Potentials of Key Performance Indicators

Latest revision as of 13:14, 22 April 2019

Author: Gustav V. Josephsen - s154318 - F19

[edit] Abstract

The article concerns the topic Key Performance Indicators (KPI) and their use within an organization or a project team. The purpose is to introduce the reader briefly to the use of KPIs and how to define them for given project, program or portfolio.

KPI is a Performance Management System (PMS), which can be used independent of the project size and structure. KPIs can be used in the different workflows of Project, Program and Portfolio Management down to an individual level and help to ensure quality. KPI is used to track the progress of certain goals or sub goals within a business plan. By using KPIs the project manager can possibly help ensuring the time schedule is kept, the expenses are regulated, and the customer satisfaction is improved e.g. The effects of different assessments can be monitored and compared to other projects running the same KPIs. Benchmark analyses can thereby ensure quality of work and learnings can be gathered and shared with similar organizations, creating optimized workflows and services. KPI is used as a communication tool in order to create transparency and insights in the overall progress of the project. Communicated correctly KPIs can help motivate as well as inform employees and stakeholders of the development of the project. KPIs forms a quick overview of the current project. In order to choose the right indicators for a certain project it is necessary to have a clear scope of the business plan and measurable goals. By just adopting KPIs uncritically from one project – or from one organization to another - can result in analyses and benchmarks, which are not applicable for the current project. To see the full potential of KPIs it is important to have a clear idea of which assessments to measure and how. The optimal use of KPIs can help improve the efficiency and effectiveness of the organization and its future projects. ^[1]

[edit] Introduction

Key Performance Indicators (KPI) is a management tool, which is widely used in companies, organizations and other similar project teams. KPI is a tool to achieve a defined goal and help the development of an organization. KPIs are a set of measurable milestones with the purpose of keeping track of the progress towards a set of requirements. KPIs can be used to monitor the progress and performance of programs, projects, and products e.g. This way the project team can ensure that their work is focused towards the goals set ^[2]. KPIs often associated with the improvement of performance initiatives, because they can be used with other different project management tools in order to optimize workflows and routines.

[edit] Indicators

Indicators are datasets forming the foundation of measuring the performance of a certain project. In order to set up a KPI management tool, which can evaluate different progression aspects, indicators are needed as input. Indicators are the values needed for a comparison and evaluation of the current project status. This information is gathered through existing data, surveys, data generated from risk management tools, cost estimations, etc. The amount and quality of indicators gathered for e.g. a benchmark analysis can variate and affect the outcome of the comparison. For example, the size of the information pool doesn’t directly correlate with the quality of the output, demanding that the gathering of indicators must be structured thoroughly to achieve the best possible outcome for the project organization.

Indicators are information gathered in the past describing the project or assessments in retrospect. The use of indicators is defined as ‘’lagging’’, because future aspects are not taken into consideration. Contrary to indicators, future measurements or predictions are called prognosticators, which evaluates different possible outcomes. These are widely used in risk management ^[3]. Indicators a categorized in two different types:

Quantitative indicators

“Objective” measures, which do not take feelings and subjective opinions into consideration. Mostly consisting of larger pools of information, which often is based on numeric values from e.g. cost expenses.

Qualitive indicators

“Subjective” measures, which is based on personal opinions and are affected by feelings. Qualitive indicators are often gathered based on surveys to measure e.g. employee satisfaction.

If other organizations are running the same KPIs, the project manager may benchmark their progress and performance with similar projects. However, it requires that both projects are measuring the same indicators to have a valuable comparison. This can indicate if the project is on track or optionally ahead of schedule which further actions are to be made. The possible benchmarking of two similar projects form the basis of knowledge sharing and mutual learning bites.

[edit] Communication of KPIs

Dashboards can be used to display the KPIs of a project or organization e.g. to get a quick overview of the current status. Source: Own creation.

Indicators vary from project to project and must reflect the desired outcome. The amount of rotten fruit delivered to a supermarket can be a key performance indicator for the supplier to monitor their overall service performance – quantity indicator; where the customer satisfaction, when buying the fruit, can be a source of feedback for the supermarket – quality indicator.

