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Find out how to choose the right performance indicators

by , 07 May 2015
In managing a company, you need to consider the right performance indicators, as they represent a key element in your company.

Many companies tend to get financial performance indicators, even though they may be communicating strategies such as maximising customer experience, or attracting and retaining the best and brightest people.

Thus, keep in mind that KPIs will to a degree be conditioned by the industry in which a company operates, according to Pwc.com.

While a company in the retail industry might use sales per square foot and customer satisfaction as key performance indicators,  an oil and gas company might opt for measures of exploration success, such as the value of new reserves, according to the previously mentioned source.

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Keep in mind that the KPIs should be relevant to that particular company and that management should explain their choice in the context of the chosen strategies and objectives.

Here are some elements and measures that are most important for a particular industry:

EXHIBIT 2: Measures that matter across industries

Banking    -------------------------- Petroleum ------------------------ Retail

Customer retention -------------Capital expenditure-------------Capital expenditure

Customer penetration -----------Exploration succes rate----------Store portfolio changes

Asset quality------------------Refinery utilisation----------Expected return on new stores

Capital adequacy--------------Refinery capacity-----------Customer satisfaction

Assets under management -------Volume of proven and probable reserves------Same store/like-for-like sales

Loan loss----------------- Reserve replacement costs -------------Sales per square foot/metre

As provided by Pwc.com.

How many KPIs should you choose?

It really depends of the company and each should identify how many KPIs are needed. It is recommended to have between four and ten indicators.

Should you use segmental or group KPIs?

In order to make a good choice, consider "how KPIs are collated and reported internally. – whether they make sense when aggregated and reported at a group level, or would be more usefully reported at business segment level", Pwc.com recommends.

For instance, it's more informative to report a retail business segment separately rather than combining it with a personal financial services segment.

How flexible is the choice of KPIs?

As stated by our previous source, you have to know whether the KPIs you've chosen will be relevant over time. In most cases, it's logical that since strategies change over time, the same should happen with the KPIs.

"The choice of KPIs is not set in stone for all time: but the reason for, and nature of, changes in KPIs and how they are measured and reported should be clearly explained", explains Pwc.

When it comes to other performance indicators, Pwc says that "if they are not deemed by management to be KPIs and/or are outside the control of the entity, the level of information about each one will generally be less than for a KPI. In our view this would, at a minimum include: its definition and calculation and, where available, the corresponding amounts for the preceding financial year".

Here are some examples of such measures, usually outside management's control:

Advertising industry – advertising growth rates
Insurance industry – life expectancy demographic data
Oil and gas industry – commodity prices and supply/demand data

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