Performance Measurement: Critical success factors and key performance indicators

Liesel Botha CA(SA) Senior lecturer: Management Accounting School of Accountancy, University of the Free State

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Measuring performance is a complex and intricate process, and might even be seen as a somewhat contentious matter by some. The reality is, however, that it forms a crucial part of enterprise strategy.

The CIMA defines performance measurement as: “The process of assessing the proficiency with which a reporting entity succeeds, by the economic acquisition of resources and their efficient and effective deployment, in achieving its objectives. Performance measures may be based on non-financial as well as on financial information.”

From this definition it follows that performance measurement is a process of determining to what extent the entity has achieved its strategic objectives. The information obtainable from this process will be of great interest to a variety of stakeholders and care should therefore be taken in deciding on what measures to use. Measures must be relevant and the benefit obtained from it must justify the costs of it.

The critical success factors should be identified. These are the factors that enable an entity to achieve its objectives. Critical success factors target those things that affect quality, cost, customer satisfaction, market share and increased revenues. Clear strategic objectives are a pre-requisite for critical success factors.

Performance with reference to critical success factors are measured using key performance indicators (“KPI’s”).  These KPI’s must adhere to the SMART criteria: specific, measurable, achievable/attainable, relevant and time-bound.

Consider the following example pertaining to a restaurant:

Restaurant ABC
Critical success factor Food quality
Key performance indicator No more than 5% returned meals per month.
Restaurant DEF
Critical success factor Food quality
Key performance indicator Improve food quality continuously

The critical success factor above would impact quality, customer satisfaction, and ultimately increased revenues.

 

 

An evaluation of the above KPI’s provides the following results:

ABC DEF
Specific Relates specifically to returned meals x “Food quality” in general is too vague. Returned meals, choice of supplier and inventory turnover is but a few role players in food quality.
Measurable 5% is quantifiably measurable x It does not provide a basis for measurement
Achievable/attainable 5% returned meals seems attainable x It is difficult to determine whether it is attainable without a basis of measurement
Relevant Returned meals are relevant to food quality x Continuous improvement of food quality is more of a repetition of the critical success factor
Time bound It relates to a specific time period – a month x No time period is specified

 

Restaurant ABC therefore has a well-defined KPI, whereas the KPI of restaurant DEF is not satisfactory in term of the smart criteria.

Determining critical success factors and key performance indicators is part of the foundation of all performance measurement systems. It should be noted, however, that the details of the critical success factors and KPI’s will depend on the objectives of the entity and a one size fits all approach to performance management will prove to be inefficient to say the least.