KRAs and Performance Indicators

KRAS, PERFORMANCE MEASURES AND INDICATORS

After the vision, mission and objectives are set in place, a method for measuring progress and success of implementation will be needed in the business plan. Choosing a balanced set of results-based performance measures to gauge the success in meeting the objectives is one of the important and difficult aspects of the strategic planning process.

Performance in the strategic plan should be measured because:

Most people want to do a god job. Usually, what gets measured gets done. Performance indicators and measures help managers and employees focus on what is important. By comparing actual with expected results, it enables managers and owners to evaluate progress towards the attainment of objectives.
Measuring performance is a good management practice. The enterprise requires that performance measures should be established thus providing accountability for results at each level of operating unit.
Measuring performance can enhance the quality of products and services. Performance measures or indicators inform staff of customers' needs and levels of satisfaction and make it possible to identify actions to improve quality and costs.

Measuring performance helps in budget and development review. Performance indicators and measures are valuable in the budget development process. They allow for more accurate assessment of resources needed to support activities. They also help identify what level of product or service will be provided for the amount of funding available.

Key Result Areas

Good performance measures need to be clearly identified and defined including exactly what is being measured. They must be tied and made fit to the missions and objectives. For example if an enterprise would have these objectives:

Increase in Profitability
Increase in Market Share
Enterprise Growth

In these examples, increase in profitability can be be manifested in the following key result areas:
Increase in profitability may be seen in the increase of absolute amount of gross profits, net profit before tax or net profit after tax for the planned period. Similarly, profits can also be looked at as increases in dividends declared or even return on investments, return on sales, return on assets and contribution margin. These items maybe considered as possible key result areas - because they manifest or show profitability.
Increase in the market share in terms number of product units sold or in terms of value could mean the relative position of the enterprise among similar players supplying similar products in a certain/defined geographic market territory. The percentage of market share becomes the key result area.
Enterprise growth can be seen in increases of assets, owners equity, number of additional offices/outlets, addition of affiliates in cases of franchises and increases in the number of product lines and outputs.

The Key Result Areas or KRA’s are qualitative manifestations that the objectives are being attained. KRA’s must be converted into numerical Performance Indicators or PIs. PIs are nothing but exact quantifications of the KRAs.

Performance Indicators
It is important that the key result areas be totally and clearly understood by the enterprise's operating units. Once the key result areas are identified and decided on, the enterprise need to define the quantitative performance measures, determine data requirements, identify current baselines, set realistic performance targets based on benchmarking and compare actual versus expected results.

A comprehensive set of performance measures will be linked to missions and objectives; will measure intermediate and final outcomes; will delineate clear responsibilities; will address multiple priorities and will be useful to the staff, management and owners of the enterprise.

In the previous examples used in this workbook, PIs for KRA "increase in profitability" could be expressed as
"Attain a net profit of P5.0 M by the year 200X"
"Achieve a sustained minimum return on investments of 25% in the next 5 years starting year 200X"
"Attain a return on equity of 14% by 200X, 16% by 200Y and 18% by 200Z"
Similarly for KRA=" enterprise growth"
"Attain an net asset value of P 60.M by the year 200x"
"Attain an annual net asset growth of 10% in the next five years"
"Attain an annual increase of 10 franchisees over the next five years"
Again, the PIs are the numerical quantification of the key result areas. It should be borne in mind however, that these key result areas and performance indicators should be the ultimate ones - meaning these are the KRAs and PIs of the enterprise as a whole.
Other KRAs and PIs could be done on the subordinate levels of the enterprise like , divisions, departments and sections. The KRA of a production department in a manufacturing set-up could be " reduction of rejects" and the PI could be " zero by the year 200X" or KRA and PI of " Increase in sales inquiries by 10% every six months for a marketing department as a result of an advertising program for an automotive dealership Other examples of an enterprise's subordinate-level organizational units are as follows:
"Increase of 15% in the present output of plastic film extrusion department by the end of the year."
"Reduce traveling expenses to 3% of total sales for the years 200X, 200Y and 200Z"
"Yearly increase of 5% in the commission sales force starting 200X to 200Y"

To further understand the nature of KRAs and PIs, strategic planning incorporates five common measures namely, input, output, outcome, efficiency and quality. Inputs measures the amount of resources needed to produce the products and services. Inputs include labor, materials, equipment and supplies. Input measures measures are useful in showing the total cost of providing a product or service and the related costs intertwined costs such as overhead.
Outputs on the other hand measures the amount or volume of products and services produced. Outputs focus on the level of activities in a particular enterprise unit. Outputs are useful in defining what a particular activity produces.

However, they are limited because they do not indicate whether the objectives or goals are achieved and they do not reveal about quality or efficiency.
Outcomes reflect the actual results achieved as well as the impact of the enterprise activity or program. Both intermediate and long-term outcomes can be evaluated. Enterprise owners are generally the most interested in outcome measures. Yet information about the ultimate results is often not available or practical to measure. In these instances, it may be necessary to use proxy or substitute measures. For example, computerization in an enterprise may result in the fast production of databases and information. The outputs may be inventory updates, budget updates, personnel information etc. The outcome value of these outputs should result in good, fast, accurate and right management decisions. Similarly, a good personnel benefits program should result in not only making employees happy but also increase in workload outputs and quality. A training program should be evaluated not in terms of the number of personnel trained, the number of sessions conducted etc., but rather on whether the trained personnel have attained greater knowledge, achieved the right aptitude and attitude, enhanced effectiveness and efficiency.
Efficiency measures are also known as productivity measures. Efficiency can be measured in terms of cost per unit of output, the ratio of outputs per unit of input and the ratio of outputs per unit of time. Ratios can help express the relationships between different performance measures to convey more information about productivity and the cost effectiveness of an activity or enterprise program.

Measures of quality include reliability, accuracy, courtesy, competence, responsiveness and completeness associated with the product or service. Quality measures reflect the effectiveness in meeting the expectations of customers. Some of the examples include 1) number of defect-free products and services 2) Accuracy of information entered into the enterprise data bases 3) percentage of satisfied customers 4) meeting of product/service specifications and standards.