A KPI in simple terms is relatively self-descriptive; it is a performance indicator, for example, the performance of the process it is measuring should be clearly indicated by the KPI. (59) Said to be the most common benchmarking indicator (60) , these measures are also deemed critical to the overall success of an organisation. The implication of having performance measurement critical to the overall success of an organisation is that the measurement process itself will be required to be cost effective. Therefore, they are only useful if the benefits are greater than the cost of obtaining them. (60)
Whilst being identified as critical to the overall success of an organisation, most organisations tend to construct and implement gradually. Dwyer, (2008) states that for traditional corporate and financial environments the selection of indicators relative to the achievement of corporate goals is considered elementary. In a financial environment, such as the revenue for the previous quarter, are classically lagged by approximately two months. Continuing with this example;
typical annual results, can be delayed by a far greater margin. One might say that the obvious problem here is how one can accurately determine the appropriate action required to revise the direction of the performance. Consequently, any corrective action made on the basis of a Lag indicator, could essentially become redundant if the current performance has already changed from that which was measured previously. There is significant risk, whilst using lag indicators, decisions may result in some form of overcorrection. (60)
22 The identification of KPIs can be from a variety of sources (60) (61), from Industry Regulations/Regulators, Quality Improvement teams to Senior Executives/Departmental heads. It isn’t uncommon for organisations to ‘drown’ due to the volume and variety of measures, as identification can easily become a case of ‘if it moves, measure it’. (61)
Walsh (1996) Further advises that KPIs should suit the following conditions (61):
1) Alignment with corporate strategy – KPIs should be aligned with corporate strategic goals.
2) Traceable to key business processes – KPIs should be attached to each key business process.
3) Not too many and not too few – No ‘one size fits all’, but should aim for between six and ten major indicators.
4) Avoidance of ‘turf protection’ – Encourage cross-functional management and KPIs against processes rather than functional units.
5) Relevant to all people – KPIs must reflect the needs of people at different levels of the organisation
Whilst Walsh (1996) states that too many organisations measure only ‘outcomes’ and never really understand what is happening inside key business processes, Moullin (2004) recommends utilising a combination of both outcome and process measures. (60) Highlighting the topical debate across various industries for performance measurements, Moullin (2004) discusses that it is vital to monitor a combination of outcome and process measures. (60)
For the reasons discussed in the above paragraph, Lag indicators or outcomes, should rarely be considered as a KPI, as the preferred advantage of a KPI is to adjust the relative processes and behaviour to improve performance. Therefore confirming the recommendations made by ASD (2007) that it is crucial to the performance based contract, that time and effort be taken to determine the key business drivers, (13) and subsequently appropriate KPIs. Otherwise, there is significant risk of developing ‘just another number, with appear in reporting, but result in no improvement. (59)
23 Measurement systems should retain focus on continuous improvement, rather than adopt a blame culture. (60) If a performance measure is below the target, it is important to identify, not only what might have gone wrong, but also how the issue can be prevented from occurring again. Caution must also be taken when detailing areas which are attached to a financial penalty, as prime contractors might simply end up adopting a business practice that minimises the financial penalty, rather than address the key issues exposed through measurement.
ASD PBC guide emphasises that its performance metrics, not indicators, are lag metrics, and serve the purpose of representing the Prime Contractor’s performance during the previous reporting period. Furthermore, two tiers of performance measurements are to be used (13), Tier 1 being Performance Metrics and Tier 2 being System Health Indicators.
2.3.1 Performance Metrics
Performance Metrics are used to represent the mandated outcomes, therefore providing the Commonwealth with consistent measurement of the usefulness of the subjected Weapon System. (13) Being lag indicators, and therefore representing past performance; the Tier 1 metrics are integrated with payment schemes, and are used primarily for encouraging the prime contractor to retain focus on these mandated outcomes.
2.3.2 System Health Indicators
System Health Indicators (SHI) are used to provide both parties with an indication of the background support, process and/or activities behind the mandated outcomes. (48) (28) (13) These indicators are identified and negotiated during the sustainment contract negotiation process (13), and can vary from contract to contract, depending on the desired outcomes.
Considering that the Commonwealth cannot specifically rely on performance metrics as the only indication of contractor performance (13), this second tier of performance measures, called SHIs, is critical. The purpose of the SHIs is to provide the Commonwealth and contractor with lead indications of future performance. As discussed earlier, lead indicators aid proactive management of any problematic performance area. (13) (59)