Using Key Performance Indicators (KPIs) to Measure and Track the Success of Your Services Operation
(Originally published in the September/October 2007 issue of AFSMI's Sbusiness)
By William K. Pollock
The concept of Key Performance Indicators (KPIs) has been around for as long as many of us have been working in the services sector. However, each of our organizations may have a different understanding of their importance and use. In fact, the first hurdle for many service managers is gaining the proper understanding of exactly what KPIs are, and what they can do to help them run their service operations more efficiently.
Definition of Key Performance Indicators (KPIs) There are numerous definitions of KPIs available in business textbooks, through services trade associations, or on the Web, each comprised of their own keywords, buzzwords and, oftentimes, competitive branding. However, regardless of which definition you ultimately embrace, there are still some conventions that you will need to accept as well.
Basically, KPIs are tools that may be used by an organization to define, measure, monitor, and track its performance over time toward the attainment of its stated organizational goals. TheFreeDictionary.com defines Key Performance Indicators as "a set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their strategic and operational goals". It goes on to say that "KPIs vary between companies and industries, depending on their priorities or performance criteria". For example, the services industry may evaluate itself on the basis of KPIs such as annual revenues, year-to-year trends, or growth in the size of the mobile workforce, etc.; while each of the services organizations that comprise the industry may look more to KPIs that measure specific areas of performance such as Mean Time to Repair (MTTR), First-Time Fix Rates, customer satisfaction indices, etc.
SearchCRM.com takes the definition of KPIs a step further by stating that "a Key Performance Indicator (KPI) is a business metric used to evaluate factors that are crucial to the success of the organization. KPIs differ per organization; business KPIs may be net revenue or a customer loyalty metric, while government might consider unemployment rates".
BusinessIntelligence.com brings it all together by stating that "a KPI is simply a metric that is tied to a target. Most often a KPI represents how far a metric is above or below a pre-determined target". In these cases, KPIs are typically shown as a ratio of actual-to-target and are designed to instantly let a user know if they are meeting their stated goals, or are somewhat off target.
Regardless of which definition your organization adopts, the following factors should always be taken into account: The KPIs must …
However, if your goals are more focused on field engineer utilization and spare parts availability, then you will probably be looking more at KPIs addressing the number of service calls handled per field engineer/per day, average time per call, parts availability, and related metrics. In most cases, your organization will typically look at all of these metrics, although some departments may focus on one set of KPIs, while others may focus in different areas.
The KPIs you use must also be quantitative and quantifiable. The standard rule of thumb is "if you can't measure it, you can't manage it." What this means is that it may be extremely difficult to measure your success if your targets are not quantitative in nature. For example, if your goal is to improve customer satisfaction from "good" to "very good", it may be difficult to objectively distinguish one level from the other. However, if your goal is to improve an existing customer satisfaction rating of 85% to 88%, you will know in absolute terms whether or not you have met your goal if at the end of the period you have improved to either 87% (i.e., a point below) or 89% (i.e., a point above). In the first case, you have not met your goal; but, in the second case, you have. Only by quantifying the KPI used to measure performance in this case, are you able to determine whether you have succeeded or not.
Finally, the KPIs must be linked directly to the specific measures of the organization's success. Simply tracking data over time, and reporting it back to management, is not useful if the data itself is not meaningful to the measure of success. For example, using KPIs to track employee attendance may be of use to your Human Resources department, but may not be directly relevant to the measure of your service engineer performance in the field. While these KPIs may be important to HR, there are far more that you should be using instead to measure field service performance (e.g., number of calls per engineer/per week, customer satisfaction, etc.).
Uses of Common Key Performance Indicators (KPIs) Key Performance Indicators (KPIs) are quantifiable metrics, or measurements, that relate to specific success attributes that reflect the organization's performance. As such, the selection of the specific KPIs to be used may differ widely from one organization to another - or even between and among departments within the same organization. In order for a KPI to have maximum value, it must be clearly defined, quantifiable, and relatively easy to measure. Metrics that are vague in definition; qualitative or subjective in nature; and next to impossible to collect, interpret and analyze will not serve as a good basis for a KPI.
KPIs should also be directly linked to the critical factors that drive the performance of the organization. If the metric is not directly linked to a critical organization success factor, it will probably not be worth the resources and dollar expenditures to collect and process. In the world of KPIs, there is a big difference between "need to know" and "nice to know". In the former, the resources required to collect, analyze, interpret, and distribute the KPI information will almost certainly be worth the effort. This "need to know" data and information is what management will ultimately use to make its decisions for moving forward. However, "nice to know" data and information is really not worth the expense, and will typically use up many of the scarce resources that might otherwise have been used to generate the more important "need to know" data and information.
