KPI system development in Russian companies

The Managing a Company magazine

An increasingly large number of Russian companies use Key Performance Indicators (KPI) for personnel evaluation. In the meantime, far from all CEOs or heads of departments clearly understand how to best develop and use the indicators and evaluate degrees of their attainment. The way to develop KPI based motivation system on the basis of the generalized experiences of certain Russian companies will help.

The preparation of the project

It is important and necessary that a serious preparation be done in the anticipation of the development of key performance indicators so as to make the whole process transparent and easy to understand for every employee. Heads of departments must be talked to and maximally involved in this work.

The preparation  includes a number of important steps and the development of plans. For instance, the strategy of the company must be taken into account and its connection with the business processes clearly understood, that is, the priorities of the present moment and the prospects of the company must be determined. Besides, one must be able to tell what the system of key performance indicators is needed for. One must determine and formulate the objectives the company intends to attain through the use of efficiency indicators. The objectives may, for instance, be as follows:

• increased sales or revenues
• increased productivity
• decreased employee turnover
• increased production output
• decreased spoilage, etc.

These primary objectives may be accompanied by attendant goals, such as the increased involvement of employees in the common work, their increased motivation and, consequently, the fuller attainment of the overall objectives of the company.

Further, one must determine the ways to attain the said objectives. This may be done by describing business processes, regulating and finding the key points of performance or by drawing a tree of goals (a Balanced  Score Card).

Determining indicators per business processes

Performance indicators may be developed in either of the following two ways. First way is determining indicators per business processes, at least, the principal ones. The other way is using a  Balanced Score Card.

When determining  performance indicators per business processes, one must decompose the company's objectives, bringing them to the levels of business processes. At the same time, it is important that the following should be done:

• job titles systematized and classified on the basis of grading
• a corporate planning system created
• individual motivations created on the bases of employees' individual plans attached to the overall hierarchy of goals of the organization – as determined by the heads of departments.

FYI

Grading is the distribution of pay rates as per job titles where wages depend on the evaluations of certain positions or groups of positions as per a number of purposely formed criteria.

For a lot of companies, whatever their areas of activities, the following business processes, even differing in details, are the most characteristic:

• production
• purchasing
• sales
• Human resources

Key performance indicators must be determined for each business process.

Human resource management as a business process

Let us now have a closer look at the particulars of developing key performance indicators for employees engaged in   the " HR business process of a certain Russian company as an example. In that company, performance indicators were formed in stages. The first stage was preparatory. It began with the introduction of management as per objectives. For this purpose, the company formed a so-called "Structural approach to goal attainment", which prepared the employees for work with the use of the means of the automation of business processes. The company organized the training of its employees so as to enable them to work within automated processes.

At the same time, a wide-scale PR action was held inside the company to bring home to employees the necessity and expected results of the introduction of the system of key performance indicators. Also, regulations, directives and project-related documents were issued and explained to the employees. Seminars for top managers were held with the assistance of invited consultants.

About 40 employees of the company were directly involved in this project. They included the heads of the departments owning the processes who took part in describing them and determining the effectiveness defining or reference points per each process, that is, exactly the key performance indicators.

Descriptions of business processes

The second step is describing business processes. Because at the time key performance indicators were being developed the company was preparing to be certified as to its quality management system, all the business processes were described in compliance with ISO standards.

The purpose of the  Human Resource business process is hiring properly qualified personnel. The criteria here are the compliance of employees' skills with job descriptions and the sufficiency of the number of qualified professionals.

The first criterion is met through personnel evaluations. The second criterion is the sufficiency of the number of qualified professionals. Meeting these criteria is possible only if the directives, regulations and the list of staff positions are made out not just according to the wishes of individual department heads but truly serve the necessity of attaining the organization's objectives.

The starting point of this business process is a vacancy on the list of the company's staff positions. Vacancies occur when the said list is extended or when employees are dismissed.

