Key Performance Indicators (KPI)

Developed by Rasmus Peter Østerlund

Abstract

Project management is the application of knowledge, tools, skills and techniques to meet project requirements. This article focus on effectively managing different processes during a project by using KPI's to effectively control and monitor "The iron triangle" of projects.

This article will show how KPIs are used in monitoring and controlling processes in projects, but also provide information of what a KPIs is, and how to visualize the data measured in the KPI. The article will focus on KPIs project management such as; Project time, cost and quality management. These subjects will all be analysed using project control with focus on performance measurements, which will result in the creation of KPIs.

Performance measurement is a fundamental principle of management, it is important to measure performance as it identifies the gap between current and desired performance. Managers can use Key Performance Indicators (KPIs) to identify where to take action in order to improve performance.

Key performance management is used to control stage processes in projects, they are used to assign work, monitor work, deal with issues, report progress to the project board and give better insight to take corrective actions.

Using KPIs enables project managers to track progress in a project, giving them a better overview of deadlines, budgets and more, ensuring that the project stays on track.

Definition of a KPI

A Key performance measurement (KPI) is a set of quantifiable measurements that a company uses to indicate their performance over time. These measurements are used to identify gaps between the current and desired performance, by doing this companies can determine their progress in achieving strategic and operational goals. KPIs vary between companies and industries and are based on priorities or goals for a specific company.

One of the key concerns during the implementation of KPIs is the identification of strategy-driven metrics from the other metrics. Choosing wrong KPIs can decrease performance in an organisation, as people will focus on the wrong aspects in a process or project. Developing the right KPIs can increase performance, some of the criteria for creating a good KPI is that the KPI should be simple so that the users can understand the KPI, correlated the KPIs drive to desired outcome, Actionable the users know how to affect the outcome of the KPI.

Source: Educause,

This figure illustrates how KPIs can be used on the operational, business and corporate level in an organisation, but also showing that the information that KPIs give should be limited to the part organisation that uses it.

Controlling time, cost and quality in a project

The following sections on time, cost and quality control are based on "A guide to the project management body of knowledge"

The purpose of controlling time, cost and quality in a project is to monitor the status of the activities in order to update progress and manage activities in the schedule. The benefit of monotoring processes are that the project manager can recognize deviations in the schedule, and take actions based on this information.

In order to create the KPIs needed to monitor progress, several input factors should be considered:

- Management of the project work

- Project plan

- organisational assets

The figure is an simplification of the process flow diagrams used in the "A guide to the project management body of knowledge"

The KPIs needed for time management in these input factors should include information on the current status of the project, reviews of the current process, time spent in total or by an individual, adjustments to schedule, days spent or cycle times for repeated tasks/activities.

The KPIs for controlling cost management should include input factors that ensures that the project is done in a timely manner, and also ensure that the cost used to create benefits in the project is spent effectively

Due to the cost aspect is heavily affected by the project time, there will be a section covering both time and cost control.

Project Cost and Time Management

There are various ways of analyzing the different performances in a project, various techniques can be used in order to analyze the inputs:

• Trend analysis

Trend analysis evaluates project performance over time and shows whether performance is increasing or decreasing

A way to measure on trend analysis is through reporting/meetings, where the following questions should provide the necessary insights in the analysis of the project:

- Is the project aligned to its goal?

- Where are we compared to last performance check, did we improve? did we decline?

- Did the project minimize risks?

- Did the project maintain standards in planning and communication?

• Critical path method

If the project isn't progressing along the critical path there is Comparing progress along the critical path determines whether or not the progress of the project adheres to the current end dates in the schedule.

A way to track progress through the critical path is tracking progression with scheduling software, a simple example at how to set up a visual of the CPM is shown below excelPIC

• Earned value management

The earned value management is a method that combines scope, schedule and resources measurements to assess project performance through the following KPIs : Planned Value (PV), Earned Value (EV), Actual Cost (AC), Schedule Varians (SV), Cost Variance (CV), Schedule Performance Index (SPI) and Cost performance index (CPI). These KPIs show performances on cost, performance and time spent

• Planned Value (PV)

is the budget allocated to the physical work that needs to be accomplished for an activity or WBS component in the schedule. PV is often referred to as the Performance measurement baseline (PMB). The sum of each PV is also called the Budget at Completion (BAC)

• Earned Value (EV)

Measures work performed in terms of budget allocated to the scheduled work at the completion. EV is measured when comparing the value to PMB, the EV cannot be greater than the PV. EV is used to measure the progress of the work, and should be measured on each component in a project. EV can be used to monitor single projects, or be cumulative to determine long-term performance

• Actual Cost (AC)

Actual cost is the realized cost for work performed on an activity or WBS, and is basically the amount of money spent during any point of time in an activity.

