Chapter 7
Foundation Stones for Implementing Key Performance Indicators

There are seven foundation stones that need to be laid before we can successfully develop and utilize key performance indicators (KPIs) in the workplace. When building a house, you need to ensure that all the building is undertaken on solid foundation stones. Success or failure of the KPI project is determined by the presence or absence of these seven foundation stones (see Exhibit 7.1). They are so important that I can guarantee you will have limited success without them in place. I have witnessed far too many projects where well-meaning and talented individuals have compromised these foundation stones only to later suffer the fate of an underperforming KPI platform.

c07ex001 — **Exhibit 7.1** The Seven Foundation Stones in the Winning KPI Methodology

In the first two editions of this book, I came to the conclusion that there were four foundation stones; these have been extended by foundations stones numbered five to seven. The seven foundation stones are:

Partnership with the staff, unions, and third parties
Transfer of power to the front line
Measure and report only what matters
Source KPIs from the critical success factors
Abandon processes that do not deliver
Appointment of a home-grown chief measurement officer
Organization-wide understanding of the winning KPIs definition

“Partnership with the Staff, Unions, and Third Parties” Foundation Stone

The successful pursuit of performance improvement requires the establishment of an effective partnership among management, local employee representatives, unions representing the organization's employees, employees, major customers, and major suppliers. Implications of the “partnership” foundation stone include:

Recognition by all stakeholders that significant organizational and cultural change requires a mutual understanding and acceptance of the need for change and how it is to be implemented
Commitment to the establishment and maintenance of effective consultative arrangements with unions, employee representatives, and employees
Joint development of a strategy for the introduction of best practice and KPIs
Extension of the notion of partnership to include and involve the organization's key customers and key suppliers

If you want to improve satisfaction with your major customers, would it not make sense to sit down with them and ask, “What should we measure to better manage the delivery of our products and services to you?” If you want your key suppliers' performance to improve, would you not visit them and discuss your expectations? What is important to you? What do you want to measure?

“Transfer of Power to the Front Line” Foundation Stone

Successful performance improvement requires empowerment of the organization's employees, particularly those in the operational “front line.” Although this has been discussed in many management books, the guiding lights in this area are Drucker, Peters and Waterman, and Hamel, and I recommend that the reader become familiar with their work.

Implications of the “transfer of power” foundation stone include:

Effective two-way communication	The operation of effective top-down and bottom-up communication, including a welcoming of candor with staff being able to challenge and pass up observations that may well be bad news (e.g., no longer is the messenger of bad news shot; now they are rewarded)
Empowerment	The empowerment of employees to take immediate action to rectify situations that are negatively impacting KPIs (e.g., able to authorize the doubling of cleaning staff to speed turnaround time for an anticipated late plane)
Devolving responsibility	Devolving responsibility to the teams to develop and select their own performance measures and to make more decisions
Training	Provision of training on empowerment, decision making, KPIs, the organization's critical success factors
Lean and Agile methodologies	Exposure to Lean and Agile methodologies
Awareness of learning difficulties	Additional support for those employees with literacy, numeracy, or other learning-related difficulties

Example: Empowerment at a Car Manufacturer

Leading car manufacturers have long realized the importance of empowerment. When staff members on the production line see a quality defect, they place a tag on it. If they have time, they will start to fix it. The next person on the line spots the tag and, after completing designated tasks, also carries on the rectification work. When the next operator realizes that the fault cannot be fixed before it will be covered over by the installment of the next panel, he or she simply pulls the “cord” to stop production in that section. Management then organizes the fixing of the fault and restarts the line. They investigate whether the decision to stop the line was correct. If not, they see it as a failure of the training, not the fault of the individual, and simply discuss the matter with the staff concerned. The ability of staff to stop a production line without consultation is a high-level form of empowerment. The key to the success of this method is that staff members are not only empowered, but feel confident to make the decision to stop the production line.

“Measure and Report Only What Matters” Foundation Stone

It is critical that management develop an integrated framework so that performance is measured and reported in a way that results in action. Organizations should be reporting events on a daily/weekly/monthly basis, depending on their significance, and these reports should cover the critical success factors.

Implications of the “measure and report” foundation stone include:

Abandon ineffective reports	Every report should link to a success factor or critical success factor; no report should exist because it was done last month and the month before. We should adopt Peter Drucker's abandonment mantra.
Measures to have a reason to exist	We should measure only what we need to. Each measure should have a reason for existing, a linkage to a success factor or critical success factor.
Leads to action	What gets reported should be followed by action. The chief executive officer has to commit to making phone calls: “Pat, why did BA235 leave 2.5 hours late?”
Lean reporting	There needs to be a major revamp of reporting embracing the lean movement. It needs to be more concise, timely, efficient to produce, and focused on decision making.
Data visualization	Reporting should be prepared in accordance with the work of Stephen Few, the leading light in data visualization.
Bottom-up	Organizational performance measures will be modified in response to the performance measures developed at team level, e.g., a bottom up process.