The ending point of this business process is a filled vacancy, that is having gained an employee: hired, adapted, trained and motivated for attaining the result the company seeks.

This procedure and each step within it require the appointment of persons responsible for their completion. The responsibility is reflected in the following chain: the responsible person – the co-responsible person – the person they report to. The last link in this chain may be a staff member simultaneously engaged in any other business process related to the  Human Resources. The expected result must be indicated for every procedure. The descriptions of all procedures together form the description of the whole business process.

The following are the definitions of the criteria of the estimation of a business process:

• resource requirements (employees, premises, materials and equipment and material resources required for the process to function)
• the complement and sources of process management (process owner and co-owners, if any)
• the boundaries of the process (time constraints for various procedures in the process)
• process reference points (the exact key indicators)
• the estimation of the effectiveness of the process
• the estimation of the maturity of the process.

Special attention must be paid to the interconnections between the business process and other processes in the company and their interaction.

Key indicators

In the company in question, a number of key indicators were determined for the  Human Resources business process. They included several indicators estimating the duration of the  personnel recruitment process, depending on their levels and categories (top managers, medium-level managers, office employees, engineering and technical personnel and laborers). The three key indicators here were the number of employees successfully completing probation, the percentage of employees fully complying with job requirements and employee turnover.

The following points were determined for each indicator: measurable characteristics, the weight of the indicator, the periodicity and methods of measurements and acceptable values (the norms serving the purposes and particulars of the functioning of the company (Table 1).

Table 1. Reference points in the progress of the process measurement

The progress of the process was estimated by adding indicators, accounting for their percentage weights, to the following formula:

P_rogress =  P1*0.25 + P2*0.2 + P3*0.1 + P4*0.05 + P5*0.1 + P6*0.2 + P7*0.1

where P_rogress is the  estimation of the percentage progress of the Provision of Personnel process

Estimation of the effectiveness of the process

The effectiveness of a business process is one criterion of its estimation (Table 2).    In the example on hand, the evaluation of the  Human Resoutces process was done monthly by the HR Director

Table 2. The estimation of the effectiveness of the process

Effectiveness is assessed by adding the effectiveness indicators of the company's every department and calculating the ratio between this number and the number of departments.

  E_ffect = (E1+E2+E3+E4+E5+E6+E7+E8+E9+E10+E11) / 11, (%)

Where
E_ffect is the estimated effectiveness of the Human Resources business process
E1 — company  management
E2 — human resources
E3 — financial planning
E4 — logistics
E5 — production departments
E6 — sales
E7 — legal department
E8 — accounting
E9 — capital development
E10 — informational technologies group
E11 — other departments

The criteria of effectiveness is the sufficiency of personnel on hand within 80% and more

Effectiveness was assessed as per the special scale (Table 3) that allows planning the increase of the effectiveness of the business process for the next reported period.

Table 3. The scale for assessing effectiveness

Assessment of the maturity of the process

Another important criterion of the assessment of a business process is its maturity. The methods used for assessing it are based on comparing the actual results with the approved norm. The maturity of a business process is assessed monthly by summing up process effectiveness and progress figures as per reference points (KPI):

M_aturity = (E_ffect + P_rogress) / 2, (%)

where M_aturity is the assessment of the maturity of the Human resources business process.
The assessment of maturity was also done as per the scale shown in Table 4, which allows the company to plan the attainment of business process maturity.

Table 4. The scale for assessing and planning better process maturity

Bonuses and payroll accounting

Depending on the business process maturity indicators calculated on the bases of  performance indicators, a system of bonuses is made up for the company personnel. The simplest version of the distribution of bonuses when the bonus amount equals the value of the maturity of the business process in question is as follows:

• excellent: 81% to 100 % of the bonuses allotted to the department
• good: 61% to 80 % of the bonuses allotted to the department
• satisfactory: 41% to 60 % of the bonuses allotted to the department.

