CSFs and KPIs

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What are CSFs and KPIs? Description

Critical Success Factor

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.

A CSF is some feature of the internal or external environment of an organization that has a major influence on achieving the organization's aims. A KPI is a quantifiable gauge that an organization uses to measure its performance in terms of meeting its CSFs. There can be more than 1 KPI per CSF. A KPI can be financial or non-financial.

It is useful to understand that at least 3 levels can be distinguished to express the aims of any organization:

  1. Vision/Mission. An expression of the basic reason why the organization was established and continues to exist. Example: Oxfam was established to relieve poverty and suffering in the world. Compare: Strategic Intent, Shareholder Value Perspective, Stakeholder Value Perspective.
  2. Strategic Goals. Faced with the internal and external circumstances that an organization must deal with in the next years: what should be the focus of the organization so that it can successfully pursue its Vision. Such Goals are identified by various techniques available in strategic analysis. See for example: SWOT Analysis, PEST Analysis, Core Competence, Value Chain.
    Example: A Goal of Oxfam is to seek to provide secure livelihoods for farmers in order to relieve poverty.
  3. Objectives. Strategic Goals are by their very nature high level expressions, big ideas. These Goals must be broken down into something more concrete and specific, so that tactical plans can be devised (budgets), responsibilities assigned and measurements made. Therefore the Strategic Goals are analyzed to determine the Factors that affect their achievement. These Factors are the CSFs.
    Example: funding, training and education programs create secure livelihoods. Therefore funding, training and education are CSFs for this Goal.

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:

  • You can’t manage what you can’t measure.
  • Things that are measured get done.
  • You can’t improve what you can’t measure.

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.

According to Rockart, there are 4 basic types of Critical Success Factors:

  1. Industry.
  2. Strategy.
  3. Environmental.
  4. Temporal.

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).

For each CSF there must be at least one Measurement (KPI) and a Target for the current or forthcoming budget exercise. According to this technique, an Objective (tactical aim) is composed of a CSF plus a KPI plus a Target.

Conflicts are inevitable between so many objectives. For example a cost cutting objective may be in conflict with a customer satisfaction objective. Hence it is important to create a balance between the various objectives set for each CSF/KPI combination. Thus the business plan for the organization as a whole is viable. This principle is called Satisficing (Herbert Simon) as opposed to Optimizing.

There is a heavy emphasis on IT to achieve all this, since the data that are associated with the KPIs needs to be captured and consolidated. Often the presentation of this information is done through Business Intelligence software and uses some form of scorecard, dashboard, traffic light system or similar. It is crucial to decide when, how often and how the performance will be measured. Equally it is essential to create authority structures and assign organizational responsibilities that enable the Objectives to be actively managed.

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:

  • A Transportation Company didn't pick up passengers on a certain route, because then the buses would come too late!
  • An Hotel couldn't make name badges for new personnel quickly enough. Therefore it issued badges that had already been made. Hence Susan had ‘Mary’ on her uniform for a couple of weeks.

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 Goals.

Steps in the CSFs and KPIs. Process

  1. Establish the Vision.
  2. Determine Strategic Goals.
  3. Analyze each Goal - what Factors (CSF) influence the Goal.
  4. Assign at least 1 Measure for each Factor (KPI).
  5. Assign a Target for the current budget exercise.

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

  • Targets are good Servants but bad Masters. Existing CSFs and KPIs must be reviewed frequently.
  • There is an emphasis on measurement. This can quickly result in forgetting or undervaluing major 'soft' elements, which are more difficult to measure. Compare: Scientific Management.
  • It is difficult to establish the right number and types of CSF.
  • The technique needs a number of cycles and considerable organizational "pain" to get it right.

Book: Harvard Business Review, Sept.-Oct., 1961 - Management Information Crisis

Book: Christine V. Bullen - The Rise of Managerial Computing

Book: Peter M. Senge - Fifth Discipline

Book: David Kaplan & Robert Norton - The Balanced Scorecard

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Best Practices

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🥇 Difference Between a KPI and a KRA?
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