A great exercise to perform in an organization is to ask the chief executive officer to write a memo, requesting all staff and management to provide one copy of every report they work on in a given month. A person is designated to gather the reports, to ensure all management and staff have sent in their reports, and to weed out the duplications. In some organizations, the pile will be over four feet high. Put all the papers in a see-through container, and then make a container a quarter of the size and announce that this is the total amount of reporting allowed.

“Source KPIs from the Critical Success Factors” Foundation Stone

Critical success factors should be the source of all performance measures that really matter: the KPIs. It is the critical success factors and the performance measures within them that link daily activities to the organization's strategies. The critical success factors impact 24/7 on the business; therefore, it is important to measure how the staff in the organization are aligning their daily activities to these critical success factors. I believe the main purpose of performance measures is to ensure that staff members spend their working hours focused primarily on the organization's critical success factors. The traditional balanced scorecard approach, however, sees the purpose of performance measures as helping to monitor the implementation of the strategic initiatives. There is, thus, a significant difference in how measures are produced in “winning KPIs” methodology and that of the traditional balanced scorecard approach. This will be explained in subsequent chapters.

Implications of the “source of KPIs” foundation stone include:

CSFs more important than strategic initiatives	An organization's critical success factors are more fundamental to an organization than its strategic initiatives. An organization can still succeed without a well-formulated strategy, and many do.
Primary role of measures	The primary role of performance measures is to help the workforce focus on the critical success factors of the business, day-in and day-out. Other methodologies see the primary purpose of performance measures as monitoring the implementation of strategic initiatives.
CSFs come first	Before KPIs can be found, the critical success factors have to be determined in the process outlined in Chapter 11. If a measure is not linked to a critical success factor, it will not be a KPI and is unlikely to be very important to the organization and, therefore, should be screened for potential abandonment.
Linkage to CSFs	The KPIs, performance indicators, result indicators, and key result indicators that an organization is using should all be linked to either a critical success factor or a success factor. The database of measures that an organization utilizes should record this linkage.

“Abandon Processes That Do Not Deliver” Foundation Stone

This is a new addition to the four foundation stones mentioned in the first two editions of this book. The need for this foundation stone came about as a result of ferociously reading Peter Drucker's work, especially Elizabeth Haas Edersheim's interpretation.¹ I knew that if I absorbed his work, I would be able to improve my understanding of performance management.

Of all of his legendary insights, “abandonment” stands head and shoulders above them all. Drucker saw abandonment as the vital source, the fountain of innovation. Abandonment is a sign that management is recognizing that some initiatives will never work as intended, and it is better to face this reality sooner than later. It is essential that the organization has freed up enough time to give the KPI project and the attendant balanced scorecard the time and commitment they deserve.

Implications of the abandonment foundation stone include:

Abandonment day each month	Create an abandonment day each month during which teams report back to the organization on what they have agreed to abandon.
Measure the abandonment rate	Measure the abandonment rate, which will be significant for the CEO.
Abandoning all dysfunctional performance measures	In some circumstances, it would be worth abandoning all performance measures in an organization and restarting the exercise basing performance measures on the critical success factors. Some measures will no doubt be reinstated, but many will remain discarded.
Abandon reports	Abandon reports that are completed the same way they were last month and the month before, with nobody reading them. Every report should have a small box, on the front page, explaining how it is relevant to the organization's critical success factors and strategy.
Abandon meetings	Abandon meetings that have become a ritual, held because they were held last week and last month, and yet the action points are never cleared. They just fall off the “to-do” list over time. Every meeting should have a clear statement explaining why it is in existence, a record of what action it has taken, and the cost per hour to the organization.
Abandon broken-down balanced scorecards	Abandon the existing balanced scorecard and any balanced scorecard software if the scorecard is not working. The scorecard application may be able to be recycled by the KPI project team.
Abandon projects	Review the current projects schedule for projects that are no longer appropriate or needed.
Abandon performance-related pay linkage to annual targets	Performance-related pay, when it is linked to annual targets, will either be too easy or too hard—see Appendix A for some guidelines about how it should be restructured.
Abandon the annual planning process	The annual planning process, as it is currently set up, is only an annual political event serving no purpose. Visit www.davidparmenter.com for an explanation of quarterly rolling planning.
Abandon performance reviews	Annual or twice-yearly performance reviews—nobody likes receiving them, the managers hate preparing them, and they do not help with remuneration. Managers should be giving regular feedback to their staff, and this should occur at least once a month.

