The much-anticipated Facebook IPO is set for May 18, following the social media giant’s regulatory filing earlier this month.  Facebook set a price range of $28 to $35 per share, valuing the company at  $77 billion -$96 billion and setting the stage for the biggest Internet IPO yet. If successful, this IPO will top the previous record Internet IPO (held by Google-valued at $23 billion when it went public in 2004). Assuming you can actually obtain them when the company goes public, is Facebook stock a worthy investment?

Earlier this year, Aswath Damodaran, Professor of Finance at the Stern School of Business at NYU and author of  Investment Valuation, Third Edition, analyzed the financials on his blog Musings on Markets. At that time, he valued the company at $29.05 per share, which falls within the range Facebook set, although on the lower end.

Where Facebook Stands Right Now

According to Facebook’s S-1 filling, revenues in 2011 were $3,711 million, up 88% from revenues of $1,974 million in 2010, which, in turn, were up 150% from revenue of $777 million in 2009. The company is primarily equity funded and its book value of equity at the end of 2011 was $5,228 million; the only debt on the books was capital leases and operating lease commitments for a total debt of $1,174 million.

Facebook is on a “high growth” path, with revenues growing by 150% in 2010 and another 88% in 2011, but as even that sample of two observations suggests, the big question is how that growth rate will hold up as the firm becomes larger. He estimates a compounded revenue growth rate of 40% for the next five years and a scaling down of that growth rate to the nominal growth rate in the economy by the end of 10 years.

Facebook Has a Better Business Model Than  Groupon or LinkedIn But Investors Should Still Proceed With Caution

While Damodaran notes that Facebook possess great promise and could end up being worth $100 billion, current valuations are based on promise that may or may not ultimately pan out.

David Parmenter, author of the field-defining Key Performance Indicators, has been working with government agencies and non-profit organizations to implement KPIs for those very different kinds of organizations. And now he shares his experience and knowledge in this framework for KPIs for GANP groups:

1.    Working with a balanced scorecard and/or Dashboard

Do you always use balanced scorecards as the framework for successful KPIs – can you have one without the other?

The balanced scorecard is simply saying we need to measure performance in a balanced way, more holistically. So in other words, yes, we have to have a balanced scorecard for winning KPIs. But, I do not think the word balanced scorecard is necessarily the right name for your scorecard when you have it up and running in your organization. I actually promote that organization’s have a “naming competition”.  While we need to acknowledge Kaplan and Norton’s great breakthrough, we can call it what we like.  One organization calls it “our compass”.   The word balanced scorecard does not have to be the brand title for it in your organization.

Kaplan and Norton have used their methodologies for non profit organizations, what do you think?

I think it is imperative for all organizations, whether not for profit, government, or the private sector to be using a balanced scorecard. To this end I have written a companion book, Key Performance Indicators for Government and Non Profit Agencies. Some very major improvements have been made in not for profit organizations, by helping staff focus on the critical success factors. It’s good for any entity, whether it’s a sports club or a hospital.

How do KPIs tie into an organization’s core business competencies?

As you can see in the above exhibit, KPIs link to the critical success factors that link to the strategies. That’s the key link that we are trying to achieve. The main use of core competencies is to make sure staff have the necessary skills to perform their job and are acquiring new skills in preparation for their next move upward, or for increased adaptability.

I don’t like using the word”competencies” in any other way. When we are talking about an organization’s competencies, I get a bit confused with that terminology.  I like to think of businesses in the way Warren Buffet does, and that is business should be simple.

When we as individuals try to use wording or use a term out of context we can confuse ourselves and those around us.  I only use the word competencies when referring to workgroups, positions or individual staff.   KPIs certainly tie into competencies struck at this level.  We want staff to be competent in taking actions which will rectify KPIs which are showing signs that we have a problem. We want staff to be competent enough so when they see a late plane in the sky, they can get it back on time and they know what decisions they have to make, and then they make them, very promptly.

2.    Identifying the critical success factors – the key step for success

How can I convince senior management that the critical success factor workshop is necessary?

In this current recession that we are in, performance management is more important than ever. We’ve got fewer people doing more work so we’ve got to start as Peter Drucker said to abandon processes that are not adding value. There’s no better way of doing this than guiding our staff through understanding of critical success factors in the company. We are saying to staff “we need you to focus most of your efforts and thinking time on how you link to these critical success factors and we want to measure your efforts in this area”. By moving people in this direction, we will find we will be cutting out a lot of unnecessary and time consuming activities. The classic “performance management tool” that should be questioned is the annually planning process. Why have organizations not been throwing it out quicker? I would say they haven’t had the necessity to get rid of it. Now we can’t afford this carnage in performance management. There’s plenty of good discussion about the way forward in my webcast on CGA Canada http://www.cga-pdnet.org/en-CA/PDResources/2010/Pages/KeyPerformanceIndicatorsAnIntroductiontoWinningKPIs.aspx.

Many people in my company think that high customer satisfaction is a critical success factor, but not all employees feel that they can influence the customer satisfaction matrix, so how do you make it more practical for all employees across the organization?

When you talk about success factors, we have got to get very precise. The one you’ve mentioned is very sloppy and it’s quite typical. The main criticism of it is, “do we want all customers to be satisfied equally?” I would suggest to you the answer is “no”. Why? Because we have a core group of customers that are critical to our business and we want our staff to be focused on them. If we have somebody in dispatch we want them to single out all the priority or key customers’ dispatches and make sure these are dispatched first and that they are double checked, maybe with some special quality assurance procedures so that nothing will go wrong with their delivery.

