Book summary “Key performance indicators”: summary

Introduction

You track hundreds of metrics every month, yet your organization fails to improve its core performance. Most measures reported to the board are financial summaries of past actions rather than tools that drive positive operational behavior. You waste countless hours gathering data that nobody uses to make decisions.

True key performance indicators are rare, nonfinancial metrics derived from operational critical success factors and managed by an in-house team rather than external consultants.

David Parmenter provides a step-by-step blueprint to fix your measurement framework. The book explains how to abandon ineffective practices, find critical success factors, and design timely reports.

You will find answers to the following operational questions:

• How do you distinguish true key performance indicators from ordinary performance measures?
• Why do annual targets and linked remuneration destroy employee motivation?
• How do you secure chief executive commitment for a measurement project?
• What process should you use to run successful metric design workshops?

1. The Great KPI Misunderstanding

Most organizations track hundreds of metrics under a single banner, yet true key performance indicators remain rare. You must separate these metrics into distinct categories to understand what actually drives performance.

Performance measures must be divided into four distinct types and maintained within a strict organizational limit.

Four Types of Measures

Result indicators summarize the combined input of multiple teams. They help boards track overall outcomes without pointing to specific team accountability.

Performance indicators tie directly to a single team or a cluster of teams working closely together. Adding the word key creates four specific categories:

• Key result indicators (KRIs)
• Result indicators (RIs)
• Performance indicators (PIs)
• Key performance indicators (KPIs)

Seven Characteristics of True KPIs

For an indicator to be genuine, it must meet strict criteria. You will find that standard operational metrics rarely pass this test.

• Nonfinancial measures
• Timely data
• Focused on by the chief executive officer
• Simple enough for all staff to understand
• Team-based for clear accountability
• Significant impact on critical success factors
• Limited dark side with minimal unintended negative consequences

A senior British Airways official focused on the timely arrival and departure of airplanes as a primary KPI. This drove airport managers and staff to take immediate corrective actions to recover lost time regardless of who caused the delay.

The 10/80/10 Rule

Organizations with over 500 full-time equivalent employees should maintain a balanced hierarchy of measures. You should limit the total volume of metrics to avoid operational confusion.

The 10/80/10 rule sets exact upper boundaries for your reporting framework:

• 10 Key Result Indicators
• 80 Result Indicators and Performance Indicators combined
• 10 Key Performance Indicators

2. The Myths of Performance Measurement

Tying performance measures to remuneration and relying on fixed annual targets corrupts organizational behavior.

Remuneration and Targets

When you link key performance indicators directly to financial compensation, employees manipulate the data to secure higher payouts. This practice turns your key performance indicators into key political indicators. You should treat performance with key performance indicators as a ticket to the game rather than a variable incentive target.

Fixed annual performance contracts are doomed to fail because you cannot accurately predict what good performance looks like before the year begins. Debating arbitrary targets results in figures that are either too soft or too hard. Providing regular progress updates against peers and market conditions encourages staff to work as hard as possible without artificial caps.

Balanced Scorecard Expansion

The traditional four perspectives of the balanced scorecard fail to encompass all critical organizational dynamics. You should expand the framework to capture reality properly.

The expanded model includes six distinct areas:

• financial perspective;
• customer perspective;
• internal process perspective;
• innovation and learning perspective;
• staff satisfaction perspective;
• environment and community perspective.

Attempting to break down high-level executive measures like return on capital employed down through organizational tiers ignores operational reality. Cascading performance measures down an organization is a damaging process. True alignment is achieved by starting measurement design at the operational front line and cascading upward to connect daily effort with critical success factors.

3. Foundation Stones and Change Methodology

The implementation of the winning KPI methodology follows a compacted three-stage process that spans a sixteen-week timeframe for organizations with over 500 FTEs. Success relies on establishing seven critical foundation stones before you develop any measures.

Project success depends on establishing seven foundation stones, applying the abandonment principle, and leading through emotional drivers.

Seven Foundation Stones

You must secure the presence of these seven stones to prevent project failure. They define the structural integrity of your measurement initiative:

• partnership with stakeholders;
• frontline empowerment;
• reporting only what matters;
• sourcing all KPIs from critical success factors;
• abandoning non-delivering processes;
• appointing a home-grown team leader;
• establishing an organization-wide understanding of KPIs.

The Abandonment Principle

Management must regularly eliminate dysfunctional initiatives to free up time and resources. Abandonment serves as a vital source of innovation and creates room for new projects.