“Appointment of a Home-Grown Chief Measurement Officer” Foundation Stone

This is a new addition to the four foundation stones mentioned in the first two editions of this book.

There needs to be a new approach to measurement that is done by staff who have been suitably trained: an approach that is consultative, promotes partnership between staff and management, and finally achieves behavioral alignment to the organization's critical success factors and strategic direction.

I have been working with performance measures for many years and have spent untold hours endeavoring to unlock their secrets. Over the years one thing has become abundantly clear: you need a measurement expert in-house. Dean Spitzer ² called this the chief measurement officer.

I have now come to the conclusion that I have not emphasized enough the importance of this in-house resource in my earlier work.

Implications of the chief measurement officer foundation stone include:

Full-Time Responsibility	In most of the implementations I have observed, my advice to appoint a KPI team leader and make him or her, where possible, full time, has been compromised due to workload commitments. In every case this has delayed and put the project on the back foot. For organizations with over 250 full time staff this position should and must be full time. In small organizations this duty must be at least half the workload with much daily operational activity reassigned so that the incumbent has a chance to focus and create some momentum in the project.
In-House Appointment	Peter Drucker said, “Never give a new job to a new person.”³ He called it a widow maker. When an organization wants a new system implemented, it is very tempting to hire someone who has the requisite expertise: a consultant or a permanent appointee. Drucker pointed out that they do not stand a chance as staff who are concerned about the change will do their utmost to destabilize the project.
	Instead you need to appoint an in-house person best suited for the role: someone who is well respected in the organization, who has a pile of “I owe you” favors that they can use when support for the new initiative is required.
Reporting Line	The position would report directly to the CEO, as befits the knowledge and diverse blend of skills required.

Performance measurement is worthy of more intellectual rigor in every organization that is on the journey from average to good and finally to great. The chief measurement officer would be part psychologist, part teacher, part salesperson, and part project manager. Only when we have this level of expertise within the organization can we hope to move away from measurement confusion to measurement clarity. The chief measurement officer would be responsible for:

Testing measures for value	Testing each new measure to ensure the dark side is minimal.
	Vetting and approving all measures in the organization and eliminating those that are duplicated, worthless, have a negative cost benefit, and so on.
	Consulting with staff so that there is some idea of the possible unintended consequences of the measure. The officer has to ask staff, “If we measure XXX, what action will you take?”
	Piloting the performance measure to enhance its chance of success.
Overseeing measurement	Leading the KPI team and any balanced scorecard initiative.
	Developing and improving the use of performance measures in the organization.
	Promoting the abandonment of measures that do not work.
Resident expert	Learning about the latest thinking in performance measurement including work by Stacey Barr, Dean Spitzer, Paul Niven, Kaplan and Norton.
	Being the resident expert on the behavioral implications of performance measures.
	Replacing annual planning with quarterly rolling planning.
	Revitalizing performance-based pay by basing it on solid, well-thought-out foundation stones.

See Appendix B for a draft job description for this position.

“Organization-Wide Understanding of the Winning KPIs Definition” Foundation Stone

This is a new addition to the four foundation stones mentioned in the first two editions of this book.

After working over 20 years analyzing what makes KPIs work, I have realized that unless the organization embraces the new definition of what a KPI is and what it is not, the progress will be limited very quickly. I have repeatedly found that, once the organization has held the two-day critical-success-factor workshop, staff who have gone back to their offices soon start to call all measures KPIs again.

It is vital that the senior management team, led by the CEO, communicate the new meaning of a KPI and that all breaches of the term “KPI” are quickly picked up and corrected by staff and managers.

Implications of the “organization-wide KPIs definition” foundation stone include:

KPI definition	Key performance indicators (KPIs) focus on the aspects of organizational performance that are the most critical for the current and future success of the organization.
KPIs are organizational based	Teams will only have KPIs in their area if a KPI is significant to the organization.
KPIs are operationally focused	Most measures used by teams will be PIs and RIs. Head office teams such as Finance and IT are unlikely to have a KPI as these are largely in operations.
Two groups of measures	The understanding of the two groups of measures, result indicators and performance indicators, will need to be conveyed to all managers in training sessions. Staff will need to be able, with the help of the KPI team, to segregate measures into KRIs, RIs, PIs, and KPIs.