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Garrett Cronin, PricewaterhouseCoopers, considers the practical aspects of selecting and communicating KPIs.

Reporting key performance indicators (KPIs), both financial and non-financial, is a critical element of effective communication of a company’s progress towards its goals.

Narrative reporting requirements continue to evolve in many territories, but one common theme is emerging – the need to report on KPIs. This provides an explanation of how the company is doing against its stated objectives and strategies. Yet choosing and reporting on KPIs is proving tricky for some companies. What makes a performance indicator ‘key’? What type of information should be provided for each one?

The starting point for choosing which KPIs to report is that it they should be ones the Board uses to manage the business and monitor progress against stated strategies. But these are often financial, even though communicated strategies might focus on maximising the customer experience, developing new products or retaining talented people. The challenge for companies is whether this is because information tracking progress in those strategies is not available, or simply because it is monitored lower down the organisation and not yet escalated to the Board. In such situations, development of KPIs to monitor progress going forward may be necessary.

The industry angle should also be considered when choosing KPIs. Research over the past decade has shown that the same measures matter to both management and investors in a particular industry.

Measures that matter to industries

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However, management should not feel compelled to create KPIs to match those reported by their peers. Relevance to the particular company and its chosen strategies is paramount. Accordingly, it is inappropriate to specify how many KPIs a company should have – but our experience suggests that between four and 10 measures are likely to be key for most companies.

Consideration of whether KPIs aggregated across a group make sense is also important. KPIs for specific segments that reflect the industry and strategy of that segment may be more valuable to investors. Aggregating KPIs for a retail business segment with those for a personal financial services segment, for example, is unlikely to provide useful information.

As strategies evolve over time, so will the related KPIs. However, an explanation of the rationale behind any changes in KPIs is vital.

Finally, management may have concerns over the reliability of the KPIs and be uncomfortable about providing them externally. This is understandable given the move away from traditional financial measures that have been generated through established systems and controls processes and externally assured. However, it is not necessarily the KPIs themselves and how reliable they are that is important, but the overall picture they present. Provided the source of information and its calculation is explained, and any limitations of its reliability set out, readers can make their own judgments on whether to use the data or not.

PANEL

A model for effective communication of key performance indicators

Link to strategy KPIs presented in isolation from strategies and objectives, or vice versa, do not allow readers to understand progress towards goals.

Definition and calculation Clear definitions help to cut through industry-specific jargon, while specific components of the calculation allow comparisons to other companies.

Purpose Management’s view of a KPI’s relevance is important.

Source, assumptions and limitations Readers can assess data reliability when provided with its source, assumptions and limitations. Showing whether KPI data is independently assured is also valuable information for readers.

Future targets A forward-looking orientation, whether quantified or set out in commentary, allows readers to assess the potential for strategies to succeed as planned.

Reconciliation to GAAP Differences between GAAP and non-GAAP measures should be explained.

Trend data Reporting the improvement or deterioration in performance over time is vital for assessing the success of management’s strategies and actions to address performance trends.

Segmental KPIs relevant to a specific segment’s industry or strategy supplement those with a more group-wide focus.

Changes in KPIs KPIs evolve over time as strategies do. Explaining these changes aids comparability, a key principle of good corporate reporting.

Benchmarking Readers value a clear indication of management’s view of the company’s competitive peer group and their comparative performance.

Garrett Cronin, Director, PricewaterhouseCoopers Advisory Services, Georges Quay, Dublin 2. T: (01) 704 8807 E: garrett.cronin@ie.pwc.com