You can operationalize this principle through structured routines:

• hold an abandonment day each month where teams report back on what they have agreed to abandon;
• measure the abandonment rate and make heroes of the teams who embrace abandonment;
• abandon all dysfunctional performance measures;
• abandon reports completed the same way without readers;
• abandon meetings that generate little or no follow-up action;
• abandon broken-down balanced scorecards;
• abandon projects no longer appropriate or needed;
• abandon performance-related pay linkage to annual targets;
• abandon the annual planning process;
• abandon performance reviews and provide regular monthly feedback instead.

Other teams have twenty-four hours to appeal an abandonment decision. A KPI project must be led by a respected, full-time in-house team leader reporting directly to the CEO rather than an external consultant. Medium enterprises need one hundred to two50 full-time equivalents, while organizations with over 250 full-time staff require a full-time position known as the chief measurement officer.

Leading and Selling Change

Change initiatives and projects are rarely sold through logic and must instead be pitched by appealing to the emotional drivers and points of pain of your audience.

A car salesperson tailors their pitch entirely differently for a young IT professional, a safety-conscious older buyer, and a style-conscious customer by addressing their specific emotional desires. You must prepare a concise forty-to-sixty-second elevator speech targeting these exact pain points. Selling the project requires four to seven days of PR consultancy time and employee surveys involving thirty to two hundred staff. You will need thirty to forty minutes for your executive presentation and must apply Guy Kawasaki's 10/20/30 rule to ensure clear visual communication.

4. Getting Commitment and Up-Skilling Resources

Securing active commitment and time from the CEO and senior management team is vital for the survival and success of a KPI project.

The CEO must act as the central driver while the senior management team sets aside time weekly to give feedback, participate in interviews, and approve investments. Management must also abandon obsolete projects, processes, and reports to clear the path for the initiative.

You must prepare and practice an elevator speech to gain the CEO's attention using a 40 to 60-second sales pitch. You need to secure a 20-minute slot to sell the project, obtain the green light to run the 2-day CSFs workshop, and agree on initial timing, resources, and approach.

To prepare for this change, you will follow these actions:

• ascertain what needs to be abandoned to make room for the KPI project;
• ascertain the existing measurement culture;
• decide how the KPI project will be rolled out;
• report wins to the senior management team each week.

An external facilitator must act solely as a mentor and guide rather than taking on project leadership. This specialist helps scope the project, secures senior management commitment, assists in selecting the in-house team, and guides the senior management team to accept the six balanced scorecard perspectives during the first year.

Building the In-House KPI Team

The KPI project must be driven by trained home-grown staff working full-time and reporting directly to the CEO.

Relying on external consultants to run the project is doomed to fail. The team should be a balanced mix of experienced veterans and fearless young talent, freed from all other operational duties.

Team sizing scales according to the size and structure of the organization. Less than 100 FTEs requires a 1-person team, 100 to 250 FTEs requires a 2-person team, and over 3,000 to 10,000 FTEs requires a 4-person team. A 16-week duration is achievable for a total rollout in organizations under 500 staff.

You must execute the following implementation tasks:

• select the in-house KPI team;
• secure full-time commitment of KPI project team members;
• establish a project office and move team members into it;
• conduct training sessions and team-building exercises;
• build a cluster of mentors for the team leader;
• determine the appropriate size and number of the KPI team;
• finalize a strategy for the KPI project rollout;
• review all steps for consistency with the seven foundation stones.

The team must adopt a just-do-it culture and utilize existing basic software applications during the first 12 months without heavy investment in specialized KPI software. You will instill a just-do-it culture avoiding endless debate, utilize existing spreadsheet, presentation, and database applications, and set up intranet pages using SharePoint Team Services or Microsoft Teams.

5. Finding Critical Success Factors

Without agreed operational critical success factors, managers prioritize work based on personal views, leading to counterproductive activities. Organizations should have only one set of 5 to 8 operational CSFs that focus daily staff attention, rather than cascading measures from high-level financial metrics or strategies.

Operational critical success factors serve as the sole source of meaningful measures and require structured sphere of influence mapping.

Operational CSFs as the Source

Boards naturally look from the outside in and prefer outcome statements like growing a new market, whereas operational CSFs describe daily activities that staff can control and execute. Conflating external outcomes and operational critical success factors creates internal confusion.

