The KPI Crisis in Modern Business

Most organisations are drowning in metrics while starving for insight. According to research by MIT Sloan Management Review, over 70% of executives believe their KPI systems don’t provide the strategic guidance they need (Neely & Bourne, 2020). This disconnect illustrates a fundamental problem: despite the prevalence of performance measurement systems, few organisations have metrics that genuinely drive improvement.

As David Parmenter explains in his seminal work “Key Performance Indicators: Developing, Implementing, and Using Winning KPIs” (2015), “Most organisations have been measuring the wrong things in the wrong way.” The result is what he calls “measurement dysfunction”—where metrics create perverse incentives, drive suboptimal behaviors, or simply fail to influence performance at all.

Parmenter’s Revolutionary KPI Framework

What makes Parmenter’s approach revolutionary is his fundamental reclassification of performance measures. Unlike traditional approaches that treat all metrics as “KPIs,” Parmenter establishes a clear taxonomy:

The Four Types of Performance Measures

  1. Key Result Indicators (KRIs): High-level measures that tell the board how management has performed in a critical success factor or perspective
  2. Result Indicators (RIs): Tell you what you have done
  3. Performance Indicators (PIs): Tell you what to do
  4. Key Performance Indicators (KPIs): Tell you what to do to increase performance dramatically

This distinction is critical. As Parmenter notes, “The term KPI has been misused for years. Most measures that organisations proudly call KPIs are simply performance indicators at best, and many are simply result indicators masquerading as KPIs” (Parmenter, 2015).

The 10/80/10 Rule

Based on this taxonomy, Parmenter advocates for what he calls the “10/80/10 rule” for organisational measures:

  • 10 Key Result Indicators (KRIs) for the board
  • Up to 80 Result Indicators (RIs) and Performance Indicators (PIs) for management
  • 10 Key Performance Indicators (KPIs) for staff

This structured approach helps organisations focus on what truly matters while avoiding metric overload.

The Seven Characteristics of True KPIs

According to Parmenter (2015), genuine KPIs share seven essential characteristics:

  1. Nonfinancial measures: Not expressed in dollars, euros, yen, etc.
  2. Measured frequently: Daily or weekly (not monthly or quarterly)
  3. Acted upon by senior management: Leadership demonstrates their importance
  4. Clear understanding: All staff understand the measure and what corrective action is required
  5. Ties to responsibility: Can be tied to a specific individual or team
  6. Significant impact: Affects multiple critical success factors
  7. Positive impact: Encourages appropriate action with minimal unintended consequences

When evaluating potential KPIs, these characteristics provide a valuable litmus test. If a measure fails on multiple criteria, it’s likely not a true KPI.

Common KPI Mistakes and How to Avoid Them

Mistake 1: Focusing Almost Exclusively on Financial Metrics

As noted by Robert Kaplan and David Norton in their Balanced Scorecard work (1996), “Financial metrics tell you the results of decisions you made 1-3 months ago.” They are inherently backward-looking.

Solution: Parmenter recommends that true KPIs be nonfinancial measures that lead to financial results rather than simply measuring them. For example, measure customer satisfaction (leading indicator) rather than just revenue (lagging indicator).

Mistake 2: Measuring Too Infrequently

According to Parmenter (2015), “A monthly measure can never be a KPI… it’s simply too old to be relevant for daily or weekly decision making.”

Solution: Create systems that allow for more frequent measurement of critical metrics. With modern technology, many previously monthly metrics can now be tracked weekly or even daily.

Mistake 3: Setting Arbitrary Targets

Many organisations set targets without understanding the measure’s natural performance range, resulting in what statistician W. Edwards Deming called “management by arbitrary numerical goal.”

Solution: Use statistical process control principles to understand natural variation before setting targets. Parmenter suggests at least 15 data points to establish a baseline.

Mistake 4: Measuring Too Many Things

A study by Bain & Company found that companies with effective KPI systems measured fewer things—they were focused on what truly mattered (Marr, 2012).

