Chapter 17
Finding Your Organization's Operational Critical Success Factors
Many organizations fail to achieve their potential because they lack clarity regarding the more important things to do. This lack of clarity means that often staff members will schedule their work based around their team's priorities rather than the priorities of the organization, that performance measures are often meaningless, and that many reports are prepared that serve no purpose. This chapter is an extract from my white paper, “Finding Your Organization's Critical Success Factors.”1
As Exhibit 17.1 shows, even though an organization has a strategy, teams often are working in directions very different from the intended course.
EXHIBIT 17.1 Discord with strategy
David Parmenter, Key Performance Indicators: Developing, Implementing, and Using Winning KPIs, 3rd Edition, copyright © 2015 John Wiley & Sons, Inc. Reprinted with permission of John Wiley & Sons, Inc.
This mayhem stems from a complete lack of understanding of their critical success factors (CSFs). While most organizations know their success factors, few organizations have:
- Worded their success factors appropriately
- Segregated out success factors from their strategic objectives
- Sifted through the success factors to find their critical success factors
- Communicated the CSFs to staff
If the CSFs of the organization are clarified and communicated, staff members will be able to align their daily activities closer to the strategic direction of the organization, as shown in Exhibit 17.2.
EXHIBIT 17.2 Alignment with strategy
David Parmenter, Key Performance Indicators: Developing, Implementing, and Using Winning KPIs, 3rd Edition, copyright © 2015 John Wiley & Sons, Inc. Reprinted with permission of John Wiley & Sons, Inc.
BENEFITS OF UNDERSTANDING YOUR ORGANIZATION'S CRITICAL SUCCESS FACTORS
Knowing an organization's CSFs, communicating them to staff so they can better align their activities, and measuring teams' progress with the CSFs is the El Dorado (the goldmine) of management. There are some profound benefits of knowing your CSFs, including:
- It leads to the discovery of an organization's winning key performance indicators (KPIs).
- Measures that do not relate to your CSFs or impact them cannot, by definition, be important, and thus often can be eliminated.
- Staff members know what should be done as a priority, and thus their daily actions now are linked to the organization's strategies.
- The number of reports that are produced throughout the organization is reduced, as many reports will be clearly exposed as not important or irrelevant.
Reporting the progress the organization is making within each CSF gives the board and senior management a much clearer understanding about the current status of the organization's performance.
An Airline CSF
A good CSF story is about Lord John King, who set about turning British Airways around in the 1980s, reportedly by concentrating on one CSF and one KPI within it. Lord King appointed some consultants to investigate and report on the key measures he should concentrate on to turn around the ailing airline. They came back and told Lord King that he needed to focus on one CSF, the “timely arrival and departure of airplanes.” I imagine Lord King was not impressed, as everyone in the industry knows the importance of timely planes. However, the consultants pointed out that while he knew that “timely arrival and departure of airplanes” was a success factor, it had not been separated out from all the other success factors, and thus staff members were trying to juggle too many things. The consultants' analysis proved that “timely arrival and departure of airplanes” was different from all the other success factors; it was in fact the most important one, as shown in Exhibit 17.3. With this knowledge, it was a relatively short step to find the appropriate measure that would transform the organization. Was it timely planes or late planes? Analysis would have pointed them quickly to selecting late planes over a certain time. This late plane KPI is discussed in more detail in Chapter 18.
EXHIBIT 17.3 Hierarchy of success factors
Source: David Parmenter, Key Performance Indicators: Developing, Implementing, and Using Winning KPIs, 3rd Edition, copyright © 2015 John Wiley & Sons, Inc. Reprinted with permission of John Wiley & Sons, Inc.
RELATIONSHIP AMONG CSFS, STRATEGY, AND KPIS
The relationship between CSFs (also sometimes incorrectly referred to as key result areas) and KPIs is vital, as illustrated in Exhibit 17.4. If you get the CSFs right, it is very easy to find your winning KPIs (e.g., once the “timely arrival and departure of airplanes” was identified as being the top CSF, it was relatively easy to find the KPI—“planes currently over__ hours late”).
EXHIBIT 17.4 How CSFs and KPIs fit together and link to strategy
CSFs identify the issues that determine organizational health and vitality. When you first investigate CSFs, you may come up with 30 or so success factors that are important for the continued health of the organization. The second phase of thinning them down is crucial.
I recommend that operational CSFs should be limited to between five and eight, regardless of the organization' s size. However, for a conglomerate, the CSFs will be largely industry specific (e.g., the CSFs for an airline are different from those for a retail record chain store). Thus, there would be a collection of CSFs in the conglomerate greater than the suggested five to eight.
It is important to understand the relationship between CSFs and strategy. An organization's CSFs are impacted by a number of features. Most industries will have one or two generic CSFs (e.g., for the airline industry, “timely arrival and departure of airplanes”). However, each organization has some unique temporary conditions (e.g., a cash flow crisis), some CSFs specific to strategy, and other CSFs relating to normal business conditions (see Exhibit 17.5). The main impact of an organization's CSFs is on its business-as-usual activities. Strategic initiatives, if implemented successfully, will create new business ventures that then become managed through the CSFs (see Exhibit 17.6 ).
