ORGANIZATIONAL KEY PERFORMANCE INDICATORS

- a management tool with bottom line effect ------------------------------------------------------------------------------COPENHAGEN 2011

Abstract
In a world, where almost everything else in a company can be bought or copied, the human organization has developed to become a critical parameter of competition. This tool makes it possible to carry out a data based estimation of the strengths and weaknesses of the human organization within a company, to identify the most important development areas as well as to estimate the financial impact of developing alternative not to develop these areas.

I was asked to assess the tool from a financial validation perspective, before testing it in 3 Masco companies. The conclusion is, that it is a very trustable tool and the best tool, I have ever seen bridging Finance and HR. In a very simple way it makes it possible to link performance and activities within, what we normal consider to be the areas of HR, with the logic of business and finance. The tool helps managers to understand the business value of some important parameters of the human organization. Even though it analyzes and describes some very complex issues, it is an easy-to-use tool! I am very impressed. Darius Padler, in 2009 Business Controller, today CEO of Hppe

Organizational KPIs

A companys ability to make optimal use of its employees has developed to become a strategic parameter when it comes to the competitiveness of a company. Nonetheless a lot of the initiatives which are instigated in order to develop the human organization are often based on personal observations and judgements rather than data and analysis. Absences and failure to use data based organizational key performance indicators are quite unsatisfactory when companies take initiatives to develop their organization. Such key performance indicators could ensure focused and business oriented efforts.

Outcome

Once in a while, a tool is developed which introduces something completely new. This tool developed by Per Krogager and Kysti Schmidt: Organizational Key Performance Indicators is such a tool. The tool introduces new, significant organizational key performance indicators and new calculation principles and methods that make it possible to estimate the competitiveness of the human organization and the financial effect of such on a companys bottom line. But more than anything else, this tool is innovative because it very simply connects the soft with the hard in such a way that you cannot call organizational relations soft areas any longer.

It is actually possible to find quite a substantial amount of money on the bottom line and I will immediately look into our recruitment costs in our factories.
Michel Trrup, former General Manager SCA Flamingo

Organizational Key Performance Indicators offers concrete evidence as to how a companys organizational performance can be measured and evaluated by means of data which, to a large extent, are already available but which are rarely used in order to comprehend the overall performance of a company. The tool measures on 27 significant organizational areas which are divided into four main categories; 1) how strong is the organizations market position? 2) How vulnerable is the organization in relation to its key competences? 3) How much strain does the human organization put on the company financially? 4) How effective is the companys organization? Taking into consideration that the human organization often generates more than 50% of the overall costs, any company manager should focus on these four areas.

Benchmark

The organistational key performance indicators can be useful to monitor within the four walls of a company. They make it possible to monitor the development within one or more selected area in a data based way and together with the attention from management the measures will often have a positive effect and be a driver in itself. However, a lot of inspiration for improvements and development activities can be obtained by comparing a companys organizational key performance indicator with key performance indicators from other companies. In fact, it can be difficult to see your own organizational strengths and weaknesses unless you compare to other companies. The tool therefore contains the possibility for comparing to other companies. The data base consists of 112 different businesses which can be put together to a smaller number of 27 business groups and again 9 main categories. The tool enables a company to estimate how the human organization actually performs in financial terms compared to other companies.

The concept: Carries out a data-based evaluation of a companys organizational strengths and weaknesses Identifies the most important development areas Estimates the financial bottom line effect of developing these areas or not developing, as the case may be

13 Organizational Key Performance Indicator Categories

The concept measures on 13 categories of organizational key performance indicators. These categories are: Performance in the market Innovation ability Joint focus Organizational profile Organizational adaptation ability Successor rate in key jobs Total payroll costs Salary level Number of employees per manager Investment in competence development Staff turnover Absences due to illness Accidents Some of these raw key performance indicators are already used today. Such indicators are: Staff turnover, Absence due to illness and Accidents. But to some extent we also have vitality index which is used in American companies. In other areas we have developed new key performance indicators.

There are obviously quite a large number of hidden costs in the human organization which you as manager are unaware of. Most managers will probably just perceive them as noise.
Mette Sndergaard, Financial Director SCA Flamingo

