Transcription
Well, hello everyone. My name is Paul Kon. I've been, uh, in my 25th year now running Kon Business Solutions. I'm a CPA, and I've been worked, uh, working for many years in the mining industry. I was born and raised in a mining town near the Yukon.
And at Kon, I've been involved with over 100 implementations of accounting and ERP software for mining companies. Uh, I thought the best way to introduce Kon Business Solutions is through clients. So this slide shows the open pit from one of our most important clients, uh, with an operation in West Africa.
At Kon, we do what we do because it's vitally important to the success of our clients. When, when we work with, uh, with our clients, mining companies or others, um, the solutions we implement stay with them for many years. I mean, an ERP solution is not an easy solution to move off of, and we know that. So we take our work very seriously.
Uh, we're somewhat unique in the field of ERP consulting is that we focus just on the mining industry. And this focus enables us to deliver our projects without the usual learning curve where our clients have to teach us about mining. You don't have to do that with us. We get it.
So what does it really mean to support mining? Well, it really means, uh, limiting our work to four industries. U, First of course, mining companies. The bulk of our clients are Canadian mining companies, but we also support the companies that support our clients. Right? So every mine in the world's got a supply room. We support the distributors who get the product to your supply room. We also work with manufacturers of mining equipment, and on occasion, we've worked with construction companies that help our clients to build the mines. So that's our scope. That's the introduction to Kon, and as you can see, mining is really the center of our world.
Introductions out of the way, I'm going to now move to the main topic of today's presentation, which is Key Performance Indicators, or KPIs. So I'll start with a definition. Other than being a three-letter acronym, or TLA, a KPI is essentially a metric, you know? And metrics are quantifiable measures. They're used to track business processes and judge performance of your, of your business.
There are hundreds and hundreds of these metrics because there's so many different businesses in the world, each with different processes, different success factors. I mean, just with mining, with very little effort, I came up with a list of 55 different KPIs for the mining industry. So at Kon, we're often asked to create reports, design dashboards from our clients' ERP solutions, and we found that, you know, reports and dashboards are obviously required, and they can be very useful in tracking key metrics. But we found that while in some cases they're critical to business success, in others, they're relatively useless. And today, I'm going to talk to you about why that is.
For the rest of the presentation, I'm going to review some approaches you can take to selecting your KPIs that'll be useful and relevant information. So the question I'll address today is, out of all the numerous metrics out there, how do I find the ones that are best for the business? I mean, the first thing to realize is that finding KPI Nirvana is not exactly an easy task. Matter of fact, it's, it's a big area and it occupies a lot of brainpower in consulting firms and also in academic institutions.
So let's consider, you know, what consultants and analysts are saying about that. Um, McKinsey Consulting has published a lot of articles on mining, uh, including an excellent article a couple of years ago called "Navigating a Decade of Challenges." I'm not going to go into the details, but the article did a really good job of listing the challenges that, that we face, uh, in, in the mining industry, and it also talks about KPIs. So the, the that article does a really good job of identifying a goal of improving throughput and reducing costs for mining companies for the next decade. But it also explains which KPIs you should look at to measure that. So it's worth a read. Happy to send the link to you after this meeting.
Uh, I'm not sure, in the middle there, I'm not sure if you're aware that there is a KPI Institute. So it's a research institute that was formed in, in 2004. It operates in 54 countries and has published over 225 research reports. They also have a certification. You can become a certified KPI professional and practitioner. I did not know that. The KPI Institute recommends a three-step approach to selecting relevant and aligned KPIs. And a key step in their process is what's called KPI clustering. Simply put, you take all of the possible KPIs that could apply to your business and cluster them and align them with the goals of the organization. And from that, you will be able to define a KPI strategy that supports your goals.