What we want to do is find out what makes our key customers happy. It might be something as simple as key customers like to have delivery “in-full on time”. Meaning that they want what they ordered, to the quality they expect, at the agreed time. Once we do that, they are happy. If this is the case we start measuring that as it will be a major driver of satisfaction. We can thus be far more precise with our critical success factor and it could be delivery in full on time to our key customers rather than “delivery in full on time to all customers”.

It could be that your major customer is Toyota, so you could say the critical success factor is “delivery in full on time to Toyota”. With such a critical success factor everybody in the organization knows what one of the major focus points is and it gives clear direction to all staff, no matter where they are working.

Finding the critical success factors seems like a very important exercise to conduct, but, you’re talking about doing it in a short amount of time. How can such an important exercise be completed in just a few days?

The organization has known for years what its’ success factors are, but unfortunately, we’ve never got round to reducing them down, as a chef might do to a sauce, to which are the critical ones. Of course if you said this to your senior management team, they would be utterly insulted. If you asked senior management “what are our critical success factors?” they would rapidly come out with a bunch of statements. If you asked each member of the senior team, you would find the list growing and this is the problem.

Finding your critical success factors from your success factors is a simple process as it is a mapping process as long as you get the right people in the workshop.  I’m talking about the oracles in your company mixed with some young guns. In a two-day workshop we can clearly identify the success factors, get the wording tighter, and then work out what success factors would be in the top five to eight (e.g., your success factors).  While you may never get your critical success factors 100% right, because it is a subjective area, you would get 90% of the groundwork completed in these two days. I’ve run this workshop a number of times in different countries to know that it works. All that intellectual property used to run the workshop is available in my book Key Performance Indicators and the companion book Key Performance Indicators for Government and Non Profit Agencies. So nothing is holding you back on this one.) For those consultants out there, go for it, it’s a great consultancy tool and what a legacy you could leave in an organization if you help them find their success factors in those two days!

I’ve got a company with a large number of employees, how do I drill down to just five or six KPIs?

In the “critical success factor” two-day workshop, you will come up with eight to nine critical success factors and we will gradually drill them down to about five to eight. Then there is a signing-off process with the senior management team and I would even get them signed-off by the Board or the council (whatever you call your governance body). The beauty of these success factors is when you actually show them to the Board they go, “you mean to say you spent two days doing this, we could have told you this”. Of course they recognize the words and immediately the “combination to the lock” for that is what your success factors are.  They will say “yes that’s right”. But they would have never come up with those words so you just smile knowingly and say “yes I’m sorry we didn’t ask you”.  They’ll sign off immediately and say “yes we totally understand and agree with the success factors”.

After agreement of the critical success factors you should ask teams to brainstorm performance measures that will help keep performance on track.  For example, one of the success factors for an airline would be “timely arrival and departure of airplanes”. The accounting team would be struck dumb, thinking, how can we measure something in our team, and then you say to the team, “I don’t think you can but that’s a critical success factor of our airline”. Beware of it because when there is a time when you can contribute in that area, you should start measuring. Let’s pass and move on and move on to the next success factor, after they are exhausted the team will look at the remaining success factors. Gradually some teams will realize that their efforts are directed at many of the success factors.

Only measures that are directly relate to critical success factors can be KPIs. Any activity in the other success factors is going to be performance indicators or result indicators. If somebody in the accounting team or IT team gets very upset that they do not have any KPIs, just tell them to change their job, move over to operations then they can have that satisfaction. I’m not saying those teams aren’t important, I’m saying to the organization, that teams activity is not critical and I’m sorry that’s often a fact of life.

What are some critical success factors and KPIs for a telecom manufacturing organization?

I often get asked to provide, “off the cuff”, the critical success factors or KPIs that are relevant for a sector.  Organizations in a sector whether it be finance, telecommunications, or car manufacturing, are all slightly different – they’re not all generic. Certain things would be, for example, an airline, those planes in the sky, would certainly be a KPI for any airline. But the other KPI for an airline would be a low- or high-end type airline or a national carrier. So in answer to this question – I would be a multi-millionaire if I could give an answer to this question. However, I have set up in my work, a very simple process to go through it. Yes I could give some ideas and shortcut some processes here but it is a very dangerous thing to do. I always say to companies, you just need to run that two-day workshop on the critical success factors and you will start a major step on this journey. Yes I could second guess, but I don’t do that deliberately because it would end up in disaster as people would start using them and not doing the work.

Do you think mind mapping is a good way to brainstorm critical success factors?

I am a great believer in mind mapping and when I get people in workshops to start brainstorming performance measures from a critical success factor, I always use mind maps.

For those people who are not familiar with Tony Buzan’s work, basically you will have a circle in the middle of a whiteboard which is a critical success factor (e.g., timely arrival and departure of planes). You might have five arrows coming out of it and you would label each arrow. You might say, baggage handling, re-fuelling, cleaning, caterers, crew, passengers, and so on.  You then start brainstorming measures within one of these areas of influence (e.g., crew).  If the crew doesn’t arrive on time you are not going to get the plane off on time so you say ”let’s measures the instances when crew were late to arrive”, report immediately when it is known that some crew are going to arrive late (their plane bringing them to the airport is running late, etc). Then, you look at another area of influence such as the passengers. Then you work the measures in those areas and it all radiates out from the center and it’s a great technique and I’m sure many of you use it when you’re planning your major articles, memos, and reports.

I’m heading up a KPI team that’s focused on our four main focus groups within the organization. I’m having the most trouble with mission vision and critical success factor alignment with the “ideas to offering process team”. That team is stalemating on critical success factors and KPIs. Do you have any advice on breaking the stalemate?