29 Organizational Key Performance Indicators

Each key figure category contains a couple of organizational key performance indicators which result in a total of 29 organizational key figures: 1a. Market performance 1b. Turnover per employee 1c. Earnings per employee 1d. Turnover development per employee in relation to last year 1e. Development in earnings per employee in relation to last year 2a. Innovation ability (Vitality index) 3a. Organizational focus 3b. Number of managers and key employees with performance dependent salary (bonus) 3c. Performance dependent payroll share (bonus) 4a. Administration and support salary costs per employee 5a. Organizational adaptation ability 6a. Successor rate on key jobs 6b. Job positions filled with internal candidates in relation to the vacant jobs 7a. Payroll share of total costs 8a. Average salary for managers 8b. Average salary for salaried workers 8c. Average salary for hourly-paid workers 8d. Average salary, all except senior management 9a. Number of employees per manager 9b. Number of middle managers per senior manager 10a. Investments in competence development in per cent of the total costs 10b. Number of investments for competence development covering activities connecting the goals and plans of the company 11a. Staff turnover in per cent (leavers) 11b. Staff turnover in per cent (starters) 11c. Average seniority 11d. Share of staff turnover from employees with less than 12 months seniority 12a. Absence due to illnesses in per cent 13a. Accident frequency. Number of injuries per 1 million work hours 13b. Severity, average number of lost work days per accident

Concept

In order to organize the 29 key performance indicators in such a way that it is relatively easy to get an overview, the tool organizes them in 4 main groups. For the same reasons, the 12 most important key performance indicators are prioritizes, 3 key performance indicators within each of the 4 main groups. The final concept is built around 4 main tools: a questionnaire, the raw key performance indicator report and an elaborate key performance indicator analysis and a more graphic key performance indicator presentation. The concept is also developed into 3 different versions which each have been adjusted to different target groups and situations. Regardless of the version, by using this tool a company can make an analysis of one or more organizational parameters and compare to other companies within the same business.

In God we trust everybody else must bring data!

Basic Elements and Outcome

The concept is built around 4 main elements:

a questionnaire, the raw key performance indicator report an elaborate key performance indicator analysis a graphic key performance indicator presentation.

In order to match the need of different companies, the concept is available in 3 different versions which each have been adjusted to different target groups and situations.

the most elaborate and detailed organizational key performance indicator analysis, directed at companies who want the best possible insight a basic version directed at companies who want to analyze and benchmark the most fundamental relations regarding the human organization and where only the most basic key performance indicators are reported a focused key performance indicator analysis for one or more key performance indicators selected by the company itself.

Regardless of the version, by using this tool a company can make an analysis of one or more organizational parameters and compare to other companies. Management cannot be reduced into a formula. The world is too complex and data is too historical and typically much too uncertain for that. However, the concept is building on the belief that good leadership is based on a combination of business overview and insight, competences, data and common sense.

Easy-tounderstand graphics

One important output of the Organization Key Performance Indicator tool is a spider web that makes it very easy to understand the strengths and weaknesses of the human organization. The spider web makes it possible for a company to see how the human organization perform compared to best in class and to average within the peer group. The spider web organizes the many indicators into four groups, each group indicating the strengths and weaknesses on 3 prioritized and selected indicators. The four groups of organizational key performance indicators are: Overall strength Key performance indicators in this main group indicate individually or put together measure an organizations overall performance in the market Vulnerability Key performance indicators in this main group measure individually or put together the organizations ability to reproduce itself Basic operation Key performance indicators in this main group measure individually or put together the burden of cost of the human organization in the company Structural characteristics Key performance indicators in this main group measure individually or put together the significant feature in the organizational structure.

Development in profit per employee

Development in sales relative to market development Vitality Index

Organisational adaptability

Staff turnover

Administrative payroll costs

No. of successors for critical jobs

Span of control

No. of positions filled by internal candidates

Investment in competence development

Absence due to illness Payroll costs in per cent of total costs

Another very important graphic is the below $ table, where the estimated financial effect of the organizational analysis is shown. In the table, a company can see the amount of money the company allocate to each of the parameters measured as well as the negative or positive cost distance to average and best in class company.

Omrde Personaleomstning
effekt p omkostninger

VFV A/S mill. DKK 10,1 779,3 38,5 15,0 12,7 81,0 936,6

GNS mill. DKK 16,4 -73,5 -9,5 -5,5 4,5 -2,7

BP mill. DKK -3,7 -117,6 -20,4 -8,7 -12,7 -8,1

Omkostninger til ln
effekt p omkostninger

Sygefravr
effekt p omkostninger

Kompetenceudvikling
effekt p omkostninger

Organisatorisk tilpasningsevne
effekt p omkostninger

Medarb. pr. leder

effekt p omkostninger

Omkostningsbase Mulig omkostningsreduktion I % af profit, 2007 Udvikling i salg i.f.t. markedet

effekt p bundlinie

-91,2 19,6 % 95,0 -

-171,2 36,8 %

I % af profit, 2007 Total, i % af profit, 2007

19,6 % 36,8 %

The table makes it very easy to see the bottom line effect of a specific competitiveness.

Foundation

The concept is based on the needs and experiences of the two HR professionals Per Krogager and Kysti Schmidt. But many more people have participated in the development of this tool.