While we're on the topic of consultants, I do want to mention the advice of a Canadian mining consultant called Outliers. They use the term "informed KPI," which really are KPIs based on what they call Key Performance Targets. So another three-letter acronym, KPT. But I really like this term because it keeps in mind the idea of a goal. You don't just develop KPIs, you develop KPIs and align them with a goal. Easy example there is, you've got a target to reduce milling costs by 10%. Then mill cost per ton is obviously a relevant and useful KPI to, to report on.
So I'm not going to give a PhD dissertation on this topic, although there are academic institutions that focus major studies on KPIs. I'm not going to present technical white papers. I'm simply going to make the point that there's a lot to the selection of the ideal KPI strategy. Consultants have their opinions, academics have their opinions, but the general theme that emerges is that KPIs are more effective and more meaningful when they're tied to the goals, strategies, and outcomes that are important to the company. So I refer to this as an outcome-based KPI strategy.
So the goal here is to, to, to develop a strategy to, to determine the KPIs that will suit your company, KPIs that will be useful to your organization. First step in that is really to, to understand the different types of KPIs, the different types of metrics that are available to us. So I'm going to go through that for a little bit here.
First of all, there's, you know, quantitative versus qualitative KPIs or measures. Quantitative KPIs measure performance in discrete numbers, ratios, percentages. Many of us on the call today are finance professionals, so we, we know all about this. We tend to live in a world of discrete numbers: profit margins, liquidity, etc. Qualitative metrics, on the other hand, they're less tangible but equally important. Employee satisfaction, safety measures like injury frequency, because mining companies rely heavily on their people. Measuring topics like diversity and promotion rates may provide us with an indication that improvement is needed. So that, you know, every company in the world has quantitative metrics. Financial statements are one indicator, you know, one example of that. Qualitative metrics, so really change based on the goals of a particular year. So if, if an objective in a particular year is to improve safety in operations, then injury frequency is really relevant and it should be measured. But in another year, the goal might be to retain key employees. Well, then promotion rates become a more important metric. Your, your KPIs change as your goals change, and they should. It just makes sense.
Four other metrics, uh, in, in the scope here are all related to each other, and these are descriptive and diagnostic, and predictive versus prescriptive. So descriptive metrics are useful to understand performance and explain what's already happened. You know, an example might be, you're driving your car and smoke is coming out of the engine. You know, what happened was your engine has a problem. Diagnostic metrics drill down into the, into the descriptive analytics to find anomalies through, it's a process called exploratory data analysis. The goal is to understand the "why." Why did this thing happen? So, so this is where you stop the car, you open the hood, and you try to understand the source of all the smoke. Uh, predictive KPIs are basically saying, you know, what's likely to happen in the future based on what I know now. Okay? So examples might be determining projected cash flow based on an event that happened that has an effect on your cash flow, planned versus actual resource utilization, given that you've had a work stoppage. All of those sorts of things will help you predict the impact of an event. In the car analogy, this is you getting back in your car and trying to determine that if you only drive at 20 kilometers an hour, you can actually get to the next town. That sort of thing. Prescriptive analytics combine all three of the above. Okay? So the goal of prescriptive analytics is to suggest ways to prevent the issue from happening again. And this is the field of academics. There's a great discussion I had with the University of Toronto where they're studying the effectiveness of certain KPIs. Mathematical modeling is used, business rules are used, you know, to, to beat my car analogy completely to death here. This, this is your mechanic speaking. Okay? So those are four different types of metrics, very important to consider.
And there's two more. Input and output metrics are much more common to most of us. They're used by all companies, mining, manufacturers, anything, primarily because they're meaningful, they're relevant, and they're easy to understand. So input KPIs track the resources that are required to do the work. For example, the costs associated with operating the mill. Output KPIs measure the result of those inputs. For example, tons of material processed through the mill. So some, some KPIs that, that fall within this are ones that most of us have seen before: cost per ton milled or mined or hauled. You know, if you're producing ore, you might be looking at all-in sustaining costs per ounce of gold sold, or just cash cost, cost excluding capex. But these, now we're starting to get into the more common, uh, metrics that we've seen every day. Okay?