This organization has probably had a consultant inside it who has broken the business into processes instead of functional teams (e.g., operations, IT, dispatch). I’ve worked with a client that’s had the same issue. So the ideas to offering process team’s team is dealing with a lot of conceptual stuff and you can just hear them say “look our work is really long term, David your KPI process isn’t going to work because we can’t think of anything that we would measure daily or weekly that would be necessary. Our outcomes are delivered over a long period of time. It’s like a funnel a lot of stuff goes in and not everything comes out at the bottom”.

What I would say to them would be, “that’s rubbish”. Every single team, whether a process team or a functional team does have things that they should be monitoring frequently. A classic thing for this type of team is to make sure that the funnel is being filled and monitoring, on a monthly basis, what’s going in the top of the funnel.  We also want to look at more importantly, every single project that is running late. Around the world there is an epidemic that’s been with us probably since Julius Caesar where we start projects but don’t finish them on time.

So with these late projects, what I like to do is name the culprits – have a name in shame list. So every week right in front of the senior management team we list every single project that is late, who’s responsible, how late it is, so that these people do not want to be on this list. If somebody has the most projects outstanding, they’re at the top of the list. They are the biggest problem the company has got. So imagine if your name was there and thinking, I do not want to go to this executive meeting again with my name up there. You would do something about it wouldn’t you? You might even work seven days a week just to get your name off there. So that’s a type of thing that the ideas to offering process team can do. They can start finishing. That’s certainly a weekly measure and could even be a KPI in organizations who do not finish what they start.

The “ideas to offering process” team needs to brainstorm how they impact on the critical success factors. Not all the success factors will be relevant. For example in an airline, an “ideas to offering process” team might when brainstorming the timely arrival of airplanes find they had a minimal impact in this area except measuring the influence new offerings might have on making planes more timely.

If they do not have any influence in a success factor they move on and look at some relevant success factors and see what sort of measures are relevant. In some teams they will need to brainstorm more in the success factors as the critical success factors are less relevant to them.  These teams, however, must first look at the success factors and see the relevance.  If absolutely none, one has to ask “why do we have this team”?

For these teams it’s often harder to get them going but when you do turn “the lights on” they’re normally very good people to work with. There’s not a truckload of measures, which is good news for them, but what ones they have are quite powerful.

3.    Selling the change to management and keeping the senior management team motivated

Is selling change to the team a top-down or a bottom-up approach?

When we first start this journey of putting wining KPIs into our organization, it will be one person or maybe two persons possibly, who have the “lights turned on” and they say “we must do this”. How does this start this change? Let’s assume that in most cases this person will probably be somewhere in management; maybe in the senior management team but most likely underneath that level. They then have got to sell through “an influencer” in the senior team and also sell the concept among their peers.  They have got to start this off and get some momentum. It’s thus more like a “middle to top”, and then followed by a “top to bottom” approach. Once the light is turned on and the senior team can see the benefits, they have to be passionate in selling the change to the staff and let the staff know that this is different, it is something that is going to be seen through, and that we’re on this journey and there’s no turning back.

What have you used in the past that has worked to really “turn the lights on” with your executive and management teams about the bottom line, the practical impact, and the benefits of KPIs, for them to take these things seriously and actually implement them?

My favorite KPI story is about Lord King who set about turning British Airways (BA) around in the 1980s by reportedly concentrating on one KPI. Lord King appointed some consultants to investigate and report on the key measures he should concentrate on to turnaround the ailing airline. They came back and told him that he needed to focus on one critical success factor (CSF), the timely arrival and departure of airplanes. Finding the CSFs and narrowing them down to no more than five to eight is a vital step in any KPI exercise, and one seldom performed!

Lord King was, however, not impressed as everybody in the industry knows the importance of timely planes.  However, the consultants then pointed out that this is where the KPIs lay and they proposed that he focus on late plane measures. He was notified, wherever he was in the world, if a BA plane was delayed over a certain time period. The BA airport manager at the relevant airport knew that if a plane was delayed beyond a certain “threshold”, they would receive a personal call from Lord King. It was not long before BA planes had a reputation for leaving on time.

The late planes’ KPI was linked to most of the CSFs for the airline. It linked to the “delivery in full and on time” critical success factor namely the “timely arrival and departure of airplanes”; it linked to the “increase repeat business” critical success factor, and so on.

The British Airways story, which I talk about on one of my www.bettermanagement.com broadcasts, is normally sufficient for senior management to wise-up that all the performance measures they have been using are totally different.  They are producing no change, merely adding to the reporting process.  From that point on, everything is easy.  I recommend to everybody, learn to deliver that story well; it’s quite a simple story. I’ve documented it in my books, my webcast on CGA Canada http://www.cga-pdnet.org/en-CA/PDResources/2010/Pages/KeyPerformanceIndicatorsAnIntroductiontoWinningKPIs.aspx, and in my whitepaper on davidparmenter.com. That’s your starting point.

What have you used in the past that has turned the lights on for executives and management about the benefits of KPIs?

I have always believed that most lights get turned on by stories. We haven’t changed much since we were three or four years old. What I always do is start my story with the British Airways tale. I urge everybody to learn it

Be a good story teller. Learn the British Airways story well and then learn how to sell the need to know your organization’s critical success factors and explain to management the reason why we spend hundreds of thousands of dollars on performance measures and they don’t change anything. That’s compelling because we’re measuring for no purpose. We could chuck all that measuring away and the organization would still continue to operate. We know we should measure performance, but we’ve got to streamline that measurement and measure the right stuff. You can design a compelling presentation to turn the lights on of the senior management team based around the material I have placed on www.davidparmenter.com for your benefit.

