CSFs and KPIs
Defining and measuring Business Objectives. Critical Success Factors and Key Performance Indicators. Explanation of CSFs and KPIs of D. Ronald Daniel en Jack F. Rockart. ('60)
Contributed by: Ed Walters
What are CSFs and KPIs? Description
CSFs and KPIs are techniques that were pioneered by D. Ronald Daniel and Jack F. Rockart. They can be used for defining and measuring business objectives.
CSF is an acronym for Critical Success Factor. KPI is an
acronym for Key Performance Indicator. Both of these words are widely
used in the context of the design of relevant aims and measurements and analysis
of the goal attainment of an organization.
It is useful to understand that at least 3 levels can be distinguished to express the aims of any organization:
When combined, the 3 levels form the basis of a Business Plan. In real life, things may not fall very neatly into 3 levels. However the implication here is that of a hierarchy of aims, from the quite vague and ambitious downwards towards the very concrete and measurable. The concept of CSF/KPI can be used throughout the hierarchy, and is the basis for often-quoted and semi-true management phrases such as:
Origin of CSFs and KPIs. History
The concept of "success factors" was originally developed by D. Ronald Daniel of McKinsey and Company(1) in the sixties. However the idea was most famously refined and popularized by Jack F. Rockart of the Sloan School of Management(2) at the end of the 80s.
These 4 areas, of course, are one view of the strategic concerns that an organization needs deal with. Originally CSFs were devised to operate at the Business Strategy and Strategic Goals level. However, the idea of CSFs has proved so useful that its use was extended to lower levels of the organization. For example towards an organization's departments, even towards sections and towards individuals! The term: "critical" originally referred to the chance of catastrophic failure of the organization if the linked goals were not realized.
How many CSFs and KPIs should there be?
Once there is a clarity of ‘Vision’, 3-5 strategic goals should be enough
to focus the organization's efforts during a forthcoming 3-5 year period.
However see the Balanced Scorecard
technique, which suggests 3-5 goals per focus area. Each Goal, as we have
seen, should be broken down into a number of Factors, perhaps again 3-5, that
affect the Goal. This would give, theoretically, between 9 and 25 Factors
that the organization should consider to be CSFs. There should not be too
many factors (focus is lost and responsibility is hard to identify). Nor should
there be too many factors (it may be difficult to measure and take effective
action to remedy problems).
How does an organization know if the Factors that have been identified are the right ones?
The simple answer is: It doesn't know! But an organization can learn - it is important to review the CSFs and KPIs periodically to determine whether these Factors really do drive the business, and are driving it in the desired direction. Targets are good servants but very bad masters. There are innumerable examples of this:
The mindless pursuit of Targets is at best futile and at worst detrimental and demoralizing to all involved. However the learning process by which organization's develops a truly useful set of CSFs is an essential feature of a healthy and well-led organization. This required learning process can then be seen as a part of the philosophy of Pete Senge’s Learning Organization and the Balanced Scorecard of Kaplan/Norton. Both of these concepts owe a debt to the CSF/KPI idea.
Calculation of CSFs and KPIs. Formula
CSF + KPI + Target = Objective
Usage of CSFs and KPIs. Applications
The technique is widely used for determining in detail where to place the
efforts of the organization, so that it achieves its Vision and Strategic
Steps in the CSFs and KPIs. Process
Strengths of CSFs and KPIs. Benefits
The idea of CSF/KPI has been very influential in many methods that were
designed to align an Organization's tactical efforts with Strategy. Notably
the Balanced Scorecard was based on this idea.
Limitations of CSFs and KPIs. Disadvantages
Compare with CSFs and KPIs: Management by Objectives | Balanced Scorecard | SMART | Business Intelligence | Performance Management | Benchmarking | RACI | Activity Based Costing | Strategic Management
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