Benchmarks and key performance indicators (KPIs) – the hidden gems of financial management tools

Key performance indicators (KPIs) are used by many industries as a management tool. Retail, manufacturing, construction and yes, utilities. KPIs are used primarily to measure and improve performance and to provide incentives for performance improvement and to drive and implement strategy.

Benchmarking is a process that develops performance indices for specific entities and compares them to internal targets or industry norms for the purpose of measuring entity performance and identifying areas needing improvement.

Utility operations lend themselves well to benchmarking performance using KPIs and there is a wealth of information and comparable KPIs available for use. This brief article is a discussion on key areas of focus in developing a KPI program.

GAP analysis

Benchmarking and the use of KPIs is a process that can reveal potential areas where a particular performance is lacking and to point to direction for further detailed examination to identify any underlying contributing root causes or mitigating factors to the performance gap. This analysis of utility financial information can be used to:

  • Set internal performance targets to gain efficiencies and effectiveness
  • Determine operational areas where performance is lacking
  • Measure progress towards strategic goals
  • Measure and manage the performance of employees or third party service providers
  • Communicate performance to external parties (wholesale customers, regulators, boards, ratings agencies)
  • Meet regulatory requirements for rate case filings and justifications

The key is to set performance goals, measure them at regular intervals and take action steps to mitigate shortcomings in performance. You should ensure the performance metrics meet these criteria:

  • Meaningful – assist with managerial decision making
  • Material – concentrate on the most material issues to the organization (both financial and non-financial)
  • Assist external assessment of the organization’s strategic positioning in the industry
  • Align with the organization’s strategic directions

The process

The overall process revolves around the ability to get data and set performance goals. A general approach includes:

  • Select what should be benchmarked and why?
  • Identify peer group – internal and external
  • Identify data collection methodologies
  • Determine performance gaps to be analyzed and measured
  • Project future performance levels
  • Select communication vehicle – gain acceptance and buy-in
  • Establish goals for current and future use
  • Establish corrective action plans, take action, measure success or further initiatives
  • Ongoing – Recalibrate benchmarks and process

Data availability is key, i.e., without the ability to generate reports that support the KPI measures and to easily recreate the process on an ongoing basis, the KPI initiative will be unsustainable.

Implementation and sustainability

In establishing the process, these questions should be asked:

  • What do we want to measure and why?
  • Is the data easily available and accessible by current business processes?
  • Can data for peer utilities be obtained for comparative purposes?
  • Is staff available, assignable or can be made accountable for performing this activity?
  • Do the activities we wish to measure fit with the organization’s long and short-term strategic goals?
  • Can the metrics we select help to mitigate our utility’s risk portfolio and enhance our risk appetite?
  • Will these metrics be treated as a useful management tool?
  • Can performance metrics become a component of the utility’s compensation system?
  • Will your oversight board consider these metrics in their governance of the utility?

The goal of a sustainable KPI program revolves around not only maintaining the program’s data requirements, but in using the data on an ongoing basis to allocate resources to meet strategic goals and to measure the success of those resource allocations.

For more information on this topic, or to learn how Baker Tilly energy and utility specialists can help, contact our team.