I deal with small business owners quite often, this methodology is certainly appropriate and applicable for them as well but how do you fire the president who fails to support the program? Or put it another way, how do you keep the president motivated and stay committed and not turn out the light on a project of this nature?

We all know that there are a lot of shall we say “challenged” presidents and CEOs in organizations. Selection processes did not work properly and these people have risen beyond their natural competence level. Some of them can rise above their handicaps such as lack of relevant sector experience, poor personal skills and lack of finishing. Some will never.

With regards to those who will never rise above these barriers you made the mistake by joining those organizations in the first place. Certainly there are some organizations when this project starts, who will never finish, and thus winning KPIs will never work. For many of us, we know these challenged organizations, we’ve probably had one under our belt already and it is important to not waste your time.

That’s the great thing about the Y generation these days, they go into a job, if the signals aren’t right within a few months, they move on. We, of course, seem to suffer for years until we build up courage to move on, constantly believing that work was going to change for the better.

We need to we sell this project to the president, by the emotional drivers that mean something to them, and if we keep on giving good news about progress so it becomes an exciting project, something that the president can talk about on the 19th hole or during Saturday lunch.  Only then will we have a good chance of making that change.  But bear in mind there are some presidents and CEOs who shouldn’t be in their roles and it will be a nightmare to work for them.  In such circumstances this project will fail because of their lack of commitment, lack of competence, their attention deficit disorder, and so forth. Their commitment is step one in the process, as shown below, they have got to be committed. If their commitment drops off, it will jeopardize this whole process as it does with any other major project.

How do you convince your senior management team to initiate KPIs when there are really no examples within your industry of anyone doing so?

To start off I would say, you tell them the British Airways story. Any senior management team who are competent, suddenly wake up because they can recognize the benefit and they can start saying, yes we must have a “late plane in the sky” measure somewhere, let’s find it. So that’s what I would say to you. In some industries there’s been appalling measurement and hundreds of thousands of dollars are invested in measurement, which go nowhere quickly! Whole teams have been set out to measure absolutely everything that moves but adding nothing but overheads and this chaos will have an adverse affect on the bottom line.

There is a silver lining in this dark economic cloud that we’ve got hanging over us. We’re going to be in these hard times for a while and I think most of us recognize that. This is the easiest time to say to the senior management team we have got to streamline our performance management. You would be able to cut out quite a big chunk of time from going from an old to a new performance measurement regime, once the “winning KPI project” is on the road.

4.    Getting the foundation stones in place for the implementation

Other successful projects have not had the foundations that you described earlier, why do we need them now?

If you’ve got a very good project manager they will intuitively know what these foundation stones are and they will never let the project wander from that base. Unfortunately, all project managers aren’t that great, and project managers might move in the middle of a project, which then makes the project very vulnerable. So it is very important for all people on the project to understand what the foundation stones are, so if staff changes, the project can relentlessly move forward in the right direction while still being on its firm foundation. So that’s why these foundation stones are important for all major projects.  I now, with all my implementations mention what the foundation stones are.

5.    Keeping implementation to a simple process

How do you convince managers who may have “padded” performance indicators in the past just to improve their own image? How do you convince them to really adopt a few substantial measures?

Performance related pay most certainly has been one of the fundamental reasons surrounding this crisis. That connected with greed has lead to ridiculous decisions being made in companies for the benefit of those making those decisions. We need collectively as organizations around the world to recognize that we have got to remunerate people totally differently. Yes, we must have performance related pay, but we must be a little bit more sophisticated in the way we do it. To hear that individuals have collected $1 billion performance related pay in a year, when they had no investment in any downside in anything that followed is absolutely crazy. Encouraging people to make risky decisions in the short term, with no investment in the medium to long term doesn’t make sense. If anybody from Mars visited, they would be mortified to think that organizations are led by people, who have graduated from some of the leading universities around the world, have signed into such “Dickensian” performance management methodologies.

All performance pay related to a fixed annual performance contract has got to be swept away and we’ve got to rebuild the way performance measures are used with performance related pay. I would not link winning KPIs to performance related pay. KPIs are to be related to how we perform our job on a day-to-day basis. Yes, we will need to look at how people perform, but do not want to jeopardize “winning KPIs” because they’re tied up with the politics of pay. We’ve got to make that break. While I know performance related pay is a big one, and it’s going to take a few years for people around the world to wake up with this. It doesn’t stop us from doing our KPI work, as long as we never let KPIs into our performance related pay. Managers then don’t much have the incentive to “pad”:  Read Appendix B in my “Key Performance Indicators for Government and Non Profit Agencies”

What’s the difference between a key result indicator and a KPI?

A key result indicator is a result indicator that summarizes many different activities. A great one, for example, is customer satisfaction. You’ve done a survey of your core customers and you’ve come out with some information, and somebody’s drawn up a graph with satisfaction going up, that’s great to know. The board certainly would like to see that information. That survey and graph has summarized a huge amount of activity done by different teams in the company and the result is we’ve got higher satisfaction with our core customer group. So that’s what I call a key result indicator; it’s summarizing a lot of important activities. But that information is actually useless for management because we don’t actually know what we’ve done to be improving the core customers’ satisfaction. So we would drill in and find out what we are doing well and start measuring that. That would be our performance indicator and some of them might be our KPIs, particularly a measure such as delivery in full and on time to our key customers’.

How many organizations are really doing this well?  Where do you think the typical organization is along the continuum of using a strong KPI methodology?

When I do the polling of questions during a webcast it does indicate that it’s certainly a minority of them that are doing it well. When I ask the question “how many people are reporting measures to the CEO 24/7 or daily?,” there is only a small amount saying yes. On this poll 20% said they reported daily and nearly 50% said they weren’t reporting any to the CEO on the 24/7 or daily frequency.

