Choosing a Good KPI? (Part 1)

Not everything that can be counted counts, and not everything that counts can be counted.

Albert Einstein

One question we often get is what is a good performance measure? While you could simply Google “performance measure” (or more typically “KPI”) and this will give you a surprising number of responses.  But a word of warning before you click those links.

While performance measures are central to a Performance Based Contract (PBC), and the associated Performance Management Framework (PMF), instead, we would ask you to think about the intended purpose of the performance measure. What do you want it to do?

So before we choose our performance measures we need to look at the role of performance measures in a PBC? Kenneth G. Charron in his 2006 article on “Why KPIs Belong in Supply Chain Contracts” suggests that:

  1. Performance Measures establish set up the buyer’s expectations in terms of performance
  2. Performance Measures can provide an incentive for the seller
  3. Performance Measures can offer an objective way to assess performance
  4. Performance Measures result in more consistent performance
  5. Performance reports will enable the buyer to compare the performance (Benchmark) of one seller to other sellers of the same services—past, present, and future
  6. Performance reports can help identify the cause of on-going service failures
  7. Performance reports can increase buyer communication and improve service over time
  8. Performance Measures can help organisations avoid or reduce the number of disputes and the resulting costs

Alternatively, having run many PBC courses and workshops we ask this same question with answers generally focused on:

  • Reducing contract price
  • Improving contract performance
  • Adjusting contract payment based on seller performance
  • Understanding commercial issues

But is this true?  Do simply having performance measures lead to these outcomes (e.g. improved performance)?  You have probably seen contracts with performance measures in them.  Did the existence of performance measures lead to better outcomes and was it simply having performance measures, or were there other aspects as well?

The intent of performance management is to ensure that requirements are consistently being met in an effective and efficient manner regardless of whether this is related to the performance of an organisation, process, employee, etc.  Performance management includes the process of setting performance expectations, monitoring performance, measuring results, and appraising and rewarding satisfactory performance.  A best practice performance measurement system will, at a minimum, be composed of the following elements:

  • formal, organised structure for performance measurement and reporting;
  • clearly defined roles, responsibilities and accountabilities for performance measurement and reporting;
  • well documented data quality standards and expectations for performance information, including monitoring and quality assurance procedures, which are clearly communicated across an organisation; and
  • assurance arrangements which may, for example, be in the form of approved data dictionaries that include adequate documentation of data sources, collection methods, standards and procedures with clearly spelt our calculation/costing methods, assumptions, etc.

So while a critical element are the performance measures, they are not the only element needed to drive behaviours.  Indeed, our approach to PBC describes 2 distinct parts to a PBC; the requirements and the consequences. As you can see from the above list most people believe that a performance measure delivers both. But do performance measures do both?  For example, if a seller exceeds the buyer’s performance requirement and is eligible for an incentive payment, is it the performance measure that pays the incentive?

In summary, before you simply take that list of ‘KPIs’ from google it is critical you understand what you are using the performance measure for and how it links to the other parts of the PBC.

In the next part of this series, we’ll look at the process for choosing and checking you have the right performance measures.

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