When identifying indicators, it is important to the project team to have a well-structured and predefined business plan as a foundation for the creation of KPIs. The KPIs must reflect these requirements and be understandable, meaningful, and measurable^[3]. KPIs are not only a tool to make sure that the project is on track according to the business plan or other projects; it is also a form of communication. The project manager can improve employee insight and create motivation in the project involvement by communicating the workflow of KPIs correctly. Using KPIs to create a more transparent project process can help the work of stakeholder management e.g. by informing them the overall progress.

The communication of the KPIs is essential. KPIs can show negative results or create uncertainty if not communicated properly. KPIs not showing a positive result does not necessarily affect the organization negatively but can be used as a driver for work improvements. The form of communicating the KPIs is therefore essential to the desired outcome.

[edit] Defining KPIs

When defining KPIs for a certain organization, the measures found, must reflect the core business objectives of the project. To achieve the best outcome the indicators must be chosen in order to fulfill the requirements of the defined goal of the project. There are certain steps to work with, when defining the specific KPIs to fit the business plan^[4]:

Desired outcome

This is the overall goal for the project. For example, the goal could be “to increase the yearly revenue by 10%”. The desired outcome is not the outcome of the use of KPIs, but the specific target of the business plan.

Matter of outcome

This is why the desired outcome is important to the organization. There must be a-reason-why behind every step of a business plan and the matter of the outcome are to define the scope of the action. For example, by increasing the yearly revenue by 10% “the company will grow economically and additionally will be able to achieve higher quality of services for the costumers”.

Progress measure

In order to realize the goal a measure is needed to track the progress. This step is closely linked to identifying indicators by getting an interpretation of the process development. If the goal was to increase the yearly revenue by 10%, a progress measure could be to track e.g. the sale development monthly in dollars earned.

Influence of outcome

The influence of outcome describes which actions to be carried out towards realizing the goal set. To achieve an optimization in an organization’s business plan it requires a certain set of assessments working towards the final goal. These actions are to improve the efficiency of workflows or the business model. For example, a new communication- and promotion strategy could be applied to the services offered in order to achieve an increased revenue.

Responsibility of outcome

The task of improving the yearly revenue requires a person being responsible for the outcome to satisfy the requirements set. For example, the project manager, the CEO or the CFO can be assigned the responsibility. The task is to make sure that the project is realized in the end. This does not necessarily mean that they are in charge of controlling or leading the project.

Achieving the outcome

When different actions of the business plan have been carried out, the organization needs to define a set of measurements, which can tell whether the goal was achieved, partly or not. This works as an if-statement, meaning that if certain requirements are fulfilled, then the project has achieved its goal. For example, if the yearly revenue has increased with 10% in the end of the project time, then the goal has been achieved.

Progress review

Progress review is an interval-based review process of the progress measures to make sure that the business plan is followed. For example, the organization can have a weekly or monthly compliance meeting with the project progress on the agenda.

[edit] Defining the project workflow

A project manager can get a clear overview of which KPIs to realize within a project by defining the processes, inputs, outputs, constraints, mechanisms and feedbacks. Here follows an example of the different aspects. Inspired from “Environmental Management Systems”^[5]

These focus points mentioned above are to be taken into consideration, when creating the KPIs suited for a specific project, program or portfolio. When setting up KPIs and indicators it is important to have a clear overview of the different processes within the project.

To obtain a structured view of the different aspects and deliverables of a project, a possible method is to define the processes, inputs, outputs, constraints, mechanisms and feedbacks. KPIs can be based on the definition of the process system of a certain project, if a clear overview is made from the start.

