Key Performance Indicators (KPIs)

Performance indicator is a type of performance measurement and is expressed as quantified amount, cost, or result of any process for indicating how much and how well the products or services are provided to customers during a given time.

Performance measurement involves determining what to measure, identifying data collection methods, collecting the data, and analysis of data. The major expected benefits for measuring performance are:

• To learn and improve 
• To control and monitor people & process 
• To report externally and demonstrate compliance 
  
 

Being in a digital era we have opportunity to access virtually unlimited data and several parameters which may or may not be useful to us. In case of business performance, there should be the indicators which can quantify performance of process and people and help management to plan, control and monitor improvement activities. Such selective indicators are called Key Performance Indicators (KPIs).

Key Performance Indicators (KPIs)

One part of the performance management process is to translate the future state of affairs into long and short-term objectives, output and outcome performance indicators and targets against which performance and progress can be measured (Mackie, 2008).

 

Key Performance Indicators (KPIs) are instruments / tools used in performance management that monitor the performance of key result areas of business activities, which are absolutely critical to the success and growth of the business (smartKPIs.com, 2010).

Nowadays, key performance indicators (KPIs) are common management tools that enable managers to better understand their business and improve performance. Although their terminology may vary from one company to another (performance indicators, performance measures or KPIs), in essence all these terms have the same meaning. According to The KPI Institute, a key performance indicator is a measurable expression for the achievement of a desired level of results in an area relevant to the evaluated entity’s activity.

The field of performance management is a relatively new area, where tools and techniques may not be very well structured and terminology is sometimes ambiguous. Bringing more clarity in regards to key concepts can reveal a more efficient way of using KPIs.

Selecting KPIs is an important step in the process of measuring performance. In order to ensure the right KPIs are chosen for each objective, managers should have a wide understanding on what KPIs are. KPI typologies present various ways to look at performance indicators and create logical clusters. Grouping KPIs on specific criteria provides more clarity in regards to what is measured in relation to the objective assigned.

In terms of developing a strategy for formulating KPIs, the team should start with the basics and understand what  organizational objectives are, what is the plan on achieving them, and who can act on this information. This should be an iterative process that involves feedback from analysts, department heads and managers. As this fact finding mission unfolds, team will gain a better understanding of which business processes need to be measured with a KPI dashboard and with whom that information should be shared.

 

The development and use of the KPIs should form the basis for the analysis of an organisation’s current performance, its future requirements and the improving strategies required for ongoing success.

 

The anatomy of a structured KPI includes:

 

• A Measure – Every KPI must have a measure. The best KPIs have more expressive measures.


• A Target – Every KPI needs to have a target that matches your measure and the time period of your goal. These are generally a numeric value you’re seeking to achieve.


• A Data Source – Every KPI needs to have a clearly defined data source so there is no gray area in how each is being measured and tracked.


• Reporting Frequency – Different KPIs may have different reporting needs, but a good rule to follow is to report on them at least monthly.

Why using KPIs?

• Perspective: KPIs indicate the health, improvement and / or success of an organisation’s strategy, project, process or area of service delivery


• Focus: KPIs are focused, relevant, measurable, repeatable and consistent


• Evaluation: measurement of critical success factors


• Management: support decision making process for performance management


• Strategy implementation: KPIs create a powerful linkage between the strategy and the initiatives / activities.

 

Typology

The usage of KPIs can range from measuring the achievements of a department in relation to a business area or the enterprise overall. Based on the impact stage, we can have:

 

• Input KPIs: used as input elements within a process or project, such as financial or human resources.


• Process KPIs: used to improve a process, its efficiency and results: time variance, budget variance, employees training etc. 


• Output KPIs: cost of a specific deliverable or functionality relative to plan, budget or benchmark, functional capacity relative to plan, budget or benchmark, usage factors, system downtime expressed as a percentage for all time and/or peak business hours etc.


• Outcome KPIs: customer satisfaction, stakeholder satisfaction - used as benchmark comparisons with comparable agencies or private sectors organizations.

 

Various attributes can be used in examining, selecting, designing and using KPIs:

• Financial / non-financial


• Customer / process / learning and growth (Balanced Scorecard perspectives)


• Lagging / leading / coincident


• Inputs / process / outputs / outcomes


• Binary / absolute / comparative / trend based

Example of a  KPI typologies is:

Qualitative vs quantitative – this is probably one of the most popular approach to defining KPIs. Usually, KPIs that measure personal traits and perceptions are considered qualitative, while the rest are quantitative. In practice, it all comes down to quantitative data when measuring a KPI, even if this data reflects qualitative aspects, such as opinions.

