Development of a key performance indicator system for sales organizations

Content:

List of abbreviations

List of graphics

List of tables

1. Introduction

2. Key performance indicator system as a management tool
2.1 Meaning and targets of a KPI system
2.2 The essential component of key figures
2.2.1 Forms and tasks of key figures
2.2.2 Quality criteria for measurement parameter
2.2.3 Multidimensionality of measures
2.3 Development of key performance indicator systems
2.4 Integration of benchmarking

3. Key performance indicator system for sales organizations of an industrial company
3.1 Determination of targets
3.2. Financial key performance indicators
3.3 Modular sales controlling
3.3.1 Internal analysis
3.3.2 External analysis
3.4 Cause-effect chains within the system

Appendix

Bibliography

List of abbreviations

illustration not visible in this excerpt

List of graphics

Graphic 1: Pufahl’s model of modular sales controlling.

Graphic 2: Forms of appearances of key figures.

Graphic 3: Approaches and tasks of key figures.

Graphic 4: Coherence between measuring dimensions performance tiers and key figures.

Graphic 5: Calculation pyramid of KPI system.

Graphic 6: Process of development of a KPI system.

Graphic 7: 3-phases model of benchmarking.

Graphic 8: Methods of benchmarking.

Graphic 9: Improvement potential.

Graphic 10: Adjusted process of KPI system development.

Graphic 11: Policy Deployment approach.

Graphic 12: Forms of organizational structures.

Graphic 13: Adjusted H-model for sales organizations.

Graphic 14: Product life-cycle.

Graphic 15: Matrix product-life cycle.

Graphic 16: Competition analysis.

Graphic 17: Key of KPI system.

Graphic 18: Sales-oriented coherences.

Graphic 19: Cost-oriented coherences.

Graphic 20: Financial coherences

List of tables

Table 1: Definitions of KPI system.

Table 2: Resulting factors of incorrect data.

Table 3: Selected short-term strategic sales targets.

Table 4: Determination of financial KPIs.

Table 5: Internal vs. external influences.

Table 6: Sales analyses within a sales organization.

Table 7: Selected sub processes within a sales organization.

Table 8: Efficiency measurement.

Table 9: Marketing and sales-related key figures.

Table 10: Key figures invoice and accounts receivable department.

Table 11: Product life-cycle key-figures.

Table 12: Customer-related key figures.

Table 13: Key figures about market share.

1. Introduction

"You can't understand, manage, or improve what you don't measure."^[1]

For every organization it is important to understand how their business is running in order to manage it. The management needs significant data in order to pursue their targets and take the right decisions ("manage", "i mprove"). Appropriate controlling methods in order to better understand running businesses are the issues of KPIs and KPI systems which find relevance in literature as well as in practice.^[2] KPIs are understood as informative quantitative data which concentrate the reality to measurable economic circumstances ("measure").^[3] Since the significance of single KPIs is limited, due to their compression of information, it is important that KPIs are connected to each other so that the measured economic issues are understandable ("understand") for the management.^[4]

This thesis will pick up the issue of KPI systems in order to develop a KPI system which is tailored on the economic reality with which sales organizations are confronted. For this purpose, the thesis will be built on a basic model which will be mentioned in the course of the thesis. The reader will, first of all, get insights about the theory of KPI systems. In this context, the reader is going to develop a basic understanding about the issue of KPI systems, i.e. their relevance as well as their basic development. In chapter 3, the actual model of KPI system for sales organization is going to be developed, by transferring basic comprehension to individual sales organizational demands.

The base of operation on which the theoretical part is based on, is Pufahl’s model of modular sales controlling which is shown below:

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Graphic 1: Pufahl’s model of modular sales controlling.^[5]

Pufahl describes effecting forces which either influence sales performance from external, such as customers, competitors and markets or influence sales performance from internal, such as products, processes and the organization itself. Within the theoretical elaboration of the thesis, key figures and analyses will be determined, by going through each of the above mentioned modules in order to determine adequate key figures and analysis methods. The goal of the theoretical part is thereby, to create a model of KPI system which makes the grade of the requirements of a modular sales controlling approach, i.e. a system which covers all driving forces of a sales organization by analyzing via appropriate key performance indicators the operating performance of a sales organization.

2. Key performance indicator system as a management tool

The following chapter will introduce the notion of KPI system. First of all, the notion of KPI system will be defined by confronting older and recent literature in order to demarcate the scope of the development of a KPI system within this thesis. Following chapters are going to discuss the particularities which need to be considered when a KPI system is developed in order to create a basis for the actual development of a KPI system model in chapter 3.

2.1 Meaning and targets of a KPI system

The introduction of a KPI system provides a management tool for decision-makers with which data can be evaluated in order to pursue targets and take right decisions. This view is supported by several authors. Selected definitions show a pattern of what is meant with KPI system:

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Table 1: Definitions of KPI system.