• Schedule Variance (SV)

Schedule variance is a measure of performance indicated by EV and PV. Schedule variance is given by SV = EV - PV. Schedule variance is a measurement showing if a project is ahead or behind schedule and can be used at any point during the project.

• Cost Variance (CV)

Cost variance is the amount of deficit or surplus at any point during a project and display the cost performance. CV indicates physical performance to cost spent. CV = EV - AC

• Schedule performance index (SPI)

SPI is a measure of schedule efficiency as the ratio of earned value to planned value, SPI shows how time efficient the project is, an SPI < 1 means less work was completed than planned, and an SPI > 1 means more work was completed than planned. SPI = EV/PV

• Cost performance index (CPI)

CPI measures cost efficiency of budgeted resources expressed through the ratio of EV to AC. A CPI < 1 imply that there is a cost overrun, a CPI > 1 means a cost overrun. CPI = EV/AC

Project Quality Management

In order to control quality, monitoring and recording the results of quality activities are measured in order to assess performance and make necessary changes. The benefits of measuring performance are:

- Identifying poor processes or product quality

- Validating deliverables and work to meet requirements specified by key stakeholders (PMBOK 8.3)

The process of controlling quality should be used during the planning and execution phase of a project to provide the stakeholders with the quality they desire. Some key terms that the project management team should know of are:

- Prevention Keeping errors out of the process

- Inspection Keeping errors away from the customer

- Attribute sampling Does the attributes deliver the needed standards

- Variables sampling The result is rated on the degree of conformity

- Tolerances acceptable results based on a specified range

- Control limits common statistical variation in a stable process

The tools and techniques used to measure quality in processes and projects are:

• Cost-Benefit Analysis

The cost-benefit analysis compares each quality activity such as less rework, higher productivity, lower costs, increased stakeholder satisfaction and increased profitability to the expected benefit for each of the activities.

• Cost of Quality (COQ)

COQ includes all cost of conformance and non-conformance in the project. Failure costs for Conformance is often categorized as the internal cost of the project, while nonconformance are considered external costs, as these are found by the customer.

• Cause-and-effect diagrams

Also known as fishbone- or Ishikawa diagrams. The problem statement is used as a starting point of the analysis, the causes are found by asking why to every problem found until the root cause has been identified. The benefit of doing the cause and effect diagram is that the project team identify undesirable effects of the project in order to take corrective actions to eliminate the issues

• Flowcharts

Also referred to as process maps. These display the sequences and branching possibilities that exist for a process that transforms an input into one or more outputs. Flowcharts show activities, decision points, branching loops and parallel paths. Flowcharts provide a better understanding of activities in a project, which can be used to easier identify costs.

• Checksheets

Checksheets are used to organize facts in a manner that will facilitate the effective collection of useful data about potential quality problems. Checksheets are used to identify defects while gathering data.

• Pareto diagrams

A Pareto diagram combines bar and line graphs. The horizontal line show individual attributes that account for probability distribution, while the line graph show the cumulative total of probabilities. Pareto diagrams typically involve either frequencies or consequences

• Histograms

A Histogram is a bar chart showing tendency, dispersion and shape of a statistical distribution, the difference between a histogram and a control chart is, that a histogram does not include time as an influence on the distribution.

• Control charts

Control charts are used to determine whether or not a process is stable, this is done by defining upper and lower specification limits based on requirements from the agreement. The limits are determed using standard statistical calculations. If the process exceeds the upper or lower limit due to an unstable process there may be penalties.

The project manager can take corrective actions if a process is unstable in order to maintain stability. Control charts are mostly used for repetitive processes, but can also be used for monitoring cost and schedule variances or other management processes to determine if these are in control.

