0%
July	500	+20	4%	2%
Aug	300	-200	-66%	-70%
....

Variations regarding the polarity of a measure

In addition to the variation regarding the polarity of a measure, it is important to establish the relative importance of each measure. Together it indicates how strong positive or negative signal should be transmitted. If a beneficial indicator increases with a high relative importance, the signal might be much stronger when it has a low importance. The relative importance of all indicators within a perspective should add up to 100%.

A variety of disparate measures

Because all Balanced Scorecards will possess a variety of disparate measures (dollars, minutes, percentages and so on), it is necessary to provide an easy way to integrate these. In order to be able to calculate an overall performance for a specific perspective it is necessary to establish a normalized score based on a standard scale from 0 - 10. Another advantage is that other people, who are less familiar with the business, are better able to interpret the results.

Norms can be absolute or relative

Norms can vary in three ways. Norms can be absolute, relative to other measures and can be set up as a range. Absolute norms can be sub divided into Under-norm-is-bad and Above-norm-is-bad. The norm-polarity is as important as the polarity of measures, since the system should know what is beneficial and adverse. Furthermore, measures may exceed norms with a particular percentage without jeopardising processes or the organization. Considering such subtle variations might enable a more adaptive and relaxed communication process between the business intelligence system and the senior manager.

The relative importance of indicators

The relative importance of an indicator multiplied by the normalized score assigns for each measure the so-called 'weighted score'. Those scores can be added up to a perspective total that in turn enables easy comparison with other perspectives. By applying this technique, it is possible to examine performance changes at all levels, from individual measures right up to the overall performance of an organization. The highest level of the scorecard is now presenting the overall score of the four perspectives. This can be displayed as a dashboard meter, which might for instance be easily integrated in the ‘installed programs’ region of the task bar of the operating system. When new data arrives, the scorecard can then be recalculated and the new performance can be compared with the previous performance or with the norm. If the performance deviates significantly from the previous period or the norm, a red or green light can be turned on.

These aspects (relative importance, integration, norms and normalized score) of key performance indicators and critical success factors apply also to measures.