What Are Effective KPIS?

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In this article you will learn about effective KPIs and features of nicely chosen measures in various BSC categories. Read more on business performance evaluation and strategic planning with Balanced Scorecard. Check additional information about effective kpis.

What is the most important stage of Balanced Scorecard implementation? It is very difficult to answer this question as all stages are equally important, and any mistakes made at any stages will inevitably cause overall Balanced Scorecard failure. Indeed, if the initial decisions and actions are wrong Balanced Scorecard will provide top management and business owners with the wrong information, and thus they will eventually make the wrong decisions. For this reason it is very important to avoid most common mistakes and ask for professional assistance from those who have experience and skills in proper implementation of Balanced Scorecard.

As known, Balanced Scorecard has a very simple principle behind it. BSC evaluates company performance in order to assist top managers in strategic planning and visualize the chosen strategy. Evaluation process is possible due to measurement of key performance indicators or KPIs for short. These are measures that cover most important success factors for internal and external environment the company operates in. In other words, they demonstrate whether or not the company is doing OK in terms of strategic goals implementation. As already said above, every stage is important and choice, as well as evaluation of key performance indicators is an essential phase of successful Balanced Scorecard introduction and maintenance in the company.

Key performance indicators can tell much about current and what is more important future performance of a company. To begin with, such indicators are divided into four categories of Balanced Scorecard: financial, customer, internal business processes, learning and growth. Names of these categories speak for themselves, as they cover the most important aspects of running a successful business.

Secondly, key performance indicators fall into two groups: lagging and leading. Lagging indicators present past information about past developments and events. Leading indicators can suggest what might happen in future and what the company should expect from the market, competitors and itself. Let's name a few examples of leading and lagging indicators. Almost all financial indicators are lagging, i.e. they present information about what has already happened: sales rate, revenue growth rate, cash flow etc. Leading indicators look into future as they offer information about what will or might happen: customer satisfaction, number of contacts with customers, number of training sessions per employee etc. As you can see leading indicators evaluate current developments that influence financial results. For example, number of training sessions per employee may directly result in improvement of customer satisfaction which in its turn leads to sales rate growth. The exceptional importance of Balanced Scorecard lies in the fact that it evaluates both leading and lagging indicators that provide top management with the most complete information on company performance.

It should be mentioned that effective KPIs are not just randomly chosen measures, but carefully selected indicators that are really representative for the company. Key performance indicators must be measurable and easy to understand, especially for those to whom they concern. For instance, a sales manager must clearly understand cause and effect ties between number of contacts with customers and sales growth rate.

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