The reason, for this lack of focus on 24/7 or daily measures at the CEO level is that organizations, to create a good bottom line, in the boom times of the past haven’t needed performance management firing on all cylinders. I suggest to you all that there can be no better time for this change than “NOW”. If you like, this is the silver lining to the economic troubles that we are currently in and will be in for a while. Initiatives that will make employees happy, customers happy, and shareholders happy will be implemented.

If KPIs are measured too frequently, isn’t there a risk of reacting too strongly to a onetime event?

A KPI will never be a one-time event. If we look at “late planes in the sky” for an airline, yes, that one plane is late, but let’s face it, it’s late going out which means it’s going to be late arriving and so forth. The circumstances that created this late plane will repeat time and time again unless management is aware of the problem and the relevant team is urged so sort out the problems.

We thus will be measuring events that have a common occurrence. So for example, with a late delivery to a key customer; we might not be reporting very many instances but as soon as we do report one, the CEO wants to get on “top of it” quickly. Now if we had a really well run company and the CEO was not receiving an exception report on these KPIs for say, the last three to four weeks, that would be fantastic.

The process of this exception reporting to the CEO creates change.  The staff is thinking I don’t want this phone call. They are taking the correct actions to ensure that these deliveries to our key customers are done on time, which is exactly what we want them to do. The organization would have another measure which we would manage weekly that would confirm that we had managed 100% of all deliveries “in full on time” and the CEO knows that because there has been no breach reported.

The teams and the CEO should celebrate this.  Good CEOs would go to the dispatch areas and praise them, hand over some sort of recognitions, and league tables should be set up so that the branches, the regions, which create the best performance, are highlighted. Jeremy Hope, in his book, Beyond Budgeting, talks about some of the leading organizations in the world has these tables where they celebrate success. On these league tables you don’t have to show everybody, but if you’re not in the top third of the table, you know that you are somewhere in the bottom two thirds, you don’t have to see your name down there, you’re shamed enough that you just aren’t in the top third!

KPI management falters with lack of consistency and continuity, for example, what has been your experience?

We’ve got to pick a team to run with the “winning KPI project”; we need a team that has a reasonable number of people. Kaplan and Norton mentioned a case where one person sat down and did all the work themselves and they actually got it near enough right. I actually believe you need a full time project team.  For a small company, say 250 or less full time staff, there would need to be two full time people on the “winning KPI team”, to a larger company up to four staff would need to be full time on the project. These numbers will ensure you’ve got cover if a project team member leaves the organisation.

You should support that team with training and exposure to other people and in the exhibit above I talk about having a facilitator available to tutor the “winning KPI” team members. The exhibit shows the project team linking directly to the CEO and to all these people so you pick this team. It is unlikely that if you pick the right people that anybody would be daft enough to leave during the life the KPI project. Why? Because this would give them such a profound work experience which would improve their CV substantially. So if you get your cards right, you’re not going to have trouble with turnover during the project life.

Are there industry specific KPIs or are KPIs always individualized to each organization?

We normally have some measures that definitely are industry or even sector based. For example, anybody involved in manufacturing would probably have a KPI based around “delivery in full, on time, to key customers”. Whenever you have got to get something to a key customer, on time, with the right amount of units, in perfect packaging there must be a measure. Not only could that be in the oil industry but it could also be in making cars, computers and so forth.

So some KPIs are generic not only across industries but also broader sectors. However, the cluster of key result indicators, KPIs, performance indicators and will eventually become a fingerprint for you. In other words, it will be unique. I wouldn’t expect the same cluster of KPIs in one company in the same type of manufacturing to be the same. Why? Because the culture you’ve got is going to be slightly different, the size, the customer base, your critical success factors will drive slightly different measures. Many of the critical success factors might be similar but there will be some difference and the work groups when brainstorming measures will interpret them slightly differently as well.

When working with a team new to the balanced score card, is it okay in the first year to have measures that are actually the establishment of certain initiatives?

That’s a pretty primitive form of a measure for the first year. I would suggest to you, the answer is “no”. Because what you are doing is saying you have already got some initiatives in place and as long as we do those, we are going to be alright for measurement. I would say no you’re not.

When implementing “winning KPIs”, you have got a fundamental change occurring, so you should start measuring in our critical success factors. What might well happen is when you perform your success factor workshop you might find that some of these initiatives that you are working on don’t even fit into any of the critical success areas. You should then question “Why are you doing these initiatives?”

If you don’t know your critical success factors, there’s a high chance that your projects may not have a good enough alignment to your success factors and your strategic objectives. I would recommend to you that you should do the critical success factors workshop, and start driving measures from the resulting brainstorming sessions.

No doubt most of the initiatives may well be relevant and it is appropriate to measure project progress.  If the project is late we can measure it under the late projects “shame and name” list.

David Parmenter is an international presenter who is known for his entertaining and thought-provoking sessions, which have led to substantial change in many organizations. He is a leading expert in the development of winning KPIs, replacing the annual planning process with quarterly rolling planning and management practices that will get you to the top. Parmenter has delivered workshops to thousands of attendees in many cities around the world, has worked for Ernst & Young, BP Oil Ltd, and Arthur Andersen, and is a Fellow of the Institute of Chartered Accountants in England and Wales. He is also the author of Key Performance Indicators for Government and Non Profit Agencies: Implementing Winning KPIs (Wiley, 2012).