When the maturity of the process is 40% or less, no bonuses are paid.

The size of the bonus fund may also be calculated using more complex formulas. It depends on what are the criteria used by an organization when allocating bonus amounts.

If a company has developed and uses a KPI system, actual bonus amounts due to employees depend on the KPI values and are paid out when threshold KPI values are exceeded. The total payroll amount as per the results is calculated as the sum total of actual wages that depend on the  performance indicator values.

Pros and contras

The considered above example of determining key indicators as to business processes shows its own advantages and disadvantages. The undoubted advantages include transparency. If a PR action is held properly, all employees understand well what the indicators are, what everyone has to do to attain them and what they will get as the result of that. There are also such positive "side effects" as the regulation and automation of business processes.

If a company already has regulations that describe such processes, one may see it as a good start as concerns determining key indicators related exactly to business processes. If a company has just decided to introduce KPI as concerns its business processes, then the advantage is in that every process will be clearly regulated and described, while there will now be a sense of responsibility for every task, completing it within the time limits and, most importantly, the expected result. Another obvious advantage of the method of determining key indicators as to every business process is the implementation of process-related approach to attaining business objectives, thus increasing efficiency and assuring orientation towards the results of key business processes.

The disadvantages of this method include the high labor intensiveness of its preparation while there is no regulation of business processes and the means of their automation yet. This increases the duration of the development and introduction of a KPI system. Besides, in-house professionals must be well-trained and highly qualified. The absence of the latter condition results in the necessity of bringing in outside consultants, which means a higher cost of the project.

Another disadvantage is certain subjectivity as concerns the distribution of bonuses within departments while there are no other criteria.  In the above considered case, this was a function of the system of corporate and individual planning. At the ends of reported periods, bonuses were distributed according to the degrees of the fulfillment of plans.

Assuring the effectiveness of the  KPI system

A Key Performance Indicators system will be effective if it has the following qualities:

1. Addressability. Each key indicator is attached to a certain employee or a group responsible for the relevant results.
2. Correct orientation. The   key performance indicators are always attached to corporate strategic objectives, key business processes and development projects.
3. Attainability. Approved indicators and norms must be attainable. The attainment of an objective must require a considerable effort but the probability of its attainment must be at least 70% to 80%.
4. Openness.  The values of key  performance indicators are computed on the bases of actual data, that is, users may intervene in processes so as to improve the results while there is still time.
5. Predictability. Key  performance indicators represent the quantitative assessments of factors affecting the costs of the business, that is, they are the indicators determining the desirable future results.
6. Remaining within limits. Key  performance indicators must help users concentrate their attention and efforts on the attainment of several high priority objectives, instead of dispersing them towards many things.
7. Understandability. Key  performance indicators must be easy to understand.
8. KPI must be balanced and interconnected. They must support instead of being in conflict with one another.
9. Initiation of change. The measurement of key  performance indicators must set off a chain of positive changes, especially when the process is watched by the company's  management.
10. The simplicity of measurement. Key  performance indicators work in the context of processes where objective-related and threshold values are used, so they must allow the periodical qualitative assessment of the progress.
11. Individual incentives. The indicators must help to motivate personnel. The organization may increase the impact of key  performance indicators by setting them so as to motivate certain employees.
12. Relevancy. The impact of even excellent key performance indicators weakens with time. That is why they should be periodically reviewed and refreshed.
13. Comparability. Indicators must be comparable, that is the same indicators should be possible to be compared in similar situations. For instance, the values of the Average Check indicator (the ratio between the average daily revenue and the daily number of checks) for downtown stores and similar stores located on the outskirts must not be compared.
14. Rationality. Each indicator must be meaningful so as to be possibly used as the basis for an analysis. For instance, the indicator computed as the ratio between the total cost of administration and the total revenue formally meets all the above requirements, being:

•   qualitatively measurable
•   may be normalized and represented graphically
•   reflects dynamics, etc.