Experiences with KPI systems showed an important development over decades. In 1919 the DuPont-System of Financial Control intended to analyze the ROI. Enhanced systems (e.g. ZVEI- and R/L-KPI system) tried to sophisticate crucial quantitative factors by going more in depth.^[10] However, these are considered as older approaches. Lachnit sees the need for sophistication and splits the KPI systems into analyzing KPI systems and controlling KPI systems. Analyzing means in this context to go deeper step by step to find the causing source of the KPI, whereas controlling means to enforce the realization of a determined target.^[11] Moreover, key figures in a KPI system need to be in either a calculating or an economically reasonable coherence.^[12]

Recent literature also came up with the notion of Performance Measurement. Neely at al defined Performance Measurement as “the set of metrics used to quantify both the efficiency and effectiveness of actions”.^[13] A strategic management approach, such as Performance Measurement implies to be, is a holistic approach trying to measure the strategy of an organization.^[14] The above listed KPI systems were too static and monotonous in terms of possibility for strategic control out of them. Insights granted with the introduction of Performance Measurement are reasonable to integrate within a modern KPI system, i.e. integrating parts out of Performance Measurement which completes a KPI system to a modern management tool with which it is possible to control an organization. These points are:

- Measurement of efficiency as well as effectiveness, i.e. measurement of soft as well as hard facts.
- Measurement of parameters which are crucial for the achievement of a set target / strategy.
- Inclusion of multidimensional key figures.
- Measurement of responsible units in the sense of the statement of controllability.^[15]

However, even though the KPI system includes above mentioned points out of Performance Measurement, it does differentiate itself due to a crucial difference: Performance Measure is designed for future actions by communicating the strategy and implementing measures to realize them.^[16] The purpose of a KPI system is, however, to have a compressed system of essential information with which it is possible to analyze, explain and improve coherent economic issues in respect to a determined target which is willed to be achieved.^[17] Strategic as well as operational measures are derived out of the KPI system retrospectively, i.e. actions are taken resulting from past happenings but prospective initiatives can be derived out of them.

The target of the KPI system within the thesis is to get reasonable coherences between key figures which are not only explained by quantitative data but also by non-quantifiable factors with which it is possible to get them linked to target-achieving KPIs and analyze them appropriately retrospective, especially in terms of sales.^[18] The KPI system allows controlling a sales organization and analyzing weaknesses. With the integration of quality criteria out of Performance Measurement reflections, the KPI system must be able to generate multidimensional key figures and bring them in economic coherences. It must be possible within the system to recognize who is responsible for the generation of a key figure and how it is possible to intervene in order to achieve a goal which can be measured by the KPIs on top of the system. The KPI system is meant to become an analyzing tool with which it is possible to analyze retrospectively for past periods.^[19] In order to analyze, the KPI system is supposed to include methods of analyzing and not only key figures. The analyses combined with key figures should permit an all-round view of the analyzed sales organization, by providing cause-and-effects causalities.

2.2 The essential component of key figures

A key performance indicator system implies that it is a system made out of indicators. Indicators are, however, not the correct expression for what it is intentioned and therefore the word key figure will still be used.^[20] Key figures provide an epistemic value which serve for analyses and control.^[21] The role of key figure is therefore highly relevant since it is the whole content and basis for any decision made out of a KPI system. The difference between a KPI and a key figure is found in the hierarchy of the key figure within a KPI system. With KPI it is meant a crucial success key figure for an organization.

2.2.1 Forms and tasks of key figures

Key figures have several ways of appearances with different meanings. A generic overview provides graphic 2:

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Graphic 2: Forms of appearances of key figures.^[22]

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^[1] Harbour, L. J. (2009) p.1.

^[2] Cf. Weber, J.; Schäffer, U. (2011) p.172.

Controlling is used as substitute for management accounting, since it is a commonly used notion at Kärcher.

^[3] Cf. Weber, J.; Schäffer, U. (2011) p. 171. From: Lachnit, L. (1979).

^[4] Cf. Vollmuth, H.; Zwettler, R. (2008) p.8.; Cf. Reichmann, T. (2011) p. 26.; cf. Weber, J.; Schäffer, U. (2011) p.188.

^[5] Cf. Pufahl, M. (2012) p. 15.

^[6] Horváth, P. (2011) p.500.

^[7] Reichmann, T. (2006) p.59.

^[8] Groll, K.H. (1990) p.19.

^[9] Lachnit, L. (1998) p.22. From: Lachnit, L. (1976).

^[10] Cf. ZVEI (1989) p.43; cf. Reichmann (2011) p.38f.

^[11] Cf. Lachnit, L. (1976) p.224f.

^[12] Cf. Meyer, C. (2011) p.25.

^[13] Cf. Taticchi, P. et al (2010) p. 3. From: Neely at al (1995).

^[14] Cf. Dillerup, R.; Stoi, R. (2008) p.621.

^[15] Controllability states: everybody in a company can be made responsible for what he or she is able to influence.

Cf. Brühl, R. (2009) p.285.

^[16] Cf. Schutt, A. (2005) p.19; Cf. Dillerup, R.; Stoi, R. (2008) p.621.

^[17] Cf. Gritzmann, K.; (1991) p.35.

^[18] KPI system development for sales organizations.

^[19] Cf. Dillerup, R. Stoi (2008) p.621.

^[20] Translation of indicator in German implies: Indikator, Kennung, Kennziffer. Translation of key figure in German implies: Kennzahl. Kärcher uses key figure as Kennzahl and Key Indicator as KPI.

^[21] Cf. Ehrmann (2004) p.214.

^[22] Based on: Preißler, R.P. (2008) p.12.