Key Performance Indicators as a tool to add value

SSON News and Analysis
Posted: 07/09/2012

Sometimes, by wrapping Service Level Agreements (SLAs) and key indicators of performance (KPIs) together, there is a risk that KPIs are seen purely as a tool to enable service users and stakeholders to validate that the performance meets the basic needs of their area of the business and for service providers to be able to check they have achieved satisfactory output. Whilst there is a clear need to fulfill those functions, there is much more potential in the humble KPI.

It is possible to identify three main applications for KPIs...

  1. Governance and management of the relationship between service provider and service user.
    Most veterans of Shared Service and Outsourcing projects will have plenty of horror stories of the disputes and conflicts (in both directions) between Shared Service Centers and the distributed business units that use their services. At the very least KPIs provide for some factual arbitration of the "service is getting worse" – v- "service is getting better" arguments. Fully utilized, they provide the foundations of strong governance and can even enable performance based charging.    
  2. Reporting to executive management
    As this is often for the same executive management that provides sponsorship (and funding) for the program there may be a temptation for program leaders to emphasize (even over-emphasize) the importance of KPIs for reporting successful achievement in order to secure that sponsorship. The risk of this approach is that many executives may not attach great importance to having their own KPI driven reports to read particularly if they haven’t had anything like the same level of performance reporting from the previous organizational structure.

    The following use of KPIs needs to raise its profile and really shape their design and usage:
  3. Managing the Shared Service Center

Even without relationship management or executive reporting (yes, there are organizations that don’t see the need for either), KPIs are absolutely essential for SSC leaders to maximize the effectiveness and efficiency of the center.   

When thoroughly planned and included at the onset of any Shared Services program, KPIs can reflect the drivers within the original Business Case, monitor the added value of the SSC and, most importantly, provide a tool for the SSC management that indicates areas for improvement and records achievement against that.

The focus of effective SSC management has to be a mix of maintaining absolute consistency with continuous improvement and innovation. The apparent dichotomy in that mixture can be solved by ensuring that the innovation and change is based on closely measured steps. KPIs enable that measurement.

If KPIs are used to measure strengths and weaknesses in performance they will highlight potential areas for improvement not only in those weaknesses but also in the progressive growth of strengths. Armed with the same KPIs to track the impact of change over time, the SSC manager has the ability to monitor and control that impact and ensure that any risk to the overall consistent process delivery quality is minimized. Taking this approach utilizes the KPIs as measures of overall ongoing performance across the operation and as monitors of the successful impact of steps taken to improve.

Having identified the potential of the role of KPIs in managing and improving the SSC the next step is to determine the content in order that it maximizes opportunity and that the KPI output can be understood in terms of the value of the opportunity and the level of achievement of that value. The big question when specifying KPIs and the data collection necessary to support them is "what shall we measure?". Frequently, the answer is provided by the provider/user discussions as the SLA is drafted rather than the needs of the SSC’s own management, bringing us back to the issue of KPIs purely establishing that performance meets basic requirements rather than maximizing potential. Even if users/clients are happy, further reduction in cost and higher than expected performance may be highly advantageous to the provider. Cost benefits may be retained or shared and performance quality benefits, if proven to add value, may produce opportunities for increased charges. So, an element of looking at KPI design from a cost/value perspective starts to become attractive.

As mentioned above, a good place to start may be the business case and associated operational costing of the SSC. This should illustrate the expectations for the cost of providing the functions to be undertaken and the scope and transactional volumes of those functions. In simple terms it should be possible to extract the cost per item (whether that is per invoice, per business unit close, per ledger entry or whatever). Some of the KPI design can then be focused on monitoring the build up of that cost (resources deployed, speed of process, etc.). There may even be an opportunity to simply reduce the number of transactions whilst maintaining the cost per transaction. For example, in the Order to cash area the number of transactions raised may include not only invoices but also credits for corrections and re-bills. By reducing the requirement for credits and re-bills the reduction in transactions may be mirrored by a reduction in cost. Similarly, establishing whether there is a relationship between accounts payable invoice line items and processing cost per invoice may enable changes to supplier invoicing that reduce processing time and cost. There are many potential ways to reduce workload as well as ways to reduce cost per item.

Monitoring and valuing potential improvements in the quality of performance is perhaps more difficult. Obviously, errors, issues, reworking, etc. are objectively measurable but quality beyond basic requirements can also be reflected in the more subjective recording of user satisfaction. Translating improvements in these areas to potential added value needs to be a mixture of cost per transaction calculations as above plus reasonable estimation of the opportunity value in improving user perception, perhaps including the anticipation of time and cost saving in user/provider interaction and stakeholder management.

With a set of KPIs focused on SSC management and improvement opportunities, supported by consistent reporting and interpretation, it becomes possible to identify those opportunities, consider action to implement improvement, value the opportunities and create a financially robust business case for that implementation. That business case can be simply related to that for the original creation of the SSC and the KPIs in place become the monitoring measures for determining the success of the action taken. By following a relatively scientific implementation of change to one aspect of activity at a time, step by step, the KPIs will identify whether impact is positive or negative. The simple principle is to make sure a change to be implemented is measurable within the scope of the KPIs, make the change, use the KPI to measure the impact then continue or modify the change accordingly. The consistency and quality of the overall process delivery is only minimally at risk and step by step measurability gives ready visibility to recognize any actions that do not produce the required results and need reversing. Where, more probably, the results meet or exceed expectations, they can be welcomed not just as change but for producing measurable added value. 

Jim Whitworth is an independent shared services specialist, directly managing Shared Service programs for major global businesses and providing support at all stages of the feasibility evaluation, design, build and operation of SSCs.  Email: jim@hwml.fsnet.co.uk               

SSON News and Analysis
Posted: 07/09/2012

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