EXHIBIT 17.5 What impacts the CSFs
David Parmenter, Key Performance Indicators: Developing, Implementing, and Using Winning KPIs, 3rd Edition, copyright © 2015 John Wiley & Sons, Inc. Reprinted with permission of John Wiley & Sons, Inc.
EXHIBIT 17.6 How strategy and the CSFs work together
David Parmenter, Key Performance Indicators: Developing, Implementing, and Using Winning KPIs, 3rd Edition, copyright © 2015 John Wiley & Sons, Inc. Reprinted with permission of John Wiley & Sons, Inc.
OPERATIONAL CRITICAL SUCCESS FACTORS VERSUS EXTERNAL OUTCOMES
Recently, I have realized the importance of distinguishing between operational critical success factors and external outcomes. A member of the board of a charity rightly pointed out that the CSFs tabled (the operational CSFs) were too internally focused. They wanted to see, understandably, the external picture: the external outcomes. The board was naturally looking from the “outside-in” perspective. The board wanted to see the CSFs expressed as the outcomes and impacts they want to see. We want the organization to “deliver this,” “deliver that,” which will provide the evidence that there has been a successful implementation of the organization's strategy.
This recent clarification has fixed an issue I have noted in a number of in-house workshops I have run, where there was a mix of operational CSFs and externally focused outcomes. This distinction is important, and, while at first an added complication, it is worth the effort to understand and execute.
Stephen Covey pointed out in First Things First2 the importance of understanding the order of things in achieving results. He talked about putting “rocks” in first every day. We can liken the operational CSFs to the rocks that the staff needs to attend to every day.
The CSFs are the rocks and should be priority, everyday, throughout the organization. Their role is to set direction to operational staff who meet current demand, current production, and, critically, deliver products and services on time. The critical success factor “delivery in full on time to key customers” is a mantra for staff meaning that major orders for our key customers, and often the difficult and complex orders, need to be tackled first. If left to handling deliveries as they saw fit, many staff would tackle the easy orders, putting the easy runs on the board and thus jeopardizing service to our most profitable customers.
External Outcomes Are Driven from the Organization's Strategy
External outcomes are driven from the organization's strategy and are the priority of a select few in senior management, such as the external outcome “developing and growing the new product __ (or market __).” This outcome is a result of many different activities happening, from secret alliance agreements being successfully signed to new operational capacity being organized in a new country. A new plant in a new country will, once operational, be guided by the operational CSFs already in existence elsewhere in the organization. To help further clarify, I have separated out the characteristics of external and operational critical success factors in Exhibit 17.7.
| Operational Vs Outcomes | Source for These Success Factors | Key Characteristics |
| Operational critical success factors—between five and eight | Can be found from discussions with the senior management team and the oracles residing in operations. Also will appear in strategic plans, induction training materials, and annual reports. |
|
| External outcomes —fewer than ten. | Often found in strategic plans. Also, gathered from discussions with directors and the strategy team. |
|
EXHIBIT 17.7 Characteristics of Operational Critical Success Factors and External Outcomes
I suggest that you will know when you have achieved some consensus of the CSFs when you have some sort of pictorial representation on office walls illustrating to staff what is important. If you cannot meaningfully explain what the staff need to do well day-in, day-out, you do not have a complete list of your organization's operational CSFs.
Operational Critical Success Factors—The Missing Link
I believe the main purpose of performance measures is to ensure that staff members spend their working hours focused primarily on the organization's critical success factors. You could be in your tenth year with a balanced scorecard and still not know your organization's critical success factors. It is like going to soccer's World Cup without a goalkeeper or, at best, an incompetent one. The term critical success factors does not appear to be addressed by some of the leading writers of the past 30 years. Peter Drucker, Jim Collins, Gary Hamel, Tom Peters, Robert Kaplan, and David Norton all appear to ignore the existence of critical success factors.
I argue that unless the operational CSFs are ascertained, managers, in their own empire, will have what is important to them embedded in the way things are done. Many counterproductive activities will occur based on this false premise. That is, what is important to me is important to the organization. For a chief executive officer to steer the ship, everybody needs to know the journey. The employees need to know what makes the ship sail well and what needs to be done in difficult weather. It can come as no surprise when I say that the term critical success factors could be a major missing link in the balanced-scorecard and other methodologies.
FINDING YOUR ORGANIZATION'S CSFS
To help organizations around the world find their CSFs, I have developed a four-task process. This process is covered in Chapter 11 of my book Key Performance Indicators, 3rd Edition.3 This chapter is part of the electronic media available to you in the PDF download. Other materials available are webcasts and a white paper on the topic,4 which can be accessed at www.davidparmenter.com.
PDF DOWNLOAD
To assist the finance team on the journey, templates and checklists have been provided. The reader can access, free of charge, a PDF of the suggested worksheets, checklists and templates from www.davidparmenter.com/The_Financial_Controller_and_CFO’s_Toolkit.
The PDF download for this chapter includes:
- A copy of Chapter 11 from Key Performance Indicators: Developing, Implementing, and Using Winning KPIs, 3rd ed. (Hoboken, NJ: John Wiley & Sons, 2015).
- Common operational success factors