Key Performance Indicators employ a faulty definition of performance and do not measure the business
One of the main causes of 20th century management problems is the definition of performance. Performance is defined as both the actions executed and the results accomplished. This definition is used in performance management, key performance indicators (KPI), and other business performance. The definition prevents the separation of results from performance in order to manage the actual business “the utilization of capital of worth in performance to incur costs and produce value in results”.
Key performance indicators do not measure actual business performance
In order to organize and manage the actual business we must use Result-performance Management to separate the three components of the business:
- Capital defined as “the set of assets and capabilities in specific performance solutions of positive (asset) or negative (liability) worth invested in and supported for utilization to produce specific business results”
- Performance defined as “the utilization of capital by the business in specific performance solutions at a level of effectiveness to incur costs and create value and quality in specific results”
- Results defined as “the set of economic outputs of positive or negative value that can be measured and counted and are produced over time against goals”
Today, many of the measures of capital, performance, and results are mixed together as KPIs or are defined as “performance”. KPIs are a mixture of result, capital, performance, and other measures that are produced without the framework of the actual business. Most KPIs measure the enterprise related to overlaid structures, rather than the business, and report artificial entities like a monolithic process, department, activity, task, center, object, etc. Very few actual business performance indicators are measured and produced for management. Most capital, results, actual performance, costs, worth, value, effectiveness, quality, etc remain unknown.
Capital must be defined and organized as performance solutions to manage utilization by the business
Many key performance indicators describe the tangible or known capital utilized by the business. Capital is all the specific tangible and intangible assets utilized as specific performance solutions to produce results.
R-pM describes capital as a set of specific performance solutions with a unique solution identifier key. Capital descriptors or metrics describe or measure the attributes of performance solutions, such as:
- Category of capital for support: Business, human, facility, or management
- Class of capital for utilization: Readiness, production, or information
- Performance manager: The manager responsible for providing a qualified solution to produce results
- Capacity: The capacity of the solution to produce results in general
- Development costs: The cost of acquiring, developing, and implementing the capital and the unamortized balance
- Capital worth: The cost of development assessed and updated as the performance solution is utilized
- Operation costs: The method of charging operation costs and total costs charged
- Uncertainty: Potential lapses in availability, utilization, effectiveness, etc that introduce result risk
- Effectiveness: The general and incidents of actual effectiveness in performance
- Utilization: Indicators of the level of utilization in capacity, time, amount consumed, etc
- Expectations: General expectations from the utilization of capital in performance at a level over time
- Improvement: Capital development or improvement to increase the value of results produced
The descriptors and measures are examples of those common to all capital items. But they can never be known or managed if capital is not organized, recorded, and utilized as a set in performance.
Results must be defined and organized to manage economic outputs from the business
Key performance indicators describe output results produced as performance. Some results are managed as isolated entities, but most results are not defined or managed.
R-pM identifies results within the set of results by a unique result identifier key. Result descriptors and metrics describe and measure the attributes of results, such as:
- Group: Revenue (Product sold), Capital (Machine repaired), and Investment (Project complete)
- Level: End-result from performance, set-result containing end-results, or key-result containing set results
- Goal: The planned volume or value of results by time period
- Volume: The count or measured quantity of results produced in a time period
- Value: The stated value of a count or quantity of a result and the value produced in a time period
- Total performance costs: The total costs of all solutions utilized to produce the result
- Value-added: The result value less total performance costs for specific results in a time period
- Productivity: The actual production against goals or standard volume in a time period
- Quality: The determinate for the quality planned or determined by the customer and the actual quality produced
- Risk: The potential or actual incidents of the result not being produced as planned
- Symptom: The impact of performance problems on producing the result that may affect the business
- Customer: The internal or external customer that is willing to pay a value for a determined level of quality
- Added value: The value increase to the result by capital development or improvement
These result descriptors and measures are attributes of all results produced by the business. But they can never be known or managed if results are not organized, recorded, and managed as a set.
Performance must be defined and managed to know the utilization of capital to produce results
Very few of today’s key performance indicators actually indicate performance. Performance is the utilization of a specific performance solution to produce a specific result.
R-pM sets up a performance record in the performance set when a performance solution is deployed to produce a specific result. Performance is identified by a specific solution key and a specific result key. Performance descriptors and indicators describe and measure the performance of a solution to produce a result. Performance is aggregated for both the performance solution and the result.
- Capacity: The capacity of the solution to produce the specific result
- Expectations: The level of performance expected in producing the result
- Cost: The amortized development or operation cost charged to the result for the level of performance
- Volume: The volume of results produced by the performance
- Effectiveness: The incidents of effectiveness or assessed effectiveness in producing the result
- Uncertainty: Incidents of uncertainty in actual performance that prevented or delayed the result planned
- Rules: Means to measure or define cost, effectiveness, and uncertainty related to result value, quality, and risk
- Problems: Incidents of other performance problems occurring in the utilization of the solution that may require solution or produce result symptoms
Performance descriptors and indicators are attributes of all performance in the business. But they can never be known and recorded unless each specific performance solution deployment to produce a specific result is organized, recorded, and managed in a set of performance and unless individual performance transactions are generated to update the solution, the result, and business records.
Key performance indicators must be replaced by actual business metrics
Performance measurement and management today requires extensive resources and many information systems, but most performance reported is against contrived enterprise measures. The reports are difficult to use for business management and become superfluous when the actual business is reported and managed.
R-pM replaces measurement and management of the enterprise with focused measurement and management of the business. R-pM provides precise management of performance solutions, results, and performance to measure and manage the utilization of performance solutions to produce results. Measurement is set up to the detail needed for adequate business management. Most performance measurement is set up one-time and generated for a volume of results produced and for performance exceptions. Performance solution modules can be used to manage routine performance for a set of results or results under a business organization unit solution.
Capital, result, and performance measurement and management is explained in The R-pM Toolkit available now at result-performance-management.com.