Lack, Managing Partner at SL Advisors, LLC, created a maelstrom of debate when his book, in which he argued that a mix of poor performance and high management fees have left most hedge fund investors with little profits, published in January. He lambasted the industry, stating that for the ninth straight year, hedge funds will fail to beat a simple blend of 60% stocks and 40% bonds. “Hedge funds have made tremendous amounts of money, but it hasn’t made its way back to the clients. In fact, if all of the money that’s ever been invested in hedge funds over the history of the industry had been invested in treasury bills instead, the results would have been twice as good.”

While Lack thinks its great that the hedge fund industry commissioned the report as a result of the book, he criticizes the 9% average annual number, stating that “it shows data mining at its best.” “They have taken a hypothetical investor from 1994, equally weighted across all hedge funds, and then maintained that for the subsequent 18 years. That’s not the average experience,” he explained in a recent interview with Bloomberg Television.

“In the first five years of their study, the average returns were 12% and in the last five years, the returns were 2%.” Lack doesn’t lament the returns during the golden years in the 1990s; however, this is not the case over the past decade, when the industry exploded and returns plummeted. The difference is the hedge fund industry is 20 times as big in the last five of the study as the first five, Lack notes.

Simon Lack, The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True, has spent his entire career in trading and hedge fund investing. After 23 years with JPMorgan, he founded SL Advisors, LLC, a Registered Investment Advisor, in 2009. Much of Lack’s career with JPMorgan was spent in North American fixed income derivatives and forward FX trading. He sat on JPMorgan’s investment committee which allocated over $1 billion to hedge fund managers and founded the JPMorgan Incubator Funds.

Yoni Jacobs, CMT, author of  Gold Bubble: Profiting from Gold’s Impending Collapse is Executive Director and Chief Investment Strategist for Chart Prophet LLC, an investment management company that utilizes its Triple Perspective Outlook to make investment decisions based on a comprehensive mix of technical, fundamental, and behavioral analysis. A contributing author and Opinion Leader for Seeking Alpha, Jacobs has appeared on the Business News Network (BNN), CNN, and ABC News, and has been featured or quoted in Reuters, the Globe and Mail, the Financial Post, CBS MoneyWatch, and many other media outlets. Follow him on Twitter at @ChartProphet

According to the ACFE’s 2010 Report to the Nations on Occupational Fraud and Abuse, the median time it took to discover a corruption scheme was 18 months and the median loss was $175,000. Clearly it behooves management to detect these crimes early to reduce the losses.

Can you guess what detection methods revealed the most corruption cases in the Report to the Nations? Put the following list in order, starting with the detection method that was present in the most cases.

Choices:

• Account reconciliation
• By accident
• Confession
• Document examination
• External audit
• Internal audit
• IT controls
• Management review
• Notified by the police
• Surveillance/monitoring
• Tip

(See below for the correct answers.)

Answers:

1. Tip 49.7%
2. Internal audit 14.5%
3. Management review 12%
4. External audit 4.7%
5. Document examination 4.2%
6. By accident 4.2%
7. Account reconciliation 3.8%
8. Surveillance/monitoring 3%
9. Notified by the police 2.5%
10. Confession 0.8%
11. IT controls 0.7%

Laura Hymes, CFE, is the Managing Editor of the ACFE’s Research Department, where she oversees the editing of books, manuals and other publications related to the prevention, detection and investigation of fraud. She also collaborates with authors and speakers who are experts in the antifraud industry to produce high-quality educational material. She has a master’s degree in publication management and years of experience in editing and publishing. She is the co-editor of Bribery and Corruption Casebook: The View From Under the Table.

The Natural P&L (or Management P&L, or Management Income Statement) is the cornerstone of management reporting in every organization.  The key characteristics of a well-designed Natural P&L are:

1.     One page!  If your report doesn’t fit on one page – using normal font and paper sizes – redesign it.
2.     Decision-focused line items.  Categorize your accounts into line items in a way that if any line has results indicating a problem, the reader has clues how to attack that problem.
3.     Appropriate dollar amounts, neither too big nor too small – all amounts in the report should be usually material to the overall organization and to typical sub-organizations.  Nor should any single line item comprise the dominant share of the enterprise’s revenues or expenses, unless that’s unavoidable.
4.     Intuitive organization of the line items.  The ordering of the line items should seem logical and sensible to any manager with a sound understanding of your organization.  Never present line items in alphabetical order.
5.     Understandable categories, meaningful to all users.  Create line-item categories that make sense and are meaningful to all users of your reports, not just to accountants, technocrats, or other specialized groups.
6.     Plain English terminology.  Craft line-item captions and column headings that are clear, terse, and accurate.  Avoid all but the most universally-understood acronyms, abbreviations, and jargon.
7.     Consistent look-and-feel.  The Natural P&L should play a key role in creating a “common language” for managers and other stakeholders in your organization.
8.     Key results equal to the corresponding numbers in the accounting system (or an explanation why not).  Tie the numbers in your Natural P&L to the accounting system so that your audience can understand where the numbers are coming from, and you can check the accuracy of your reports.

Randall Bolten (Menlo Park, CA) is CEO of Lucidity, a consulting/coaching practice focused on enterprise finance tasks. He is a seasoned and accomplished finance executive, with 30 years of experience in high-growth and high-potential Silicon Valley companies. His professional passion is generating information that can enable managers and investors to make real sense of complicated business models. He is a member of FEI’s Silicon Valley Chapter and holds a Bachelor of Arts degree from Princeton University and an MBA from Stanford University. His first book, Painting With Numbers: Presenting Financials and Other Numbers So People Will Understand You, was just published by Wiley.

Q   Which social media sites should we participate in?

