July 31, 2007 Issue 010 : Return to Articles : Printable Version

Key Performance Indicators (KPIs)

Key Performance Indicators (KPIs) are used for high dollar contracts that typically attract lots of executive eyeballs.

Customers are always thinking, if not asking, "Am I receiving what I've paid for?"

It's a legitimate question. You can't hold services in your hand, they're different every time, and they're performed in front of customers over and over again. The slippery nature of service puts doubt in customers' minds.

KPIs make service real. They tangibilize service in a way customers understand - in numbers.

Without KPIs, the only service number customers have is price. And they can't determine value from that alone.

KPIs, in their basic usage, are simply a vendor management tool. They show customers that services were performed and value received.

However, sophisticated customers use KPIs to achieve high-value strategic objectives. With these customers, contractors approach KPIs differently.

7/2/08 - In the Works: We're upgrading a list of KPIs for facility service contractors and will make it available for purchase online in August 2008. Please check back then.

Regards,

Chris Arlen, President, Service Performance

KPIs Defined

KPIs can be defined as

"...the vital few metrics that indicate progress towards strategic objectives - where metrics include the numerical measurement, measuring process and frequency."

Although there are many useful metrics for facility services, it's the vital few that are worth the time and effort.

Consider this, in older Boeing 747s, if all the instrumentation were taken out of the cockpit and laid end-to-end it would stretch over 27 feet in length.

Pilots couldn't pay attention to all those dials and displays all the time. Instead, they viewed six key indicators. If something appeared out of order, pilots checked the other instruments corresponding to that key indicator.

Now, aircraft cockpits use digital displays to show key information, which can be adjusted to display additional flight information as needed.

The same is true for KPIs as it is for 747 instrumentation. It's the vital few rather than the useful many - that's the "key" in KPIs.

KPIs with Strategic Objectives

KPIs connect service performance with progress towards customers' strategic objectives. They belong in an improvement hierarchy that includes customers':

• Future-state objectives - that are related to:
• Specific goals - that can be achieved with:
• Critical Success Factors - that are initiatives to achieve goals, where:
• KPIs - monitor & measure performance towards achievement of goals

Here's a simplistic example:

• Future-state objective: Safe workplace
• Specific goal: Reduce OSHA Recordable rate from 7.09 to 5.5 by 2009
• Critical Success Factors: Safety awareness training, safety risk analysis, safety incentive program
• KPI: OSHA Recordables Incident Rate

Customers using KPIs towards strategic objectives are data-driven and routinely work on large business goals.

Consider the Six Sigma quality measurement process baked into GE, or HP's measuring contractors' performance in TQRDCE (Technology, Quality, Responsiveness, Delivery, Cost, and Environment).

These companies connect KPIs to strategic organizational objectives. That's the way they work, and so must their contractors.

KPIs, when used in this context, are an important part of an organization's strategic food chain. However, KPIs are also used in a more basic manner.

KPIs as Vendor Management Tool

Contractors are more likely to see KPIs used as a vendor management tool than for strategic purposes.

As a vendor management tool, KPIs are a matter of perspective. Here the customer isn't looking to achieve larger, strategic objectives. They're using KPIs to view contract compliance and measure value received.

KPIs are essential in performance-based contracts, where customers put a portion of contractors' profit at risk. The amount of payment is based on contractors' performance as measured by KPIs.

KPIs in Action

As you've probably guessed, KPIs aren't as simple as they first appear.

They're impossible to corral into standard categories. One customer may place the KPI "percentage compliance to service level agreements" in a Quality category, another customer puts it in a Responsiveness category.

Other KPI considerations include:

Measuring Contractor Performance, not Service

Some KPIs measure a contractor's performance only, missing the service's impact on the facility and its end-users.

An example is using contractors' invoice accuracy as a KPI. It doesn't affect the cleanliness or security of a facility, but it's a pain to customers who have to spend extra time sorting out errors.

These vendor management KPIs can be as important to customers as those measuring service. And smart contractors treat them accordingly.

KPI Outcomes Outside Contractors' Control

The outcomes of some KPIs are not 100% controllable by the contractor. Sometimes this is due to man-made or natural disasters, the randomness of human nature, or customers' policies that adversely affect outcomes.