Solution: Apply Parmenter’s 10/80/10 rule rigorously. For every new measure added, consider retiring an existing one.

Mistake 5: Failing to Distinguish Between Different Types of Measures

As Parmenter says, “When you call everything a KPI, you end up with a dysfunctional measurement system” (Parmenter, 2015).

Solution: Classify each measure using Parmenter’s taxonomy and manage each type appropriately.

Implementing Parmenter’s KPI Methodology

Step 1: Establish Critical Success Factors

Before defining KPIs, organisations must identify their critical success factors (CSFs)—the limited number of areas where satisfactory results will ensure successful performance.

Parmenter recommends a structured workshop approach to identify 5-8 organisational CSFs. These become the foundation for all performance measures.

Step 2: Develop Balanced Set of Performance Measures

Building on Kaplan and Norton’s Balanced Scorecard (1996) and Parmenter’s refinements, measures should be balanced across six perspectives:

  1. Customer satisfaction
  2. Financial performance
  3. Learning and growth
  4. Internal process efficiency
  5. Employee satisfaction
  6. Environment/community

This balanced approach ensures no single aspect of performance is overemphasised at the expense of long-term sustainability.

Step 3: Create Winning KPIs

Parmenter recommends a bottom-up approach to KPI development:

  1. Convene a cross-functional team to identify potential measures
  2. Screen candidates against the seven KPI characteristics
  3. Test selected measures for a pilot period
  4. Refine based on feedback and observed impact
  5. Formalise the final KPI set

Step 4: Develop Reporting Mechanisms

For KPIs to drive performance, they must be reported effectively. Parmenter advocates for:

  • Daily or weekly dashboard updates
  • Exception-based reporting
  • Visual displays that highlight trends
  • Clear action thresholds

As noted in his “Winning CFO” methodology (Parmenter, 2012), “The reporting of performance measures should focus on exception reporting rather than a complete snapshot of all measures.”

Step 5: Facilitate Organisational Learning

The final step is creating systems that encourage learning and improvement based on KPI results. This includes:

  • Regular KPI review sessions
  • Root cause analysis of significant variations
  • Sharing of best practices across teams
  • Continuous refinement of metrics

Examples of Winning KPIs vs. Ineffective Measures

To illustrate the difference between true KPIs and less effective measures, consider these examples from Parmenter’s work:

Traditional Metrics vs. Winning KPIs

Financial Perspective:

  • Traditional: Monthly revenue (RI)
  • Winning KPI: Late shipments to key customers (measured daily)

Customer Perspective:

  • Traditional: Quarterly customer satisfaction score (RI)
  • Winning KPI: Number of customer complaints yesterday (KPI)

Internal Process Perspective:

  • Traditional: Monthly production efficiency (RI)
  • Winning KPI: Production line downtime in last 24 hours (KPI)

Employee Perspective:

  • Traditional: Annual employee satisfaction (KRI)
  • Winning KPI: Staff suggestions implemented in past week (KPI)

Note how the winning KPIs are measured more frequently and are more actionable than their traditional counterparts.

Case Study: Transforming KPIs at a Manufacturing Company

(Note: This case study is adapted from examples in Parmenter’s publications)

A mid-sized manufacturing company struggled with performance measurement despite having over 100 metrics tracked monthly. After implementing Parmenter’s methodology:

  1. They identified six critical success factors through facilitated workshops
  2. Reduced their measurement set to 10 KRIs, 30 RIs/PIs, and 8 true KPIs
  3. Moved key measures from monthly to daily/weekly tracking
  4. Implemented visual management boards in each department
  5. Established regular performance dialogues around the KPIs

Results after six months:

  • On-time delivery improved from 82% to 96%
  • Customer complaints reduced by 45%
  • Production efficiency increased by 15%
  • Employee suggestions implemented rose from 5 to 35 per month

The key insight: By measuring fewer things but measuring them correctly, the organisation gained far more insight and impact.