Every financial marketer should have a blog or online newsletter that interested clients and prospects can subscribe to. This should highlight areas of expertise

Social Media Effectiveness - Click to Enlarge

within your organization or information of interest to your target markets. It should offer, at a minimum, an RSS option, as well as a link to your Facebook and Twitter sites.

There are many specialized social groups both within larger sites (such as LinkedIn groups) and standalone sites, such as comments sections of blogs or other publications. Depending on your target market and your objectives, you will want to subscribe and become active participants on these sites.

Q   How do we keep up with new social media sites and technologies for managing our social presence?

Every day seems to bring news of new mobile apps, widgets and social groups that early adapters have discovered. Keeping up feels like a full-time job and no one person can manage it all. One suggestion is to form a tech council, made up of employees, vendors, even clients if appropriate. This group can call the moderator’s attention to the latest “must have” technologies and can be a sounding board for any tech innovations your company is planning. If you don’t have tech savvy people on your team, subscribe to updates from the appropriate LinkedIn and Facebook groups for the latest in what’s out in the mediasphere.

Q   We’d like to participate more on social platforms but our compliance department won’t allow us to. What should we do?

Compliance and marketing are like cats and dogs. Every cool thing you want to do seems to set the compliance department’s teeth on edge. Compliance, of course, is just doing their job. Regulators have created rules on use of social media (such as FINRA’s requirement that all communications be saved) and many compliance departments err on the side of caution by not allowing any social commenting.

Meet with your compliance officers to see if there is room for compromise. Highly regulated firms, such as RIAs, are using social media successfully, so show your compliance team examples of who’s doing what and come up with guidelines that will allow you to take advantage of social tools without crossing the line.

Q   Blogging, tweeting, participating in social sites take a lot of time. How do we measure what we are getting in return?

Measuring social media effectiveness is, in some ways, easier than measuring other marketing tactics, since it is relatively easy to gather statistics on usage. But determining success is a question of what you measure rather than raw numbers. If your goal is brand awareness, then Facebook friends or Twitter followers may be the number you’re most interested in. For building sales, watch your web site statistics to see where new visitors are coming from. If there is a sudden uptick in visitors from a particular site, you can safely assume that there is interest in your promotion and can further develop it with an offer, seminars and other tactics.

 

Evelyn Ehrlich and Duke Fanelli are authors of Financial Services Marketing Handbook, 2^nd Edition.

Evelyn Ehrlich, Ph.D. is President of EC Communications, a marketing strategy and consulting firm that has served banks, brokerages, insurance companies and other financial institutions since 1982. Louis “Duke” Fanelli has more than thirty years experience in marketing and financial services. He is currently Senior Vice President, Marketing and Communication for the ANA (Association of National Advertisers), the leading association for client-side marketers. Ehrlich and Fanelli teach Financial Services Marketing at NYU.

1      Risk Models May Not Capture All Risks
The models used to measure risk will never include all risks. Nobody should be surprised. A risk system should be viewed as a tool for summarizing and aggregating a large amount of information in a concise manner. Such a system will not be perfect, and users should recognize that in using the results.

2    Risk Measures Such as VaR and Volatility Are Backward Looking
This is simply the way the world is: we can seek to understand the past, but we cannot know the future. Understanding the past is terribly important because understanding current exposures and how they would have behaved in the past is the first step toward managing the future. As the philosopher George Santayana said, “Those who cannot remember the past are condemned to repeat it.”

3    VaR Does Not Measure the Worst Case
Statistical measures will never tell us the worst case. Whatever VaR level we choose, the world can always throw something worse our way. Although VaR is often referred to as a “statistically worst-case loss”, doing so is both intellectually lazy and dangerous. It is intellectually lazy because a so-called worst case relieves us of the responsibility for thinking of the consequences and responses to yet worse outcomes. It is dangerous because it is certain that results will, at some point, be worse.

4   Quantitative Techniques Are Complex and Require Expertise and Experience to Use Properly

The financial business overall, not just risk measurement, is complex and is becoming more complex all the time. Managers at financial firms should take their responsibilities seriously and learn enough about the business, including risk measurement, that they can effectively use the available tools. Risk professionals have the corresponding responsibility to explain their techniques and results to nonexperts in a simple, concise, transparent manner. Simple ideas, clear presentation, and concise description must be the goals for anyone engaged in measuring risk.

5    Quantitative Risk Measures Do Not Properly Represent Extreme Events

Quantitative risk measures do not catch extreme events. Experience does not catch extreme events. Imagination can try, but even that fails. Extreme events are extreme and hard to predict, and that is just the way life is. We need to recognize this limitation, but it is hardly a failure of risk techniques. To criticize the field of risk measurement because we cannot represent extreme events very well is just silly, like criticizing the sky because it is blue. Anybody who does not like extreme events should not be in the financial markets. Luck, both good and bad, is part of the world. We can use quantitative tools to try to put some estimates around extreme events, but we have to learn to live with uncertainty, particularly when it comes to extreme events.

A Proper Appreciation of Risk Management Limitations

A key component of true risk management is an appreciation of not only the power but also the limitations of quantitative risk techniques. Quantitative techniques work best in the hands of those who are keenly aware of the limits and boundaries of what these techniques can provide. A deep appreciation of the limitations gives us the confidence to rely on the techniques when appropriate and the good sense to turn elsewhere when necessary.

The existence of limitations is not a problem. Failure to appreciate our limitations, however, is a serious mistake. Overconfidence in numbers and quantitative techniques and in our ability to represent risk, extreme events in particular, should be subject to severe criticism because it lulls us into a false sense of security. Understanding the limitations, however, does not mean throwing out the tools that we have at our disposal, even if they have limitations.