Whatever the reason, it's important to identify this lack of control over the KPIs. Especially with performance-based contracts, where a portion of profit is paid based on KPI measurements.

For example, using the number of security incidents as a KPI. The problem is security incidents can never be eliminated. They can be mitigated, but they never go away entirely.

Additionally, a customer's company policy may prohibit searching end-users' bags and backpacks. This policy increases the potential for more incidents than if the security contractor used best practices and searched questionable items.

When a performance-based contract is tied to KPIs outside their control, experienced contractors pay attention and negotiate more controllable KPIs.

Benchmarking KPIs Inside & Out

Benchmarking using KPIs enables performance comparison to customers' own historical data and/or industry benchmarks.

However, when benchmarking to industry peers, it's critical to normalize data for significant differences.

For example, janitorial benchmarks might be adjusted for different densities in customers' office space, instead of a one-to-one productivity rate comparison.

In security, factors such as closed or open perimeters (fences and gates vs. campus setting) affect comparisons of security incident rates between customers.

Who Measures? Vendor or Customer?

Some KPIs require customer authorization, and/or may touch politically sensitive customer issues. These can be obstacles to pro-active contractors who seek to unburden their customers from KPI measurement.

Not all customers give contractors free reign to ask end-users' opinions on service.

For example, satisfaction metrics are important KPIs. However, some questions created by contractors, without customer guidance, may inadvertently aggravate end-users.

Additionally, if customers are already measuring end-users' satisfaction, they won't want the contractor to annoy end-users by asking similar information.

There can also be an issue with outsourcing in customers' companies. Some customers are comfortable with their end-users seeing the contractor's brand on surveys and uniforms.

Other customers require a wholly transparent relationship. One where the contractor is seen as part of the customer's company and there's no outside brand references.

The final answer to who measures, as always, is to work with customers and meet their KPI needs while respecting their position and company culture.

Selecting KPIs

Although customers have the final say of which KPIs to use, contractors can help with their choice. Useful KPIs can be presented to customers as recommendations in the contractor's proposal.

After contract award, but before service starts, contractors can research the practicality of their KPI recommendations. They can then provide an assessment to help customers select realistic and productive KPIs. Research areas can include:

• Availability of data
• Ease of collection
• Potential disturbances or interactions with end-users

KPIs should be defined explicitly, or contractors may be accused of marketing smoke and mirrors. KPI components can include:

• Metric Category: Defining categories before figuring out individual KPIs helps you choose KPIs for important business areas, such as: Cost, Quality, Safety, etc.
• Metric Name: Providing a, unique, descriptive name helps avoid confusion between similar sounding KPIs
• Unit of Measure: Name what you're counting, i.e. square feet, hours, incidents, etc.
• Calculation: The formula used to calculate values of the metric, i.e. (square feet / hours worked), or (# of responses in compliance / # responses non-compliant)
• Measurement Frequency: i.e. weekly, monthly, quarterly, etc.
• Measurement Procedure: i.e. manual tallying of complaints, or online digital tracking of requests, or however you capture data
• Weight: You may want to weight KPIs individually, or by category based on their importance, such as responsiveness may not be as critical as cost, and therefore weighted less important
• Target Value: Numerical goal for reporting period, can be either an industry benchmark, better than past, best possible value (i.e. 100 out of 100)
• Threshold: Can be current numerical starting point, minimum acceptable bottom line, or indicating deficiency

Reporting KPIs & Performance

This is a full topic in itself and will be the subject of an upcoming Revenue-IQ article. Look for it in your email.

Summary

• KPIs are metrics that indicate progress towards strategic objectives - where metrics include the numerical measurement, frequency and measuring process
• KPIs are the "vital few", not the "useful many", they're the "key" ones
• KPIs are commonly used as a vendor management tool for contract compliance & value measurement
• Sophisticated customers use KPIs towards strategic business objectives
• Some KPIs measure contractor performance, not service
• Some KPIs can be outside contractors' control
• Performance-based contracts use some form of KPIs

Permission to reprint or distribute: email info@serviceperformance.com