The primary purpose of monitoring KPIs of a business is to get an insight into its past or expected future performance. But just monitoring KPIs for the sake of monitoring it, does not do a business any good. Executives want to use the insights gleaned from KPIs to make decisions that make a positive impact on their businesses. But what KPIs should one monitor? Answering this question can be very tricky.
Of course, the answer depends on one’s objective. But the difficulty of answering this question is because a business is a complex set of interdependent moving parts in a dynamic environment. The performance of a business and its internal moving parts are impacted by many factors, both external and internal. To identify the most critical KPIs to monitor so that one can take meaningful action, one needs to consider KPIs from the perspective of the external environment, the structure of the business, and how they impact each other.
External Performance Indicators
There are two types of factors that influence the performance of a business. The vast majority are factors that are internal to the business. However, the performance of a business is also influenced by factors that are external to the business. These external factors make up the business environment in which the organization has no influence over.
Examples of external factors include everything from the performance of the industry to that of relevant markets such as financial, labor, material, etc. Some of the external KPIs a construction firm may consider include:
- Interest Rate
- Construction Start
- Labor Shortage
- Industry’s Margin
There are various reasons for a construction company to monitor external KPIs. First and foremost, they provide valuable insight into external risks and opportunities so that business executives can take appropriate actions. They also offer perspectives to benchmark the firm’s performance compared to that of the industry. For instance, a construction firm may want to benchmark its margin against that of the industry. Finally, external KPIs are critically important to ensure that the business’s performance can be attributed correctly. Without it, a firm may go on a wild goose chase looking internally for the cause of its performance lags while the source of the problem lies outside the organization or, even worse, wrongly conclude that the problem is external.
Organizational Performance Indicators
Organizational performance indicators provide insights into the performance of an organization as a whole. These are the internal metrics measured within an organization and gives us insights on how the entire organization is performing or likely to perform in the future. Some organizational performance indicators that a construction firm may monitor are:
- Customer Satisfaction
- Employee Satisfaction
A key objective of monitoring organizational KPIs is to benchmark the overall performance of the organization. The benchmarking can be against its historical performance or against that of its peers in the industry. These are mostly backward-looking KPIs, also known as historical KPIs. Another objective is to get an early insight into how the business may perform in the future.
Of course, the ultimate objective of monitoring organizational KPIs is so that a business take appropriate actions to improve its performance. However, just knowing the organizational KPIs does not always tell us the source of the problem. The business needs to know the drivers of the performance it wants to fix.
As stated before, drivers of an organization’s performance can include factors that are either external or internal to the organization. Only by monitoring appropriate external KPIs would a business be able to know how they are influencing its performance. However, the vast majority of the drivers are internal to the organization. These drivers come from the operations and functions within the organization. Without monitoring these operations and functions, the business is unlikely to be able to find the cause of its performance and take corrective actions.
Operational Performance Indicators
A business is a set of activities, and its operation drives the performance of the business. The operational KPIs are the indicators of the performance of these business operations. Some operational KPIs that a construction firm may measure are:
- Division’s financial performance
- Project Cost
- Project Delays
There are several reasons for a business to monitor its operational KPIs. Perhaps the foremost reason is to identify and monitor the drivers of organizational performance. A business may also want to monitor operational KPIs to benchmark the performance of these operations. Finally, a business may use the performance indicator of one operation as a predictor of the performance of another operation or the entire organization.
Attributing an organizational performance to the performance of an operation within the business may not be sufficient to identify the underlying performance drive. For many businesses, the activities that make up an operation are conducted by many functional groups within the organization. Therefore, in order to identify the performance driver, one likely needs to take a closer look at the performance of these functions.
Functional Performance Indicators
Functional performance indicators are metrics that indicate the performance of particular functional groups within an organization. Such functional groups may include individual departments such as accounting, estimating or IT. Some functional KPIs that a construction firm may want to monitor are:
- Successful Bids
- Estimation Accuracy
- AR Aging
- Safety Incidents
A business may want to measure functional KPIs for reasons similar to of measuring other KPIs – from attributing organizational or operational KPIs to benchmarking functional groups performance. Regardless of the reason, because of the intricate relationship between various groups, it is very important while challenging to come up with metrics that isolate the measurement of performance of one group from another.
It is also important to note that, much like organizational and operational KPIs, functional KPIs may also get influenced by factors outside the control of the group. For example, longer AR aging may be the result of worsening economic condition instead of the performance of the AR collection group. On the other hand, what seems like the influence of outside factors on a functional performance should actually be attributed to the group itself. For example, the estimation group should be able to account for projected changes in external factors, such as labor shortages, to come up with an accurate cost estimation.
KPIs can be categorized in a hierarchical fashion, starting from external and digging deeper into organizational, operational or even functional. There is a lot of interdependencies among these KPIs. Therefore, if the objective of monitoring KPIs is to identify problems and take corrective actions, it is not only important to monitor KPIs at various level of those hierarchies, but also to choose them so that the source of the problem can be isolated, correctly attributed, and corrected.