The process is the primarily activity of the project, which tells the exact function of the project. This is the scope of the project, program or portfolio e.g. to be carried out. Various inputs are needed for the process to work. Inputs are essential for the process to function and form the foundation of the process. Throughout the process, inputs are transformed into outputs being the concrete outcome of the process. The output is the intentional desired gains or benefits from the process. For the process to function certain mechanisms are taking into use being the physical aspects of the process, which are to make the process run – people, tools e.g. The process is also controlled or constrained by different factors, which limits the process. This can be physical or administrative limitations e.g. lack of manpower or limited supplies. The entire model from input to output can be monitored and evaluated throughout feedback. This workflow represents the value proposition of the process and how it meets with the requirements of the work.

When having defined these six parameters for an upcoming project, the project manager has a simplified overview of the project structure. This way he/she can pinpoint, which aspects of the project are key essentials to the forthcoming workflows. Now the project manager can decide on, which processes should be monitored throughout KPIs and what criteria they should measure upon.

This is one method to work towards defining the right KPIs of a project or organization. There are numerus approaches and ways of defining KPIs and there is no one-size-fits-all solution.

[edit] The potential value of KPIs

KPIs works as a management mechanism, which can evolve around many aspects of a project, program or portfolio. By using KPIs the project manager can keep track of the quality of the different workflows regarding a project e.g. ^[2]:

• Quality of workflows and deliverables
• Customer/client satisfaction
• Efficiency & effectiveness
• Costs
• Time- and scheduling compliance
• General employee well-being

Instead of just setting a goal for a specific target to be obtained and hope for it to be fulfilled, KPIs are used to monitor the progress during the execution phase. This way the project manager can make sure, that the different projects, programs or portfolios are on schedule and/or on budget, by having the opportunity to measure and evaluate the current status.

Using KPIs inside a project organization can potentially have multiple purposes in order to optimize and reach certain goals. KPIs can help a project team by realizing and improving many different workflows. If used optimally KPIs can be a tool to achieve e.g. ^[2]:

• Transparency of the project for stakeholders and the team organization.
• Increased production and productivity in services.
• A clear and mutual set of expectations for the workflow and expected output.
• An individual understanding of the organization and its general work.
• Increased motivation for stakeholders and employees working towards a defined goal.
• A possibility for benchmarking and sharing of experiences with other similar companies or projects.
• Feedback on the general process and workflows regarding the progress of the project.

[edit] Limitations and challenges

KPIs can be a beneficial Performance Management System to regulate and monitor the progress of a project, but if not implemented and controlled correctly, the outcome of their use is less to none. The two main drivers of success, when using KPIs, is “benefit from the project and top management commitment” ^[6]. These two aspects regulate how the output of using KPIs is realized. There need to be a management commitment along with a purpose of implementing KPIs to have added value to the project.

The four main barriers of using KPIs is related to the “effort required, data accessibility, consequences of measuring and disruption by new initiatives” ^[6]. These issues need to be taken into consideration when implementing KPIs. The workload must be defined along with the data source. Certain amounts of data occupy a certain amount of manhours to process and evaluate. The quality of the data must also be reviewed along with the accessibility. If the data is not easy retrievable, it can be an obstruction to the input of the KPIs. Sometimes retrieving data can also have consequences if the information is sensitive to a person or organization e.g. The entire work, which evolves around data care and processing, is problematic if not handled correctly. The exposure of sensitive information is often a main concern and risk to a project and is to be treated with extreme care. Furthermore, new initiatives or changed conditions within a project can disrupt the entire use of KPIs. If a certain structure of workflow changes it can affect the KPIs, which are measuring the old workflow, and possibly make them irrelevant to the project. This risk must be taken into consideration when creating the desired KPIs to ensure they are not made inapplicable to the new changes.

Project managers also tend to adopt KPIs based on other projects. This way the idea of the KPIs are based on a possible comparison between the two. Though, this may affect the quality of outcome, because other projects’ KPIs may not fit the current project size, level or goal. KPIs can be used on an individual level and in project-, program- and portfolio management, but each different type requires different tailored KPIs. It is not necessarily the optimal KPIs regarding a certain project, even though they are similar in many ways. The choosing and definition of KPIs must first reflect the process and workflows of the project and not similar ones. Afterwards the project manager may have the opportunity of comparing KPIs, but they ought to fit his/her own project first in order to make the best possible use of KPIs.

