Managing with KPIs and KRIs Prepared for: StratexSystems Webinar Series 1 November 2012.

Managing with KPIs and KRIs

Prepared for:

StratexSystems Webinar Series1 November 2012

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The objectives of this session are:

Introduce 3 types of indicators

Discuss the steps taken in defining indicators

Provide ‘knowledge transfer’ to give you the skills and tools to define indicators

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The Balanced Scorecard was introduced in 1992 which led to an explosion in the use of indicators

“What you measure is what you get”

Raison d'être for Balanced Scorecard was to provide a ‘balanced’ set of performance measurements.

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The credit crunch and subsequent fall-out is rewriting the rules on strategy execution (and risk management)

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Firms need to take an integrated approach which enables sustainable strategy execution

Performance Management

Risk Management

Strategy Management

Appetite

What are we trying to achieve?

Are we on track?

What is our Risk Appetite?

Are we operating within appetite?

Governance & Communications

Culture

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Such an approach must be underpinned by a ‘conceptually sound’ data model

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Objectives

KPIs Actions Key Risks

KRIs Actions Assessment Key Controls

KCIs Actions Assessment

Events

Certification

Risk Appetite

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What is an indicator?

An Indicator is a numeric value produced through the combination of measures which provides business insight.

Indicators inform management discussions and provides an indication of past, present or future state of the business, from a perspective of: Performance (KPIs) Risk (KRIs) Control (KCIs)

Defining indicators and measures enables: more focused and timely responses to emerging issues better informed business decisions

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Indicators and Measures – What is the difference?

What is a measure? A measure is a business value or fact which is generated

as a result of the activities of the business. Net Income (£) is a measure. It tells us the Net Income in

£ terms generated by the business activities.

What is an indicator? An Indicator is a numeric value that is produced through

the combination of measures which provides business insight.

Expressed as %’s, ratios etc. Indicators inform management discussions and provide an

indication of past, present or future state of the business. Net Income (£) as a % of target

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The three different types of indicators answer different questions

Key Performance Indicators An indicator which enables an organisation to define its performance targets

based on its goals and objectives and to monitor its progress towards achieving these targets.

KPIs are used to answer the question: “ Are we achieving our desired levels of performance? ”

Key Risk Indicators An indicator which is used by organisations to help define its risk profile and

monitor changes in that profile. KRIs are used to answer the question: “ How is our risk profile changing

and is it within our desired tolerance levels? ”

Key Control Indicators An indicator used by organisations to define their controls environment and

monitor levels of control relative to desired tolerances. KCIs are used to answer the question: “ Are our internal controls

effective? Are we ‘in control’? ”

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Types of Indicators

There are primarily two types of indicators, Leading and lagging (As a rule of thumb a good mix is a ratio of 2:1).

Leading indicators are those indicators that provide an early signal/early warning that the standards set/agreed in the business will or will not be achieved. They are input indicators.

Lagging indicators are those indicators that provide a signal that the desired outcomes/targets have or have not being achieved by the business. They are outcome indicators.

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The three different types of indicators should be related and can be reused

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A simple example of reuse of indicators across indicator types

Defining Indicators

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Basic steps in defining Indicators

Step 1 – Set the ContextStep 2 – Develop a ‘long list’ potential indicators and

measures Understand the difference between SHOULD, COULD and

ARE Step 3 – Evaluate Indicators and indicator combinations to

determine the ‘vital few’Step 4 – Operationalise your chosen few, recognising this is an

iterative process and they will change.

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Step 1 - Set the Context

Are the Objectives, Risks, Controls defined? How well?

Have you undertaken a consolidation/refinement process across your ‘entity’?

Are your objectives clear, well articulated, well understood?

How many risks and controls are you managing? Is there an explicit linkage to objectives?

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Step 2 - Develop a ‘long list’ potential indicators and measures

Understand the difference between What should our indicators be? What could our indicators be? What are our current indicators?

Avoid the natural trap of using existing indicators and measures, or those that are easy to measure.

Balance the need to ‘navel graze’ against the need for action.

Ask your entity head – what is important and why? Ask experts, consult industry benchmarks, Google. Be cautious when using ‘off the shelf’ indicators and

measures.

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Step 3 – Evaluate Indicators, and indicator combinations to determine the ‘vital few’

Good Indicators should be 1. Focused2. Objective3. Balanced4. Fact-based5. Owned6. Practical

SMART Indicators

SpecificMeasureableActionable & AlignedRealisticTime framed

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Step 4 – Operationalise your chosen few, recognising this is an iterative process and they will change. Defining Indicators can become a time consuming

process – don’t attempt to develop a ‘perfect’ set! Adopt an iterative approach. Accept they will and should change. Use initial set of indicators for approximately 3

months (3 cycles) then review.

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Defining an indicator… capture key data

Governance and ownership

Meta data about the indicator

Baseline and Thresholds

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Indicators are scored using a simple, 3 colour RAGAR approach

Out of control. Take action now!

Out of tolerance. Monitor , action may be required.

Within tolerance. Learn the lessons and disseminate

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The different indicators types enhance the ‘standard’ Strategy Map

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Risk Maps and other high level visualisations of data are important

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Each of the indicator types can be included within a separate scorecard

Strategy Scorecard

Risk Scorecard

Control Scorecard

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Example Front-page for a board report

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Example Indicator Dashboard

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Example Indicator Accountable Dashboard

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Example Detail Indicator Dashboard (via SharePoint)

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Exmaple Indicator Healthcheck

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Q&A

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About StratexSystems

“StratexPoint enabled us to reduce the value of our operational losses by 94%, the volume by 63% and our economic capital provision by 23%” - Head of Operational Risk, HML - Skipton group

Our missionTo provide an integrated strategy and risk management solutions which enhances strategy execution, enhance capital efficiency by 15% and reduce operational losses 25% while providing 100% confidence that your business is operating within appetite.

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Our solution enables our clients to “control their risks while executing strategy”

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End

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Additional Slides

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Good indicators are focused

Providing a ‘signal’ on specific, desirable results or outcomes.

Articulating the indicator as a true indicator, rather than a measure provides focus. Rather than ‘Total Operational Losses’ consider

Operational Losses as a % of Revenue Can work in isolation or in combination with other

indicators.

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Good indicators are Objective

There should be no ambiguity as to what the indicator is measuring.

There should be general agreement on how the indicator should be interpreted.

Documenting the indicator with notes, rationale etc.

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Good indicators are Balanced

Generally should use a combination of Leading and Lagging indicators.

Use a combination of financially and non-financially orientated indicators.

Consider your total number of indicators and their balance between performance, risks and controls.

• Sometimes a single indicator can be ok!

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Good indicators are Fact-based

Where possible, indicators should generally use ‘hard’ facts / numbers.

Fact-based indictors are not as open to interpretation or ambiguity as ‘soft’ numbers.

However ‘soft’ facts and ‘gut’ feel have a vital role to play in decision making. They should supplement ‘hard’ facts via management discussions.

Good example: Net Promoter Score

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Good indicators are Owned

Indicators use a partial RACI (Accountable inferred from the parent Performance, Risk or Control)

Indicators have an updater, if manual. Indicators can have an approver (often this is the

accountable of the parent Performance, Risk or Control)

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Good indicators are Practical

An indicator is only practical if data can be collected in a timely fashion, at a reasonable, acceptable cost... Or there is a plan to make this happen!

Indicators should inform the organisational discussion.

Indicators should focus on the ‘vital few’ - it is not practical to have indicators for everything.

It is not practical (or desirable) to have indicators for everything or to develop a perfect set of indicators.