Key Performance Indicators: Of course! But for whom?
Management with key performance indicators: An important Business Intelligence (BI) success factor.
The success or failure of a company is rooted in its ability to recognize and define key performance indicators (KPIs) and to track and achieve them.
The faster and more accurate the company knows and analyzes its KPIs, the greater the chance of swiftly optimizing processes and thereby securing competitive advantages, such as in financial performance, customer satisfaction or quality assurance.
Leading with key figures in the context of Business Intelligence: What is important?
It is not important for success to have as many performance indicators as possible. Rather, those key performance indicators should be defined with those employees who can effectively work with them within their area of responsibility.
Employees must be able to control the individual processes for which they are responsible and recognize its performance at all times. This applies to the top management as well as to all departments, divisions and process flows in the company.
Importance of key figures for management
Leading with KPIs allows management to identify the direction of development and, if necessary, initiate corrective measures. Management is therefore required to gain knowledge of its own company KPIs.
The use of KPIs is, therefore, important for every company in order to avoid suddenly being confronted with situations that can be critical for the company due to missing or inappropriate analyses.
Changes as a reason for redefining key figures
A newly defined alignment of business processes, the analysis of strategic goals and the implementation of systems and organizational structures are often the initial spark to create a culture of continuously measurable improvements.
The basis for this is often the integration of Enterprise Resource Planning (ERP) with Business Intelligence (BI), Performance Management (PM) and Business Process Management (BPM). Their use and combination makes it possible to correlate business processes directly with KPIs and metrics.
Key Performance Indicators: Of course! But for whom?
Managing with KPIs is not reserved for management alone. On the contrary.
Every department, every division, every employee, every member of management, i.e., practically everyone in the company, has their corporate guidelines, which must be fulfilled and maintained and even improved through continuous monitoring. The definitions of individual KPIs vary greatly depending on the area and task.
Basically, every operational area in the company should be tailor-made and measured according to requirements. Too many parameters can have a counterproductive effect.
Here is an example of which KPIs can be useful for the individual areas:
The financial KPIs are based more on profitability and Return on Investment (ROI) indicators (earnings, cash flow, contribution margin, etc.) such as:
- EBIT: Earnings before Interest and Taxes This ratio has now also become standard for SMEs.
- EBITDA: Earnings before Interest, Taxes, Depreciation and Amortization Possible approximation of profit/cash flow profitability ratio, which is often used by small businesses.
- Liquidity: Being in a liquidity position — i.e., being liquid — means that an entrepreneur is able to pay his liabilities.
The key figures for production and operations, on the other hand, tend to include the following measures:
- Food cost
- Cost per occupied room
- Service level
Who defines the key figures as the basis for successful Business Intelligence?
In many companies, the definition and generation of key figures is delegated. This can be to individual employees or to a manager.
As long as management by KPIs is not anchored in the corporate culture, the chances of success are low because there are only those who are affected — not those involved. This culture must be exemplified from above.
You can find examples of key figures for your hospitality business here.
Beware of the trap!
Why defining key figures alone is not enough: Reports and summaries are the common means in most companies to generate meaningful information from the flood of data collected from various systems in the hotel.
In the best case, controlling delivers a huge amount of key figures to the individual departments. However, it is usually difficult to concentrate on the important key figures.
As a result, the information periodically supplied to managers often cannot be correctly assessed and interpreted, and the current questions are not answered. It creates a dangerous situation.
Frequent causes for a key figure disaster:
- The key figures are not sufficiently aligned with the strategy and goals of the company or department.
- The presentation and readability are difficult to understand for the average employee and are not clear and concise enough.
- The decision-makers do not recognize which key figure they need for what and which measures would be necessary for corrections.
- The lack of comparative figures to better interpret the range of impact.
Less is more: focus on KPIs
A company will be able to define a whole range of key figures, but each company must find out for itself which ones are really important. Restrict yourself to the key figures that are really important for your area of work.
You can reduce the scope of your KPIs by concentrating on the central success factors measured by only one KPI — the so-called Key Performance Indicators (KPI). They are the “key” to success. The KPIs are important for all those responsible at all levels in the company and are defined individually by each person for their own area of responsibility.
The following central questions arise:
- How are the success and performance of our department measured?
- How can the goal and success be recognized and achieved?
Business employees know the critical processes and influencing factors that are important parameters in determining the correct key figures. The respective key figures should be questioned periodically:
Is the determination of the key figure still time- and process-oriented? Is it still aligned with the goal and does it have clear informative value? If there is consensus and clarity in the team, a KPI can be defined or confirmed as a KPI.
Another way to reduce the amount of KPIs is to combine them into a balanced scorecard. For this purpose, certain key figures are reduced to a few weighted key figures according to defined guidelines. Corresponding information is available on the web.
KPI Dashboard: Key figures in real-time
In companies that are subject to constant rapid change today, the visualization of KPIs in the form of KPI dashboards has proven its worth. Such dashboards usually present the KPIs in a format that allows the employee to check their data and key figures in real-time.
Periodic reports, on the other hand, are usually created as specific snapshots and may lose their informative value due to the loss of actuality.
Whether leading with key figures also leads to the desired success depends primarily on whether the correct and meaningful key figures are defined in the company. The motto is: Less is more!
It is worthwhile to invest sufficient time in finding the key figures and KPIs. In the end, your Business Intelligence system is only as good as your key figures. The more accurate they are, the more effectively you can use them to optimize processes and gain competitive advantages.