• Scatter diagrams

A scatter diagram is a plot of two variables (one dependent one independent), a scatter diagram is used to see if there is a correlation between the variables, the correlations can be either positive or negative, the correlation between two variables can be calculated using a regression line.

• Benchmarking

Benchmarking is a comparison between the project practices to comparable projects in order to identify best practices, generate ideas for improvement and provides a basis for measuring performance.

• Design of Experiments (DOE)

DOE is a statistical method for identifying factors that may influence specific variables of a product or process. DOE may also be used during the plan quality management process to determine the number and type of tests.

DOE is used to reduce the sensitivity of product performance to optimize a product or process. An important aspect of using DOE is, that it provides a statistical framework for changing important factors.

• Statistical sampling

Statistical sampling involves choosing a population of interest for inspection. The amount and size of samples should be determined during the plan quality management process, so the cost of quality includes the number of tests, expected scrap, etc.

• Brainstorming

Brainstorming is an information gathering technique with the goal of obtaining a comprehensive list of subjects relevant to the information needed. Brainstorming is usually performed with experts that are not part of the project team.

• Force field analysis

Diagrams of the forces for and against change. Used to understand each side of force and communicate reasoning for making the change.

• Nominal group technique

The nominal group technique is used to create ideas brainstormed in small groups to be reviewed by a larger group

• Quality management and control tools

These tools are used to sequence the activities identified in the process.

• Meetings

Project teams plan meeting to develop the quality management plan, the people attending these meetings should have an influence on the project and may include the project manager, selected stakeholders, people with responsibility for the project quality management plan.

Examples of KPIs in different businesses

Human resources (HR)

The following KPIs are based on a general strategy map for managing human resources, and are just a small sample of KPIs used in this field.

• % of training courses matching company requirements

This KPI focus on the earned value in the company, as the company have paid for improving the employee in a certain field, which in the long term should improve performance.

• motivation surveys

Surveys can be considered as checksheets, as these look at factors that can determine if there is a problem with the quality of work from the employee.

• retention of employees

Just like motivation surveys, retention is based on a checksheet, but with focus on employee happiness. Retaining talent in a company is an important metric to focus on.

• productivity

Is a cost based KPI, measuring the efficiency of the employees through revenue or other measures. (revenue/number of employees)

Measuring capability of subcontractors

The following KPIs are based on a survey evaluated by 40 large scale contractors in the turkish construction industry.

• Size of organisation and expertise of subcontractors

Can be measured looking at the amount of workers and the schedule performance index (SPI) of the subcontractor, this score will show how well the subcontractor performs according to schedule.

• Subcontractors reliability and reputation

Is a qualitative measure using attribute sampling, with importance on choosing the right attributes such as showing up on time and reviews of previous contractors, these attributes will be rated through scores of 1-5 for example.

• Quality of service and work supplied by subcontractor

This is a cost based KPI, where Earned value is used to show how the subcontractors work with the allocated budget. Another way to measure this KPI is using a cost-benefit analysis, this will show the subcontractor performs on each quality activity needed.

Benchmarking can be used in order to compare different subcontractors, where the purpose of doing this is to choose the best possible subcontractor.

Limitations

When creating KPIs it is important to consider several limitations before implementing KPIs, these limitations include strategic goals, limited focus on success factors and poor consideration of stakeholders needs and expectation.

Another issue with KPIs is how the information the KPIs are interpreted, if the data from a KPI cannot create a meaningful representation of performance, it cannot be used. KPIs are used to make informed decisions, so if the KPI does not produce or display the necessary information, the decision made would be based on a wrong basis.

Annotated bibliography

https://er.educause.edu/articles/2011/9/collaborative-development-of-key-performance-indicators : Case showing development of KPIs in an education organisation

http://cds.cern.ch/record/2276333?ln=en : Book on project management metrics and KPIs. (Preview link here : goo.gl/3yjBrY)

http://proquestcombo.safaribooksonline.com.proxy.findit.dtu.dk/book/software-engineering-and-development/project-management/9781935589679 : Book created by the project management institute to create fundamentals for PMs.

Links for the KPIs used in the article:

http://production.datastore.cvt.dk/filestore?oid=59d8da3e5010df606c0e5a9c&targetid=59a018365010df3cea59defa : Subcontractor KPI

http://www.cjournal.cz/files/89.pdf : HR KPIs