From the course: Balanced Scorecard and Key Performance Indicators

Importance of key performance indicators

From the course: Balanced Scorecard and Key Performance Indicators

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Importance of key performance indicators

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- [Man Without Glasses] Imagine that you are boarding an airplane, you have just struggled to shove your bag into the overhead bin, and you are now settling into your seat. - Ah, we're going to use that airplane pilot illustration created by our colleague, Professor Monte Swain? - Yep, this is the airplane pilot illustration. - Excellent. Okay, our passengers are now settled in their seats, you be the pilot, I'll be the co-pilot. - Okay, I'm the pilot. Ladies and gentlemen this is your pilot speaking. Welcome aboard our flight from Anchorage to Zimbabwe today. - [Man With Glasses] And this is your co-pilot. Now, up here, in the cockpit, we are noticing that there are dozens, maybe hundreds of dials, and lights, and numbers, it's beautiful but confusing. - [Man Without Glasses] Yep, we're overwhelmed with far too much data up here, so your co-pilot and I have come to a strategic decision, we can only focus on one measurement, just one. - Your pilot and I have talked it over and we have decided that there are three measurements up here in the cockpit that seemed particularly important, airspeed, altitude, and fuel level. - [Man Without Glasses] Yep, those seem pretty important, but we just want to focus on one. So, please, talk amongst yourselves, hold a little election and decide which one, which single measure, you would like us, up here in the cockpit, to focus on during our flight today. - Okay, so you're one of the passengers on the plane. After hearing this announcement what would you do? - Well, I'll tell you what I'd do. I would calmly get up, grab my backpack, remove my carry-on bag from the overhead bin, and then calmly but quickly get off the plane. - [Man With Glasses] Absolutely. We all know that the pilot and co-pilot can't fly the plane just by monitoring one thing, they have to look at many things. I want them up there monitoring the fuel, and the altitude, and the airspeed, and lots of other things. - [Man Without Glasses] Now an organization is a complex entity, just like an airplane. You can't run an organization just by looking at one number. - For example, Return on Equity is a great financial ratio, but a company CEO needs to follow more than just the company's ROE to run the business. What about employee satisfaction? What about percent of production capacity utilized? - As another example, percent of deliveries made on time is a great measure for a package delivery company, but that is not the only thing to measure. How 'about fuel efficiency? How 'about speed of collecting cash from customers? - [Man With Glasses] The reporting challenge in an organization is to identify the key measures, to organize them into a framework that makes them easy to remember and to understand, and then to design a performance evaluation system that will give people in the organization an incentive to pay attention to those measures.

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