Examples:

• Qualitative: # Customer satisfaction index, # International corruption index, # Service quality rating;


• Quantitative: # Transactions processed per hour, % Orders delivered on time, # Production cycle time.

 

Rules for using KPIs

KPIs are a particular category of Performance Indicators and provide an organization with quantifiable measurements of factors that are important for long-time success. The skill in applying KPIs is in the selection of the optimum number and appropriateness of KPIs. This maximizes the benefit of using them whilst minimizing the cost of using them.

 

During the use and application of KPIs, certain principles should be taken in consideration:

• KPIs should not be an end in themselves, but be considered as an aid to management. They are a start to a proper informed debate that should lead to a plan for improvement.


• KPIs should be seen within their local context and have more a meaning as a comparison over time than as a comparison between organisations.


• A set of KPIs should be balanced. For example, measures of efficiency should be set against measures of effectiveness and measures of cost against quality and user perception.


• After being proposed and applied, KPIs should be reviewed and updated. The review determines the management utility of each indicator and the feasibility of getting source data for continuing use.


• The targeted performance description, which is described in measurable terms through the KPIs, must be deployed to the organisational level that has the authority and knowledge to take the necessary action (smartKPIs.com, 2010).

 

References

• Mackie, B. (2008), Organisational Performance Management in a Government Context: A Literature Review, available at: http://www.scotland.gov.uk/Resource/Doc/236340/0064768.pdf (accessed 12 December 2010). 


•  smartKPIs.com (2010), KPIs, KRIs, PIs, metrics and measures, available at: http://www.smartkpis.com/pages/context/info-i8.html (accessed 16 August 2010).


• smartKPIs.com (2010), Using KPIs, available at: http://www.smartkpis.com/pages/context/info-i13.html (accessed 16 August 2010).
• www.integratingperformance.com
  

Fundamentals of procurement

Procurement isn’t rocket science, it’s not brain surgery and it’s not curing illness, junior buyers have been told. 

For the most part, procurement is “absolutely about following a series of systems and processes” to identify, source and manage contracts, said Matthew Sparkes, head of financial services at the Crown Commercial Service (CCS), who describes himself as “not a procurement person by trade”.

What Is Procurement?

Procurement is the act of obtaining goods or services, typically for business purposes. Procurement is most commonly associated with businesses because companies need to solicit services or purchase goods, usually on a relatively large scale.

Procurement generally refers to the final act of purchasing but it can also include the procurement process overall which can be critically important for companies leading up to their final purchasing decision. Companies can be on both sides of the procurement process as buyers or sellers though here we mainly focus on the side of the soliciting company.

The Sri Lanka Government Procurement Guideline defines procurement as.

'Procurement means obtaining by Procuring Entities of Goods, Services or Works

by the most appropriate means, with public funds or funds from any other source 

whether local or foreign. received by way of loans, grants, gifts, donations. 

contributions and similar receipts. It would include purchase, rental, lease or hire 

purchase. including services incidental to the provision of the said Goods or 

Services or the execution of the Works'.

DEFINITIONS
Unless the Context otherwise requires, the following terms whenever used in these Guidelines have the following meanings:

“Bid or Quotation” 

means a formal offer by a potential bidder indicating the price and other terms at which the bidder agrees to provide the Goods or Services or to execute the Works, where the offer tendered by the bidder is accepted by the Procuring Entity.

“Foreign Funding Agency” Means any multi-lateral or bi-lateral agency which has entered/intends to enter into an agreement with the Government of Sri Lanka and is not limited to the World Bank, Asian Development Bank, Japan Bank for International Co-operation.

“Foreign Funded Project”

 means a project fully or partly financed by a Foreign Funding Agency.

“Goods” 

means commodities, raw materials, products, equipment and other physical objects of every description, whether in solid, liquid or gaseous form and electricity.

“Procuring Entity” 

means a Government ministry, provincial council, Government department, statutory authority, government corporation, government owned company, local authority or any subdivision thereof or any other body wholly or partly owned by the Government of Sri Lanka or where the Government of Sri Lanka has effective control of such body, that engages in Procurement.

Key Points

Procurement is the process of purchasing goods or services and is usually in reference to business spending.

Business procurement requires preparation, solicitation, and payment processing, which usually involves several areas of a company.

Procurement expenses can fall into several different categories, depending on the procurement demand.

Competitive bidding is usually a part of most large scale procurement processes involving multiple bidders.

How Procurement Works

Procurement and procurement processes can require a substantial portion of a company’s resources to manage. Procurement budgets typically provide managers with a specific value they can spend to procure the goods or services they need. The process of procurement is often a key part of a company's strategy because the ability to purchase certain materials or services can determine if operations will be profitable.