 Thomas S. Coleman is the author of Quantitative Risk Management + Website: A Practical Guide to Financial Risk. He has worked in the finance industry for more than twenty years and has considerable experience in trading, risk management, and quantitative modeling. Coleman currently manages a risk advisory consulting firm. He is also the author, together with Roger Ibbotson and Larry Fisher, of Historical U.S. Treasury Yield Curves.

Download a preview chapter of Quantitative Risk Management to learn more: Risk Management vs Risk Measurement Chapter 1 Sample>>

Since 1950, stocks have performed considerably worse in the six months between May to October than they performed between November to April. According to Stock Trader’s Almanac, the Dow has gained just 0.4% on average from the May-October period compared to an average gain of 7.5% in the November-April period.

Hirsch attributes this year’s early sell signal on several factors, including a mild winter. “The really warm winter months may have brought first quarter gains early this year, with the DJIA, S&P 500, and NASDAQ all advancing solidly in 2012 to their best first-quarter performance in years.”

Since 2006, stocks have risen every April, gaining an average of 4.2% and April is the best Dow Jones month since 1950. However, gains are lower in presidential-election-year Aprils. “Election year April has been about half as good with the Dow up only about 1% back to 1950 and NASDAQ actually going negative in election years. There tends to be quite a bit of selling in April after you have a better idea of who the contenders will be for the national election.”

Hirsch recommends traders take profits now instead of waiting until May. However, they don’t have to jump out completely. Hirsch is tighening up stops and increasing downside protection by looking at the iShares Barclays 7-10 Year Treasury Bond ETF ($IEF) and iShares Barclays 20+ Year Treasury Bond ($TLT). He also suggests checking out AdvisorShares Active Bear ETF ($HDGE), a fund that shorts stocks.

Jeff Hirsch discussed this in a recent interview with FOX Business:

During workshops I deliver I have been asked by attendees from government and non profit agencies (GANPA) “Will winning KPIs work for us?”  The answer is a profound “yes”. Finding your winning KPIs will create much benefit.  By embedding “winning KPIs” government and non profit agencies would benefit from:

• Knowing their critical success factors (CSFs) and conveying them to all staff;
• More widespread empowerment and more clarity on what should be recorded and reported;
• CEOs, both current and future, connected to staff who are working in the CSFs (e.g., there will be daily follow-up calls on the KPIs); and
• Staff’s daily activities linked to the strategic direction of the organization.

Even though an organization has a strategy, teams are often working in directions very different to the intended course as shown in Exhibit 1(a).  If the CSFs of the organization are clarified and communicated, staff will now be able to align their daily activities closer to the strategic direction of the organization as shown in Exhibit 1(b).

Exhibit 1: The impact of winning KPIs to the daily routine and tasks performed by staff

(a) Before winning KPIs	(b)After implementation of winning KPIs

The process is relatively simple and will take between 6 to 16 weeks of elapsed time depending on the size of the organization.  The process I recommend requires an understanding of four types of performance measure:

1. Key results indicators (KRIs). Six to 10 financial and nonfinancial monthly or quarterly measures giving an overview of past performance;
2. Performance indicators (PI). Thirty to 50 nonfinancial daily, weekly or monthly measures telling staff and management what to do;
3. Results indicators (RIs). Thirty to 50 financial and non financial daily, weekly, monthly, or quarterly summary indicators telling staff what they have done; and
4. KPIs. Six to 10 non financial measures telling staff and management what to do to increase performance dramatically, measured 24/7, daily or weekly.

Other requisites are:

• Selling the project to the CEO as the most important thing the organization can be doing at this time;
• Laying, and building upon, the project’s seven foundation stones see Exhibit 2.
• Having a balanced view of performance (i.e., the six perspectives of the balanced scorecard: (1)financial, (2) internal process, (3) customer focus, (4) employee satisfaction, (5) innovation and learning and growth, and (6) environment and community);
• Locating the five to eight CSFs which have the greatest influence (out of the organization’s 30-plus success factors);
• Finding measures that will drive the appropriate behavior within the CSFs and SFs;
• Working with measures relating to activities past (last week, last month), current (yesterday and today) and future (the scheduled dates of key tasks); and
• Ensuring the right timing” for freeing resources to complete this task.

Exhibit 2: The seven types of performance measures

External Advisers and Internal Resourcing

In implementing winning KPIs, a small to medium enterprise may need to rely on an outside professional adviser (e.g., a trained business coach, or the business’s accountant (if they have trained themselves in this area)). However, while this adviser must work closely with the in-house resources chosen to run the project, they must not drive it (since that could lead to a lack of internal ownership).

It is also important that the project does not fail through lack of resourcing or of management attention.

Further Reading and references

This article is a very brief introduction into a methodology that will leave a lasting legacy in your organization.  For additional information, see:

• Key Performance Indicators: Developing, Implementing, and Using Winning KPIs, David Parmenter, John Wiley & Sons, 2010
• Key Performance Indicators for Government and Non Profit Agencies: Implementing Winning KPIs, David Parmenter, John Wiley & Sons, 2012
• www.davidparmenter.com for checklists and templates from my books

David Parmenter is an international presenter who is known for his entertaining and thought-provoking sessions, which have led to substantial change in many organizations. He is a leading expert in the development of winning KPIs, replacing the annual planning process with quarterly rolling planning and management practices that will get you to the top. Parmenter has delivered workshops to thousands of attendees in many cities around the world, has worked for Ernst & Young, BP Oil Ltd, and Arthur Andersen, and is a Fellow of the Institute of Chartered Accountants in England and Wales. He is also the author of Key Performance Indicators for Government and Non Profit Agencies: Implementing Winning KPIs (Wiley, 2012).