A forestry organization held a two-day workshop over a Friday and Saturday at a local hotel with nearly 50 attendees ranging from foremen and forklift drivers to the CEO.

The Four-Task CSF Process

Finding an organization's critical success factors requires an exhaustive internal hunt, a collaborative workshop, staff presentations, and displaying the CSFs in every workplace. You will move from extracting success factors from historical documents and interviewing oracles to running a two-day workshop using sphere of influence mapping, communicating the results to staff, and posting them on walls.

You will execute these specific tasks during the project:

• Task 1: Wording the Success Factors and the External Outcomes
• Task 2: Determining the Critical Success Factors in a Two-Day Workshop
• Task 3: Presenting the Critical Success Factors to the Staff
• Task 4: Get the CSFs on the Wall in Every Workplace

The sphere of influence mapping process helps teams discover operational CSFs by analyzing how success factors impact one another. You will handle 30 to 40 success factors in most organizations and identify 10 to 15 success factors ranking well after the first cut.

You will apply these mapping steps in the workshop:

• Type all success factors into numbered boxes on a large sheet of paper.
• Start with one success factor and check if others impact it by drawing truncated arrows labeled with box numbers.
• Pretend the magnitude of relationships is equal for the time being.
• Split into smaller teams of two or three people after mapping a couple of boxes.
• List top five success factors for each team on a summary chart to find the most frequently selected ones.

6. Designing and Refining Measures

Organizations must run structured two-day performance measures workshops involving cross-functional teams to design meaningful indicators derived from critical success factors. You bring together managers, supervisors, and experienced specialists in cross-functional groups of five to seven members. Attendees learn what makes a good indicator and how to derive them from critical success factors.

Workshops and centralized databases allow cross-functional teams to generate and refine meaningful measures.

You apply these practices during the workshop:

• Draw up a list of managers, supervisors, and experienced specialists to attend.
• Break attendees into cross-functional workgroups of five to seven staff members.
• Ensure the room has tables, flipchart paper, whiteboard pens, and a laptop for each group.
• Train attendees on what makes a good indicator and how to derive them from CSFs.
• Break down each CSF into expected results by recycling its words.
• Ask what good performance and poor performance look like for each result.
• Mark measures with P for past, C for current, and F for future.

A global financial institution used an in-house KPI team to deliver workshops in Australia, Asia, and Europe. They utilized simultaneous translation in Asia and reduced 1,700 initial measures down to about 130. Over 1,500 measures were gathered across five workshops in this case study.

The Performance Measures Workshop

All performance measures collected during workshops must be recorded immediately in a centralized, user-friendly database managed exclusively by the KPI team. You assign unique numbers to all measures for control and traceability. Only the KPI team holds the power to delete measures.

You follow these database practices:

• Select a database application that is widely available and user-friendly within the organization.
• Include sections where teams select relevant critical success factors and success factors.
• Allow teams to interrogate the database using keywords.
• Allow teams to add new performance measures while restricting deletion power solely to the KPI team.
• Record the source CSF, measure name, and whether it is a Past, Current, or Future measure.

Sorting and Refining Measures

The KPI team must systematically refine raw workshop measures by deleting statements and duplicates, evaluating cost-benefit ratios, and rephrasing indicators. You score indicator strength from 5 as very strong to 1 as very weak. You score measurement feasibility from 5 as very easy to 1 as very difficult.

You follow these sorting practices:

• Ensure the database retains original and revised measure name fields.
• Mark measures that are merely statements for deletion.
• Group remaining measures into standard operational categories.
• Mark duplicated and inferior measures for deletion.
• Delete measures where the cost of getting data outweighs the benefit.
• Reword remaining measures to make them easier to understand.
• Evaluate potential measures by asking how strong and how feasible they are.

Organizations should hold a Measures Gallery to harness the wisdom of the crowd, allowing all staff to review shortlisted measures and expose any hidden dysfunctional consequences. You display shortlisted measures on the walls of the KPI project room. Staff place notes on the gallery walls identifying dysfunctional behaviors experienced when specific measures were used in the past.

Ascertaining Winning KPIs

Organization-wide KPIs must never be created by consolidating departmental measures, but rather ascertained through strict filtering against seven unique characteristics and tested across three divisions. You limit organization-wide KPIs to no more than 10. You test all the KPIs in three divisions and communicate them to all staff through team leaders and managers.