Creating a KPI Implementation Roadmap

Based on Parmenter’s “Four Foundation Stones” methodology (2015), here’s a practical roadmap for implementing effective KPIs:

Foundation Stone 1: Partnership with Staff, Unions, and Third Parties

  • Form a cross-functional KPI team
  • Involve frontline staff in measure selection
  • Train managers in performance coaching
  • Address concerns about measurement openly

Foundation Stone 2: Transfer of Power to the Front Line

  • Push decision rights to where information exists
  • Create visual management systems
  • Establish action thresholds and response protocols
  • Empower teams to adjust processes based on KPI signals

Foundation Stone 3: Measure and Report Only What Matters

  • Apply the 10/80/10 rule rigorously
  • Report different measures to different audiences
  • Focus on exception reporting
  • Use technology to automate data collection

Foundation Stone 4: Source KPIs from Critical Success Factors

  • Identify organisational CSFs
  • Derive department and team CSFs
  • Align KPIs to these critical factors
  • Review alignment quarterly

The Financial Controller’s Role in KPI Implementation

As financial controller, you have a unique opportunity to lead KPI transformation:

  1. Education: Help the organisation understand the difference between various types of measures
  2. Facilitation: Lead workshops to identify CSFs and potential KPIs
  3. Integration: Connect KPIs to planning and budgeting processes
  4. Analysis: Provide insight into relationships between lead and lag indicators
  5. Technology: Champion systems that enable more frequent measurement

As Parmenter notes in “The Leading-Edge Manager’s Guide to Success” (2011), “The finance team is uniquely positioned to lead performance measurement initiatives given their analytical skills and organisation-wide perspective.”

Self-Assessment: How Effective Are Your Current KPIs?

Evaluate your current measurement system against these criteria:

  1. Do your “KPIs” meet Parmenter’s seven characteristics?
  2. How frequently are your most important measures updated?
  3. Can frontline staff explain how they influence key measures?
  4. Do your measures balance across all six perspectives?
  5. How many levels of approval are required to act on a KPI signal?
  6. Do you distinguish between different types of measures?

The more “no” answers you have, the greater opportunity for improvement using Parmenter’s methodology.

Next Steps for Your KPI Journey

  1. Audit current measures: Classify existing metrics into KRIs, RIs, PIs, and KPIs
  2. Workshop CSFs: Identify 5-8 organisational critical success factors
  3. Pilot better frequency: Select 2-3 metrics to measure more frequently
  4. Visual management: Create simple dashboards for team performance dialogues
  5. Review and refine: Establish a quarterly KPI review process

Conclusion

Effective performance measurement isn’t about more metrics—it’s about better metrics. As Parmenter emphasises, “Let’s put time, effort, and money into measuring those activities that, when done well, will deliver the results we need” (Parmenter, 2015).

By applying his systematic approach to KPIs, financial controllers can lead a transformation from measurement as a bureaucratic exercise to measurement as a performance driver.

In our next post, we’ll explore how to translate these KPI principles into lean financial reporting that executives actually read and use for decision-making.

References

Kaplan, R. S., & Norton, D. P. (1996). The Balanced Scorecard: Translating Strategy into Action. Harvard Business School Press.

Marr, B. (2012). Key Performance Indicators: The 75 Measures Every Manager Needs to Know. Financial Times/Prentice Hall.

Neely, A., & Bourne, M. (2020). Why Measurement Initiatives Fail. MIT Sloan Management Review.

Parmenter, D. (2011). The Leading-Edge Manager’s Guide to Success: Strategies and Better Practices. John Wiley & Sons.

Parmenter, D. (2012). Winning CFOs: Implementing and Applying Better Practices. John Wiley & Sons.

Parmenter, D. (2015). Key Performance Indicators: Developing, Implementing, and Using Winning KPIs (3rd ed.). John Wiley & Sons.