DFN: Good article, too summarize, ‘you’ need to pick on a few, relevant KPIs; they’ need to be simple, understandable; relationship between KPI’s needs to be well thought out. Lastly, FP&A can and should play a major role in implementing a Key Performance Indicator process within companies.
Best Practices for FP&A Key Performance Indicators
By Thomas W. Smith
As the old saying goes, “what gets measured will get managed.” While this adage holds up well over time, the successful implementation of Key Performance Indicators (KPIs) is anything but a given and definitely falls well short of being a cure-all for all that ails a business. Having KPIs tools in place and checking off a box is not enough. KPIs are not, on their own, transformational. They are simply tools, and there are a few basic pitfalls that all too often can accompany KPI implementation.
The good news is that FP&A professionals can and should play a major role in ensuring that well-designed KPIs end up being good tools when placed in the right hands.
Quantity vs. Quality
Too many KPIs can defeat the very purpose of using measurement to focus on key business driver improvement. After all, there really is a limit as to how much information humans and their organizations can digest. Simply stated, too many KPIs, or the wrong KPIs, can detract focus and add hidden costs, as unnecessary administrative burden is imposed upon those responsible for collecting, summarizing, and analyzing KPI data. In extreme cases, it becomes the classic case of analysis to paralysis.
Companies can maximize return on their KPI investments by paring the number of KPIs down to the right handful of truly essential measures. The selected KPIs and associated targets should together paint the portrait of success that a company or business unit seeks. FP&A professionals can and should take a leading role in urging the organization to take a step back to assess or reassess whether or not it has selected a manageable number of high-quality KPIs.
Complexity vs. Clarity
Even the best of planning intentions can yield a set of KPIs that the average employee does not fully comprehend. Financial and technical measures are particular areas of risk in this regard, and this risk multiplies considerably when a poor or non-existent communication plan accompanies implementation. Not to worry, though, as this only really becomes a significant problem if we are looking for people to understand how what they do impacts organizational success. As long as the top leaders in the company understand the KPIs, it’s all good, right? Unfortunately, companies who believe this and think along these lines are destined to miss out on employee engagement as a key lever of KPI success.
The smart money says companies are well-advised to keep KPIs as simple and straightforward as possible so that employees have a chance of actually doing things that they know will drive a few simple, straight-forward measures in the right direction.
Conflict vs. Coexistence
It is entirely understandable that a company’s top leadership will want to maximize just about everything that is good and minimize just about everything else that is bad. Consider the case of a company that has already moved its production offshore to cut its direct costs of production (no doubt one KPI nailed right there!), while at the same time establishing KPIs to reduce transportation costs, improve time-to-market, and maximize customer service. Well, reality is chiming in to say that it may not work exactly as planned. While each KPI is a good pursuit on its own, this highly-combustible KPI mixture makes for the perfect storm in terms of promoting competing objectives and sparking organizational discord.
It pays dividends for companies to take the necessary time to understand the potential conflicts and behavioral impacts that they may unknowingly be designing directly into their KPI measurement systems. Perhaps they may also be giving managers too much credit for being able to mediate these conflicts on the front lines. FP&A professionals can and should play an important role in helping business leaders to quantity the KPI trade-offs that will be required to keep highly-interactive KPI equations in balance.
Call to Action
Current publications increasingly trumpet the emerging “star power” of FP&A and its potential to really change the finance world. Just like the high-potential athlete who has tremendous natural abilities, it is clearly not a given or an automatic that FP&A will turn out to be a game changer. KPIs are an excellent example of where FP&A can and should play a major and highly visible role in helping business leaders and their organizations to succeed. What a great way for FP&A to achieve its full potential and maximize its organizational relevance!
Thomas W. Smith, Director, FP&A Home Systems Division, Legrand North America, is a member of the FP&A newsletter editorial advisory board. This article originally appeared in the June issue of FP&A.
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