KPI based management for multilevel companies (Part 5)
Cause and effect relations between KPIs
While building a map of KPIs for the departments and the responsibility centers, the process of defining cause and effect relations between KPIs is also performing. Those relationships could be divided into two groups: clear (the ones that might be calculated) and unclear (hidden) ones. Clear (computational) cause – effect relationships can provide the way to calculate a higher level KPIs on the basing on lower level KPIs’ values. Unclear (hidden) indicators present cause – effect relationships between KPIs, which belong to different categories or subcategories. While building the conceptual map, it needs the quantity of KPIs, which refer to management level, to be limited by 15 – 20 ones for one level of management. It is urgent for big companies with sophisticated hierarchy; it is aimed to prevent the KPIs to be mixed up and present conflicting information. This suggestion of limitation of the KPIs is based on concept called “necessary minimum provides the best way to present the achievement of goals”, which appeared as a result of practical repots of companies in different business sectors and locations. It is certainly is not an absolute rule, but the logic of preventing the map of KPIs to be overloaded by the quantity of measures needs to be understood by top management.
The process of establishing cause and effect relations between KPIs, which form the structure of the system, is actually the process of balancing the scorecards. While performing the relations’ determinations and formalization, strategic hypothesis, related to the way on how one indicator’s performance value dynamics depends on another KPI’s performance value dynamics, appear as well as relatively redundant indicators are determining. Usually each hypothesis has a formalized nature, i.e. it actually represents the certain stable assumption, which usually is one of the strategic points (for example: «Achievement of the set market share promotes share price persistent growth»).
The presence of hypotheses, related to cause and effect relations of strategic goals between each other, can be revealed on the following basic points:
- Evidence of logical interrelation between indicators;
- The function relations between indicators exist and can be presented in a way of mathematical formulas;
- The correlation linking between the indicators existence is proved by the correlation coefficient, which had been determined as a result of the analysis and research (this point highly increases probability of existence of a cause and effect relation).
The process of balancing scorecards is the last stage to complete the creation and forming KPIs’ map. When the dynamics of KPI’s values, referring to the strategic management is defined, it needs the stability of cause and effect relations between indicators to be verified in an operative mode with the purposes of formation of more exact cause and effect hypotheses.
The map of the article
- Part 1: This part introduces the basic statements of KPI based management. Also it defines the term KPI;
- Part 2: BSC management system’s methodology;
- Part 3: Leading and Lagging indicators concept as an inherent part of KPI based management;
- Part 4: This part presents the basic criteria of what KPI to include in the map;
- Part 5: Cause and effect relations between KPIs;
- Part 6: The beginning of Cascading description: classification of indicators for management according to their importance
- Part 7: Conclusion of Cascading description: Indicative and Imperative KPIs
