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Monitoring performance

Monitoring performance

Monitoring Performance Monitoring performance is a sometimes overlooked part of the strategic planning process. It is nevertheless important to define the key performance indicators (KPIs) that will be used to track and monitor performance.

The most commonly used KPI’s tend to be financial KPI’s such as revenue, margin, profit and cash flow with actual performance tracked against planned performance along with variances.

There are two key issues with common practice:

  1. There are four types of KPI’s: leading, lagging, input and output. Financial KPI’s are outputs that tend to lag real underlying performance.
  2. You get what you measure. When a company focuses on short term financial performance, this is what it gets especially when bonuses are at stake. It is not unknown for the sales team to be encouraged to drag revenue from the following year into the current year under the mantra of ‘We will worry about next year, next year.’ A favourite trick of a no longer FTSE 100 Plc. was to sweet talk its key customers into paying invoices a few days early and to sweet talk its major suppliers to allow payment to be a few days late. Whilst this practice improved short term cash flow, the same game had to be played in subsequent years merely to stand still. Such behaviour does not create value.
Kaplan and Norton

In 1992, Robert Kaplan and David Norton proposed companies adopt a more balanced four perspectives approach to monitoring performance. The Balanced Scorecard was born. The four perspectives are:

  • Financial – how do we look to investors
  • Customer – how do customers perceive us
  • Business processes – what must we excel at
  • Learning and growth – how can we continue to improve and create value

A set of KPI’s are chosen to answer each of the four question prompts and monitor performance of the four perspectives.

When applying the Balanced Scorecard, it is helpful to colour code the cells of the resulting table of KPI’s over time i.e. green for improving, yellow for about the same and red for deteriorating.

Remember also that KPI’s are key performance indicators and do not fall into the trap of attempting to measure and monitor too much. Instead focus on the measurable and manageable inputs that drive the desired financial outputs.

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