Key Performance Indicators (KPIs): The Pros and Cons.

What is KPI? Let’s begin by defining KPIs as quantifiable performance that measures a business objective over time. The goals are tied to milestones and gauge progress against an organization’s strategic goals. The KPIs intend to align people across the organization to measure employee performance, making them accountable for their roles and responsibilities (RP). In theory, the performance KPIs allow management to introduce adjustments aligning for a balanced scorecard. Administration adapts performance using leading indicators and objectives for the right KPI results. 

Choosing your leading indicators. 

As soon as Cogent Analytics arrives onsite at a new client, our mandate is to provide our clients with a front view of their company by introducing the cash management system (CMS) and the sales trend analysis (STA). I also focus on performing the stockholders’ interview and defining the organization’s roles, responsibilities (RPs), accountabilities, and key performance indicators. During this exercise, I identify opportunities to capture all quick wins1. Upon completing this exercise, we seek organizational consensus. I will work with the RPs to implement strategic KPIs. We use multiple tools and must choose a fit-for-purpose tool. Success shows the best results by working on the behaviors and modifying leading indicators. For employee satisfaction, align best practices with performance and compensation. 

Identifying process indicators in financial KPI. 

The typical application of financial KPIs is monitoring the budget and profit plan, actual versus forecasted, and introducing actions to the process indicators to correct deviations. Key performance indicators are the perfect management tool applied widely throughout the organization’s processes. The alignment of profit sharing with KPIs is one of the pitfalls of the system. 

KPI examples. 

There are many examples of financial KPIs manipulations that backfire. The most recent prominent KPI example failure is West Fargo Bank2 (WFB) and the loss of clients and public credibility. WFB business goals #2 KPI: Generate new qualified leads and acquire new customers. Bank officers were remunerated, among others, as a function of this KPI metric. Inflating and falsifying new customer numbers lead to misleading metrics and incorrect customer KPIs. As a result, the bank lost credibility, which caused, among others, the CEO3 to resign, and affected the overall net profit.  

On a more personal note, a positive example I had a hand in. For ten years, I was responsible for the audit comity of a financial institution. Management recommended and implemented a profit plan with the leading indicator tied to individual performance KPIs. After experiencing multiple deviations from norms and established procedures, I concluded that the only truly effective KPI that worked in this situation was the one associated with the distributions to owners. Therefore, our specific goal became directing all efforts toward quantitative indicators making a profit, and providing an adequate return to the owners. 

Important KPI indicators. 

Selecting the right KPI indicators is critical to achieving successful implementation. Keep it simple at a high level. Refrain from overthinking or over-complicating the sales KPIs. For key results, ask the RP how his work directly affects profit. Cogent Analytics validates our clients and dedicates time to implementing strategic KPIs. We work on your behavior and closely monitor the metric and performance indicators during implementation. When working with different KPIs, we consult with the owners, make them aware of the pitfalls, and adjust accordingly. Use leading KPIs that are factual and make the RP accountable. 

Testing your key performance indicators.  

Further, test and audit your chosen performance indicator to meet the desired objective. Always test against your strategic objectives and business goals and adjust where needed. Executing the correct key performance indicators shows in your gross profit margin results.