Furthermore, the number of KPIs used to measure an organization's performance should typically be kept to a minimal. The average rule of thumb is roughly 3 to 4 KPIs per department, and another 3 to 4 KPIs for the organization as a whole. This does not mean to say that a department or organization cannot have more or less KPIs at their disposal; however, the more KPIs that are in use, the greater the chance that some may end up being in conflict with one another. For example, a KPI that measures revenues may be in conflict with a KPI that measures profitability. If the organization's primary strategic goal is to increase revenues, then the former will represent the more important KPI to measure. However, if the primary strategic goal is to maximize profitability, then the more important KPI will be the latter. Ultimately, it will be up to senior management to choose the measure that is most important, and the selection of the appropriate KPI will follow.
Once an organization's KPIs are defined, and the required data and information are collected, processed, and distributed to the appropriate parties, they may be used in many ways as performance management tools. Service managers can use them to measure and track the degree to which they are meeting (or not meeting) their monthly, quarterly, or annual performance goals and targets. The examination of period-to-period trends for any given KPI will also lead to the likely identification of problem areas, areas requiring improvement, or areas reflecting significantly high levels of good - or bad - performance. From these trends, decisions can be made to review, assess and/or modify specific areas that require attention.
KPIs can also be used as either internal or external promotional tools. For example, day-to-day, month-to-month, or year-to-year performance trends can be measured, tracked, and presented internally at strategic planning sessions, quarterly meetings, or other company events. KPIs that reflect internal successes with respect to performance may also be used for external promotional purposes, such as including the findings in customer newsletters, market reports, or as promotional pieces on the company's Web site.
Every organization is able to establish its own unique KPIs to measure, monitor, and track its performance over time. However, regardless of which KPIs are ultimately used, they must be realistic; quantifiable; linked directly to the organization's stated goals and targets; and, preferably, reflective of the "need to know" mentality that drives the business. There must also be a formal process for the ongoing collection of key performance data and information to support the ongoing KPI process.
Examples of Common Key Performance Indicators (KPIs) Before determining exactly which KPIs should be developed to support the organization in measuring its performance over time, the specific units of measurement must also be clearly defined and understood. For example, there is a significant difference between customer-paid and company-paid service activities. In the former, the customer pays for the services rendered, whether they are hardware- or software-related, or provided under a service level agreement (SLA) or time and materials (T&M) basis. However, in the latter, the services rendered generate no customer revenues, typically involving warranty work, factory modifications, no-charge installations, service giveaways, etc. The contribution to the bottom line will vary greatly depending on whether the services performed involve actual customer revenues (i.e., customer-paid) or are absorbed by the company itself (i.e., company-paid) - and these differences will need to be factored into any KPIs reflecting overall performance and profitability.
Figure 1 provides an illustration of the various types of "need-to-know" KPI metrics that a company may use to track its overall service operations performance and ensuing customer satisfaction. These KPIs are designed essentially for the executive level management that oversees the entire business operation.
Figure 2 provides a similar representation of the various types of KPIs that field service managers may use, focusing on areas such as field engineer utilization and customer satisfaction. Other KPIs that most field service managers will also want to look at include:
The Technical Assistance Center, or TAC, has its own set of "need to know" KPIs, typically focusing on metrics such as number of incoming/outgoing calls, calls by time of day/day of week, average length of call, and other telephone-related quality measures (Figure 3). Depending on how the particular TAC is set up, other service/parts cross-selling metrics may also be addressed.
Other areas within the overall services organization may also require their own set of KPI metrics. For example, parts/logistics would most likely focus on ratios relating to inventory turns and fill rates, in addition to the same types of revenue and customer satisfaction metrics that other departments are monitoring (Figure 4).
Setting the Stage for Using KPIs Depending on where you are positioned within your company, your need for KPIs may be very different than those of your counterparts in other departments or service territories. In order to make sure that you are using the most appropriate KPIs, we recommend that you begin by focusing on the most basic, or standard, KPIs (e.g., such as MTBF and MTTR), and then develop more sophisticated metrics that will allow you to hone in on the most critical areas requiring monitoring and management.
Many companies are also in various stages of developing or implementing CRM or ERP systems within the organization. In these situations, it is typically far better to build in the required KPI data collection processes before the system is implemented in order to save time, money - and anxiety - before the systems are set in stone.
Before embarking on any KPI development initiative, it will be important to set the stage properly by first:
William K. Pollock is president of Strategies For GrowthSM (SFGSM), the Westtown, Pennsylvania-based services consulting firm specializing in strategic business planning, services marketing, CRM consulting, market/survey research, and customer satisfaction measurement and tracking programs. Bill may be reached at 610-399-9717 or via e-mail at firstname.lastname@example.org.
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