Critical success factors and key performance indicators

At a glance:

• CSFs and KPIs are invaluable concepts for any business looking to turn its mission and strategy into tangible, measurable operational objectives. 

• Identifying them and communicating them to the business's key stakeholders (including staff, suppliers and customers), is essential to securing a business's long-term competitiveness. 

• As an accountant, you can employ CSFs and KPIs (and the foundational analysis underpinning them) to help your business or clients towards success.

What are CSFs and KPIs?

Critical success factors (CSFs) are the elements of a business that are vital to sustained competitive performance and long-term success. Key performance indicators (KPIs) are the metrics used to measure how well a business is performing in line with its CSFs.

How do CSFs and KPIs relate to a business?

Every business has a mission, even if it’s not been put down in writing. The business’s mission is its reason for existing, containing its overarching goal, core offering and primary intended market. Putting that mission into practice means setting objectives, which might fall into the following categories:

• Financial objectives, including increasing revenue or reducing costs
• Customer objectives, including increasing market share or improving customer retention
• Internal objectives, including developing innovative products or services
• Operational objectives, including reducing waste or streamlining processes
• Developmental objectives, including upskilling staff or improving employee retention
• Regulatory objectives, including ensuring compliance or improving environmental sustainability

Once a business has identified its core objectives, successful performance against those objectives depends upon identifying those factors which are most important in providing the business with competitive advantage. These are the business’s CSFs, and once you’ve defined those you can work out the KPIs that measure how well the business is performing against its CSFs.

How do you identify CSFs?

CSFs can be drawn from many sources, including the business’s strategy, mission and objectives. Not all CSFs need to be internally generated, however; CSFs can relate to macro and environmental factors. For example, a courier company should identify the price of fuel as a critical CSF, because this will have a significant impact on financial performance and operational planning.

There are four main sources of CSFs:

• The industry or market the business competes in
• The business itself and its position in its industry (How does it compare with its immediate competitors in terms of market share and position? What is the business’s dominant market strategy? Where is the business located?)
• The external environment (national and international)
• Temporal factors (responding to immediate short-term issues, such as breaking into a new market, implementing improvements after a compliance failure, etc.)

Identification of CSFs should be carried out alongside an evaluation of the business’s resources and capabilities, allowing the business and its advisers to evaluate whether the business has the resources and capabilities it needs to excel. A business’s capabilities tell us what a business is good at, while a business’s CSFs tell us what it needs to be good at to succeed. To maximise the likelihood of success, a business should align its capabilities to its CSFs.

For example, if a business’s mission is to deliver market-leading quality, then ‘product quality’ is a vital CSF for that business. The business’s capabilities should be evaluated in light of that core CSF, to ensure CSF and capabilities are aligned; if the business’s production processes are focused on cost reduction, there is a mismatch between CSF and capabilities that will work against the business succeeding. Conversely, if a business’s driving market strategy is cost leadership, logically ‘cost reduction’ will be a core CSF, in which case a production process focused on cost reduction indicates a positive alignment between the business’s capabilities and its CSF.

How do you develop KPIs?

Once a business's core CSFs have been defined, these can be used to develop KPIs. KPIs are specific criteria used to measure performance, helping a business understand how well it is delivering against its CSFs. KPIs are more detailed and quantitative than CSFs. For example, if ‘product quality’ is a CSF, this might be used to generate the KPI ‘reduce returns by 10% year-on-year’.

Effective KPIs should be designed to address the key performance areas identified by CSFs, and should follow the SMART acronym for objective-setting:

• Specific
• Measurable
• Achievable
• Relevant
• Time-bound

A business looking to develop CSFs and KPIs should follow a step-by-step process, starting at the highest level with its vision and mission, and working down to the most detailed level of setting KPIs:

• Define vision and mission, and use these to agree key priorities
• Develop strategic objectives, linked to the business's mission
• Identify CSFs, highlighting those that are truly critical to success
• Develop KPIs, linked to specific CSFs
• Communicate CSFs and KPIs to the business's key stakeholders, so everyone involved is clear on what they are and how the business aims to succeed

Because KPIs are more focused than CSFs, one CSF might have multiple KPIs linked to it which are used to measure performance.

Putting it all together

As an example, a startup business might first employ a PESTLE analysis (looking at political, economic, social, technological, legal and environmental factors) to understand the context it operates in, Five Forces analysis to understand its market, and SWOT analysis to map its own strengths and weaknesses. Having done this foundational analysis, the business affirms its mission is to deliver a product that’s competitive on price, and market-leading in terms of environmental impact.

Using the mission, the business develops several strategic objectives. One strategic objective is ‘minimising waste’, in line with the business's environmental sustainability mission. Multiple CSFs are then identified relating to this objective:

• Increasing recycling
• Developing ‘green’ processes
• Reducing carbon emissions

Focusing on one CSF in particular, ‘increasing recycling’, leads to the development of two linked KPIs:

• Increasing proportion of production materials that are recyclable by 5% year-on-year
• Increasing internal repurposing of production by-products by 10% year-on-year

Each strategic objective can give rise to multiple CSFs, each of which can in turn be linked to several KPIs. It’s important to keep the total number of CSFs and KPIs at a manageable level. Too few means the business won’t get the level of detail necessary to define its operational priorities and measure performance; too many can lead to a lack of focus, and arbitrariness as to which CSFs and KPIs command attention.

A business looking to systematically implement CSFs and KPIs should also consider what information will be needed to evaluate performance. If the current information systems won’t provide all the necessary information to track KPIs, the business and its advisers will need to research the most effective and cost-efficient way to improve the current systems or source the requisite information through other means.