You follow these criteria to ensure winning KPIs:

• Ensure that KPIs are nonfinancial measures not expressed in currency.
• Ensure KPIs are measured frequently such as 24/7, daily, or weekly.
• Ensure KPIs are acted on by the CEO and senior management team.
• Ensure KPIs clearly indicate what action is required by staff.
• Ensure KPIs tie responsibility down to a team or group of teams.
• Ensure KPIs have a significant impact across core CSFs and balanced scorecard perspectives.
• Ensure KPIs encourage appropriate action with a minimal dark side.
• Limit organization-wide KPIs to no more than 10.
• Test all the KPIs in three divisions.
• Communicate the chosen KPIs to all staff through team leaders and managers.

Team performance measures must be selected directly from the finalized database to align day-to-day team behaviors with the organization's critical success factors. You limit team performance measures to a maximum of 10 for regular use. You train representatives from all teams on how to use the database and understand its fields.

Key result indicators reported to the board must be limited to a balanced set of ten or fewer that track external impacts and cover all six balanced scorecard perspectives. You review graphs used in strategic documents or previous board papers. You ensure there is at least one KRI for every CSF and outcome statement.

7. Reporting Performance Measures

Effective reporting frameworks require strict adherence to data visualization rules and specialized dashboards for boards and management.

At least half of all KPIs must be reported daily at 9 a.m. or constantly updated 24/7, while the remaining half are reported weekly. British Airways updates its plane delay KPIs constantly on a 24/7 basis. Boards should never see management KPIs or scorecards; instead, they receive a one-page governance dashboard tracking five to eight KRIs.

Reporting Framework Levels

Organizations must structure their reporting framework to accommodate different management levels and ensure timely decision-making. You follow specific guidelines for managing reporting templates and data visualizers:

• Leave the design of reporting templates solely to the KPI team.
• Ensure the KPI team is up-skilled in data visualization.
• Record and investigate suggested modifications from senior management after a trial period of three to four months.

Stephen Few Graph Rules

Data displays must avoid clutter, excessive decoration, and meaningless variety. Graphs should always start their scale at zero, show a minimum of 15 months of trend analysis to capture seasonality, limit gridlines to around five, and use bullet graphs and sparklines. The press often misleads decision-makers by showing exchange rates within a very narrow five-cent band instead of starting the scale from zero. You apply strict formatting choices:

• Ban pie charts, radar graphs, and 3D graphs from reports.
• Avoid using a year-to-date budget line and instead show the annual figure or last year's actual progression.
• Use a horizontal bar graph instead of a pie chart to clearly show the magnitude between the highest and lowest values.

Board Dashboard Metrics

A board dashboard should display between 9 and 12 graphs covering critical success factors, outcome statements, and strategic objectives, including measures for staff satisfaction, expenses-to-revenue, and customer satisfaction. An accountant prepared a board dashboard overnight and presented it to the chairman, who successfully made it the first page of all future board papers. You maintain this oversight through targeted routines:

• Send employee satisfaction surveys to a statistical sample three to four times a year rather than to all staff.
• Measure customer satisfaction at least every three months for key customer categories.
• Show cumulative net profit before tax with a quarterly updated bottom-up forecast.

10 Key Ideas

1. Performance measures must be divided into four distinct types consisting of key result indicators, result indicators, performance indicators, and key performance indicators.
2. Organizations with over 500 full-time equivalent employees should maintain a balanced reporting framework of exactly 10 key result indicators, 80 result indicators and performance indicators combined, and 10 key performance indicators.
3. Management must regularly eliminate dysfunctional initiatives, reports, meetings, and broken balanced scorecards through a structured abandonment principle to free up time and resources.
4. Tying performance measures directly to financial compensation corrupts organizational behavior by turning key performance indicators into key political indicators.
5. The KPI project must be driven by trained home-grown staff working full-time and reporting directly to the chief executive officer rather than relying on external consultants.
6. Operational critical success factors serve as the sole source of meaningful measures because they describe daily activities that staff can control and execute.
7. The sphere of influence mapping process helps teams discover operational critical success factors by analyzing how success factors impact one another in a structured workshop.
8. The KPI team must systematically refine raw workshop measures by deleting inferior statements, evaluating cost-benefit ratios, and scoring indicator strength and measurement feasibility.
9. Data displays must avoid clutter by following Stephen Few rules such as banning pie charts and starting graph scales at zero while showing a minimum of 15 months of trend analysis.
10. Organizations should abandon fixed annual performance reviews and provide regular monthly feedback alongside progress updates against peers and market conditions.