STEPS IN DEVELOPING KEY INDICATORS
The key indicator system is not normally difficult to implement. Even so, there are some necessary steps if the program is to be successful. Even when working well, key indicators are a supplement to the permanent information reporting system, not a substitute.
1. Decide what is needed to manage the entity success
fully. Every organizational element, whether depart
ment, plant division, or other, has some thumping
machines. The persons working in the department,
along with the department supervisor, probably have
the best feel for what they are, and should be involved
in taking a first cut at identifying the key indicators
to be used.
2. Clarify, and refine, the key indicators selected. The
key indicators should be defined so that the per
son being measured has a clear understanding of
what is expected. There should also be agreement
between the group leader and the group that the measure is a meaningful one. In this way, there can be a linkage between the measures used in each level of the organization. In addition, there will be acceptance of the final measures chosen by all persons involved.
3. Decide on the source of information to be used. Identifying the source of information to be used helps to eliminate duplicate sources or, even worse, the lack of a reliable source of information. It also helps to identify the procedures to be followed in reporting the actual results.
4. Finalize on indicators that are easily obtainable. In
step three, some of the indicators desired may not be
easily measured. If so, there are usually alternate mea
sures that will serve almost as well. This step is im
portant in assuring that the key indicator report can
be started quickly and continued without undue dif
ficulty in collecting the information.
5. Collect key indicator information for a trial period,
and evaluate its effectiveness. This assures that a
suitable data collection procedure is available; it
also makes it possible to evaluate the key indica
tors as meaningful measures. If they aren't, they
should be changed and other indicators tried. This
is a strength of the key indicator system; it is easy
6. Relate the local key indicators with the global per
formance measures used by the company. Although
it is important that the key indicators are good mea
sures at the local level, it is equally important that
they can be related to the aggregate measures used
by top management. Sometimes the links are not as
well defined. However, this does not mean that the
key indicators are at fault; it may indicate that more
effort is needed to establish meaningful transitions
between organizational layers. As the number of or
ganization layers shrink, the relationships between
layers become more important.
7. Finalize the key indicators to be used—for now! Once
the data can be collected, and the key indicators pro
vide meaningful information, both at the local level
and with the higher levels of the organization, they
should be used for some period of time. This does
not suggest that they cannot be changed later; it does
mean that they must be used if they are to be of value.
8. Establish performance goals for each key indicator.
Goals can be established for each key indicator,
whether short-term or long-term. One nice thing
about this is that continuous improvement goals can
be built into the key indicator system, for whatever
level of detail needed. When top-level measures in
clude improvement goals, an attempt should be made
to identify the low-level measures that should be
watched for improvement.
9. Collect results and evaluate at both the local and global levels of the organization. As with any planning and control mechanism, the key indicator system should provide for the measurement of actual versus plan. It should be easier to do than with traditional performance measurement systems, and the differences should be easier to evaluate in terms of what corrective or improvement action is appropriate.
Key indicators are not cure-alls; however, they are the answers to some of today's need to measure both financial and nonfinancial results, to build flexibility into the performance measurement system, and to gain acceptance by all levels of management.
This should be one of the key steps required, should the company decide to pursue a balanced scorecard system.