Wednesday, 24 May 2017

Importance of Key performance indicators (KPI’s) for organizational transformation and the role of business head

As renowned management guru Peter Ducker says “what gets measured gets improved.”

In an organization, there are so many interactions, activities, transactions are happening across the functions or value chain.At the end of the day, only a few activities result in performance. The performance could be productivity improvement, profitability increase, sales increase, morale improvement etc.Some performances are not negotiable, vital for organizational profitability and growth and those performances are called Key performance indicators (KPI's). That means those performance indicators measure the organizational health. 

Even though key performance indicators will vary industry to industry and organization-specific, but most of the KPI’s fall under the broad categories of productivity, quality, cost, delivery aspects only.

Why is Key performance Indicators (KPI's) required?

Identifying and setting the KPI targets helps the organization 
1. To focus on the important deliverables
2. To bring the people together towards one goal
3. To improve the accountability
4. To improve the communication among the stakeholders
5. To know the reality against the desirables target at any point in time
6. To take course correction based on the reality vs target

How to implement Key performance Indicators or performance management for the organization?

Even though KPI and target setting can be done at the business level, functional level and individual level, the organization (especially SME organization) can start with business level .Once the organization becomes familiar with the business level performance management system, they can further deploy down to functional and individual level.

Assuming that SME organization like to implement the Performance management system at the organization level, the following steps would be useful.

1. Identify the Criteria under which key performance indicators (KPI’s) are measured. For example, SME organization can classify the business objectives into criteria like Productivity, Quality, Cost, Delivery, and Engagement.
2. In each criterion, identify the key performance measurements which are important to the business. For example, under productivity, one of the key performance indicators could be OEE (Overall Equipment Effectiveness) or sales per employee.
3. For each of the KPI’s, realistic target can be fixed.This target can be arrived based on historical performance or futuristic aspirations.
4. For each KPI's, people responsibility can be assigned 
5. Once target is fixed for all key performance indicators in each category, it can be tracked every month against the reality or actual performance

Role of Business head or CEO in performance management 

Setting the business goals and showing the direction is one of the prime responsibilities of the business head or CEO.While setting the target, the head must have done his homework and set the target with conviction. The target should not be too much aspiration and unrealistic, it must be achievable by the team in a given time, resource and capability. Also, the target should not be too lenient with incremental increase as this may not be too much motivation for the team to work upon.

In most of SME’s as we use to observe that the CEO or business head himself not convinced about the target, but would like to push the team by giving too much unrealistic target and sometimes he is also pessimistic about the target achievement and set very low. In both cases, CEO or business head’s communication tone, body language would reflect his uncertainty mindset to the team.

If CEO or business head set the target with conviction, he would be more certain about the target and he would drive them by any means to achieve the target. In addition, his conviction would help to grab the opportunity to meet the target. In addition, the team gets motivated when they are working for real, aspirational goals under the visionary leadership.

For example, in one of our SME client organization, the business head set the production target as 10 T / day with conviction and taking into the confidence of his entire team.In the mid of the financial year, when uncertainty happened in the existing customer's demand, his business plan got disturbed.Since he was very firm and convinced about the production KPI of 10 T / day, he went ahead with a different approach with his new customer in a short time to achieve the target of 10 T/ day.That achievement increased his confidence as well as improved the morale of his team.

       Eventually, Performance management helps to build an organization culture with the winning mindset towards solutions, performance and this will become a competitive advantage to the organization.

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