[edit] General drawbacks

Some of the main concerns regarding project management tools also relates to the use of PMS’s. If KPIs is not treated and updated along the progress of the project, the main purpose of having them is undermined. Monthly or weekly reviews may be necessary to keep the KPIs up to date in order for it to stay relevant and provide useful information. Along with just leaving a PMS to die, not communicating KPIs correctly also erases their potential value to the project. There are no gains to be made if the communication strategy for the KPIs is not clearly structured and carried out correctly. The KPIs can hold important information to the project, but this cannot be realized if the communication strategy does not function properly.

Furthermore, adding KPIs to a project does not correlate with a better project. KPIs can be a very useful tool in order to realize greater deliverables from a project, but it does not secure an outcome of quality. KPIs is just a Performance Management System which can be a tool to managing projects on different levels. Therefore, having KPIs is not a necessity to realizing a great project, but can be a key factor if implemented and used correctly.

[edit] Bibliography

”The Standard for Program Management”, The Standard for Program Management — Fourth Edition (2017-10-01). PMI standards. Project Management Institute. ISBN 9781628253931.

The article mentions in which situations KPIs can be applied as a useful project management tool. It is shown in which context KPIs potentially are to increase the value of the project goal.

”Center for Lean”, Howbiz Management Consulting. Management tool to achieve structured strategy and ensure constantly improvement of main focus areas.'

The article summarizes the potential values of the right use of KPIs. It goes into the depth of the areas of project management, which can be monitored by the use of KPIs.

”Performance Indicator”, Carol Taylor Fitz-Gibbon (1990), Performance indicators, BERA Dialogues (2), ISBN 978-1-85359-092-4.

The article gives an overview of indicators used in KPIs. It is elaborated how to categorize indicators and to what extent, they are useful.

“Klipfolio”, Key Performance Indicator (KPI) – measure of performance against key business objectives.

The article explains the identification of steps towards defining KPIs for a project or organization. It is elaborated, which key points are to be focused on in order to structure the choice of KPIs.

”Environmental Management Systems”, Gilbert Dr. (2004), Processes, Inputs, Outputs, Constraints and Mechanisms. Faculty Development and Instructional Design Center, Northern Illinois University.

The article gives a brief introduction to defining processes, inputs, outputs, constraints and mechanisms in a project. Additionally, figures and examples simplify the work of identifying a project system.

“Limitations of Performance Measurement Systems based on Key Performance Indicators” Pidun, Tim and Felden, Carsten (2011).

The article explains the obstacles and drawbacks of implementing performance measurement systems focused on KPIs. The different barriers are outlined along with recommendations on how to avoid complications when implementing KPIs.

[edit] References

1. ↑ The Standard for Program Management — Fourth Edition (2017-10-01). PMI standards. Project Management Institute. ISBN 9781628253931.
2. ↑ ^{2.0 2.1 2.2} Howbiz Management Consulting. Management tool to achieve structured strategy and ensure constantly improvement of main focus areas. Retrieved 21. February 2019 from [1]
3. ↑ ^{3.0 3.1} Carol Taylor Fitz-Gibbon (1990), "Performance indicators", BERA Dialogues (2), ISBN 978-1-85359-092-4. Retrieved 21. February 2019 from [2]
4. ↑ Klipfolio. Key Performance Indicator (KPI) – measure of performance against key business objectives. Retrieved 21. February 2019 from [3]
5. ↑ Gilbert Dr. (2004), "Processes, Inputs, Outputs, Constraints and Mechanisms". Faculty Development and Instructional Design Center, Northern Illinois University. Retrieved 21. February 2019 from [4]
6. ↑ ^{6.0 6.1} Pidun, Tim and Felden, Carsten (2011), Limitations of Performance Measurement Systems based on Key Performance Indicators. AMCIS 2011 Proceedings - All Submissions. 14. Retrieved 27. February 2019 from [5]