In many cases, procurement processes will be dictated by company standards often centralized by controls from the accounts payable division of accounting. The procurement process includes the preparation and processing of a demand as well as the end receipt and approval of payment.

Comprehensively, this can involve purchase planning, standards, specifications determination, supplier research, selection,financing, price negotiation, and inventory control. As such, many large companies may require support from a few different areas of a company for successful procurement.

Procurement Committee 

Some companies may even choose to hire a chief procurement officer to lead these efforts. A chief procurement officer can oversee the establishment of procurement standards, work with accounts payable to ensure procurement standard integration and efficient payment, and serve on procurement teams making procurement decisions when there are multiple competitive bids.

Overall, procurement costs will be integrated into the financial accounting of a business, as procurement involves acquiring goods and/or services for the revenue goals of the business.

Financial Accounting

Procurement processing can be divided and analyzed from several angles. Companies and industries will have different ways of managing the procurement of direct and indirect costs. Goods companies, as compared with services companies, will also have different ways of managing costs.

Direct vs. Indirect Procurement Costs

Direct spend refers to anything related to the cost of goods sold and production, including all items that are part of finished products. For manufacturing companies, this can range from raw materials to components and parts. For merchandising companies, this will include the cost at which merchandise is purchased from a wholesaler for sales.

For service-based companies, direct costs will primarily be the hourly labor costs of employees performing services. Procurement for items pertaining to the cost of goods sold directly affects a company’s gross profit.

By contrast, indirect procurement involves non-production-related purchases. These are purchases a company uses to facilitate its operations. Indirect procurement can involve a broad range of purchases including office supplies, marketing materials, advertising campaigns, consulting services, and more. Companies will generally have different budgets and processes for managing direct costs as compared with indirect costs.

Goods vs. Services Procurement Accounting

Procurement is part of the expense process for all types of companies, but goods and services companies account for revenues and costs differently. As such, accounting for procured goods will also differ from accounting for procured services.

Companies focused on goods will need to deal with the procurement of those goods as inventory. These companies place a lot of importance in this area on supply chain management. Service-based companies provide services as their primary revenue generator so they do not necessarily rely as heavily on a supply chain for inventory although they may need to purchase goods for technology-based services.

In general, the cost of sales for many service companies is based on the hourly labor cost of employees providing the service so procurement as a direct expense is not a major factor. However, service-based companies will usually have higher relative indirect costs because they typically deal with their own procurement as an indirect expense through marketing.

Special Considerations  

Competitive bidding is a part of most business deals involving multiple bidders. The competitive bidding process for goods is usually more simplified than for services. Procurement is also the term used for purchasing goods and services on behalf of the government which has its own bidding processes and requirements.

Competitive bidding for all types of goods generally involves proposals that detail the per-unit price, shipping, and delivery terms. Competitive bidding for the procurement of services can be more complex since it can involve a multitude of things including individuals involved, technology services, operational procedures, client servicing, training, service fees, and more.

In each case, the solicitor of bids chooses the supplier they want to work with based on both operational business aspects as well as costs. The solicitor is then responsible for accounting for expenses depending on the goods or services agreed to. Government agencies and large companies may choose to solicit procurement proposals on an annual or scheduled basis to ensure that they continue to maintain the best relationships for their business.

Tender Process and Notices

Any organization that wants to place an order after the inquiry is done, needs to fill out a tender. A tender is essentially an official letter that the organizations have to send for the procurement of the goods and services required on a large scale. For the execution of projects also tender notice is required. Thus, the tenders are filled when an invitation is received for bidding. In this, the organizations fill out their quoted prices in exchange of goods and services which are further subjected to stated conditions.

Preparing Tender Notices

A tender notice can be prepared in the form of tabular or serial or paragraph form. The tenders may be open to all the parties and are often done for pre-qualification purposes. They are meant for registered parties only.

While for the jobs that are funded through foreign assistance or loans which requires heavy technology or sophisticated machinery can be offered through global tenders.

Thus, the delivery details and the estimated value of services and goods are included in the tender. The bids that are made through tender are in non-transferable form. They are available in the form of documents, which are sold and printed only by the concerned authorities.

Further, these forms are divided into different sections which are dealing with commercial conditions and technical specifications of the product.

There is a difference between the tender and pre-qualification for a contract. Pre-qualification is completely different from a tender. It is not even a form of tendering. Because the document which precedes the tender is called pre-qualification. It is done to identify who are allowed to tender for the specific contracts.

Thus, an advertisement for pre-qualification does not mean an advertisement for tendering. Because pre-qualification just allows the organizations interested to express their desire in order to be eligible for a tender. Once the organization is pre-qualified for a particular contract than only it is eligible for that particular tender.

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