Bob Paladino
Transition from lagging to leading KPIs

How one company is leading people, process, and customer indicators to manage its expansive, entrepreneurial-driven service organization.

March 6, 2014
by Bob Paladino, CPA

For many years, finance functions have engaged internal executive teams and department heads through the controllership function with a mindset of reviewing costs and alerting leaders to trends and variances. This approach dealt primarily with lagging financial indicators and offered little opportunity for understanding “how” or “why” the financial results were obtained. Additionally, financial line items do not always provide insights into risk factors, an ever expanding area of concern for executives.

Given today’s rapidly changing competitive landscape, customers’ ever expanding expectations for service and performance, and the search and bidding for scarce employee talent, it has become more important to strategically understand the leading drivers and measures of performance. These nonfinancial measures surprisingly reside in companies’ systems and reports but have not been leveraged for strategic advantage. Identification of key strategic objectives and leading indicators should be an integral part of leadership’s strategic planning and management processes.

This article encapsulates AWARE Inc.’s development of a corporate strategy map and key performance indicators (KPIs) with focused attention on leading indicators throughout the organization. AWARE Inc. provides residential living and community care and treatment services to those with mental health, intellectual, and developmental disabilities. Its first home opened 38 years ago with a few residents in Anaconda, Mont. Since then, the company has expanded to more than 80 homes and 20 service lines serving thousands of people in Montana. AWARE has grown to become the state’s largest health care provider of its type. In reviewing leading indicators, one area of focus will be on voice of the customer, measured by Net Promoter Score (NPS). NPS, introduced about 10 years ago in an article in Harvard Business Review, is a leading indicator of customer loyalty and driver of company growth.

The approach, tools, and techniques described here can be adapted to companies of all sizes and in all sectors. Below are three steps your finance and leadership team can follow to move from a lagging set of financial indicators to a “strategic” set of leading and lagging indicators. More importantly, this shift provides clarity of purpose and direction to the employee base.

1. Engage leaders to map out the company business model.

AWARE executives partnered with me in early 2013 to design the corporate strategy map and Blanced Scorecard KPIs.

Below is a corporate strategy map or storyboard, which contains 20 strategic objectives across four perspectives. Here’s an example of the leading and lagging strategic objectives and related KPIs (highlighted in green): E3, Pursue Service Excellence through professional development and training, a leading objective, enables attainment of the strategy P4, Provide Right Services to the Right People at the Right Time. The experience of AWARE Inc. executives shows investments in people development (E3) directly affect the quality, timeliness, and level of patient service (P4), another leading objective. These two objectives, among others, result in positive voice-of-the-customer survey scores in S2, Provide Outstanding Service. S2 is measured by the Net Promoter Score.

The foregoing objectives, all leading in nature, are the factors or drivers that result in the lagging financial and risk measures embodied in strategic objectives F2, Maximize Revenue with Quality Services and F5, Manage Organizational Wide Risks. For example, F5 is measured by number of client incident reports (for example, injuries and medication errors), which can result in litigation and awards.

  • Takeaways for engaging leaders:
    • Secure buy-in from leaders on the purpose of strategic road maps and KPI scorecards.
    • Provide awareness training and guidance on strategy map linking for your colleagues.
    • Fully explore the business model with particular attention to identifying leading customer, people, process, and technology objectives and KPIs.

2. Deploy a companywide strategy map.

AWARE established a corporate performance management (CPM) team that identified multiple data sources and the types of reports needed. IT established extract, transfer, and load (ETL) maps to automate and populate strategy maps and scorecards in the scorecard software system. Notice the interplay among the five objectives and KPIs in the box below. The baseline column provides historical information on performance and provides the foundation to run forward-looking scenarios. One can clearly see the “cause and effects” forecasted by improvements in the leading indicators. For example, increased investments in E3 employee training are expected to enhance clinician capabilities and competencies and thereby enhance P4 service levels. In turn, these leading indicators will drive enhanced S2 NPS scores while concurrently reducing F5 risk factor incidents. Early survey results reveal NPS scores above 60%, which is considered excellent. According to Harvard Business Review, Southwest Airlines, long considered the industry benchmark for customer service, has NPS scores of 50% to 55%. Finally, in the driver model we observe the forecasted impact on F2 revenue. This example underscores the value in engaging leaders to more fully understand and appreciate how people, process, and customer results drive the economic model.

Forecasting Model – KPIs and Business Objectives

  • Takeaways for engaging leaders:
    • Validate the strategy map or driver model to set the stage for identifying and leveraging leading KPIs.
    • Discuss strategic scenarios to gain insights into the causes and effects, and sensitivities among strategic variables.
    • Gain deeper insights into strategic challenges and opportunities for growth or improvement.

3. Cascade KPIs throughout the organization to incorporate organizational knowledge.

Once executives agreed to the Level 1 corporate strategy map and KPI design, they actively participated in design sessions to cascade the strategy maps and KPIs to the next two levels in the organization, consisting of AWARE’s two largest divisions and their 20 division service lines. AWARE executives advocated cascading KPIs enterprisewide. Enterprisewide design included engaging employees at additional levels. An example of the cascading hierarchy is shown for the residential division below.

The Cascading Hierarchy of AWARE’s Residential Division

Nine months of rapid prototyping resulted in more than 250 strategy maps and Balanced Scorecards, a number that reflects the complexity of the organization. Executive, division, service line, and site leaders have collaborated to flesh out and populate early strategy maps and KPIs. The CPM team is leveraging ETL tables to produce early reports to train leaders on meeting management skills. Much work remains to grow this approach enterprisewide. AWARE has taken giant steps and the organization is energized by its new performance management system to augment services to families and residents and to fulfill its societal mission.

  • Takeaways for engaging the organization:
    • Sequence successive levels of personnel of the organization in the design process.
    • Solicit input from each department leader and his or her direct report teams to formulate their maps and KPIs.
    • Recognize design is an iterative process and remain flexible to incorporate new ideas.

My experience shows that it takes approximately two to three years to fully implement this across all areas in an organization. I have shared three steps your leadership team can apply to performance management processes. These steps support your shift from traditional cost drivers to strategic, operational, and fiscal drivers and objectives, which has the potential to change the relationship you have with your business partners.

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Bob Paladino, CPA, is an adviser and trainer, and author of dozens of articles and three best-selling business books. He is scheduled to speak at the AICPA Financial Planning & Analysis Conference, July 21-23 in Orlando, Fla.