So it's important to define, you know, when you're looking at your KPI strategy, it's important to define your company's approach. We've already established that KPIs have to relate to company goals. We've also learned that there's many different types of KPIs, but companies across industries prioritize different metrics because their goals and success factors are different. If you look just at the mining industry, we see that individual companies place value on different goals and targets. This happens because operations goals and objectives can differ greatly depending on what's being mined, and the nature of a mining company changes dramatically as it travels along the mining life cycle.
So if we just look at two examples here, you know, if, if you're in operations, well, maximizing equipment utilization might be a very important goal, and there's a lot of KPIs you can measure along those lines. One of the very effective ones is Overall Equipment Effectiveness, which takes the availability of the equipment times the percent it's actually used, which is the performance, and then the quality of, of the work that's done using that equipment. So you can see that that's maybe a quantitative KPI, but it also has characteristics of input, output. And now let's say, well, you know, mine safety is a major goal. You can look at the first line there on the slide, which is, you know, basically, uh, quantitative things, things that, or descriptive metrics that say how many injuries did I have? How many days were lost? What's our compensation cost? Or, or you can actually look at more prescriptive KPIs like safety training. You know, how do we avoid this from happening in the future? Can we reduce risk by doing some job hazard analysis, or even asking our employees how safe they feel on the job? So KPIs relate to goals. Your goals change as your company changes, as you move through the mining life cycle, or as your company grows. So your KPIs should change as well.
So we're going to talk a little bit now about some approaches that you can take to developing your own KPI strategy. So here are some approaches to consider. The first one is called the North Star Metric. And the approach here involves identifying one key thing, one key measure that's most predictive of your long-term success. So the idea here is this, this one thing will lead the company to long-term sustainable growth. And the approach is to get everyone focused on this goal. It discourages different departments from working against each other or against the goals of the company by focusing, again, everybody's focused on the one thing. And, you know, with any metric, this will differ depending on the company. I mean, an example is Airbnb. If you think about what they do, their North Star metric is nights booked. How many nights in the month are booked? If they can nail this down, it's easy to see that that will be, uh, the secret of their success. Maximize that.
Miners in different phases also have different North Stars. A mining company with an operating mine may have a, a North Star metric of operational efficiency. Focus everything on becoming efficient. In that case, some of the KPIs would be equipment runtime, meantime between failure, OEE, which I just talked about, also from processing, the cost per ton mined or the mining operation, etc. All of those are right in line with that North Star metric. But if you're not in production yet, the North Star might be different. Might be completely focused on cost reduction. So cost per drill hole might make a lot more sense. Okay? So that's one approach. It, there's a lot of appeal to that one because it's simple and, and it allows a focus in the whole organization.
There's another approach called the OKR approach: Objectives and Key Results. U, this is a really interesting one. It was really made popular in 2018 when a guy named John Doerr published a book called "Measure What Matters." I, I'm not sure how many of you have read that, but it's quite a good book. John was an early investor in Google, Intuit, and Amazon, so he's obviously got a good track record. But early on in his career, he worked for Intel and he became one of Intel's most successful salespeople. But this is not a picture of John Doerr. John's book was, describes a system he learned when he was at Intel, a system that was developed by Andy Grove, who became the CEO of Intel. So this is Andy Grove, and this system is called Objectives and Key Results. And the beauty of this is it's very simple. His management approach to planning and growth was a very simple, clear, and well-defined two-step approach. Each year, a company must decide on a few objectives. Typically, two or three objectives are enough. An objective is the direction. It describes where we want to go. For example, "We will put the East pit into production this year." Then for each objective, come up with three to five key results that'll support that objective. A key result is a well-described, measurable task that is typically measured on a quarterly basis. So examples might be: complete the feasibility study for the East pit expansion, hire an engineer that's experienced in this area. Those are the key results. So you can measure and you can say at the end of the quarter, I was successful or not in achieving those key results.
So the general idea here is that objectives are big and ambitious, and they're used as motivators for the entire team to rally around. Similar to the North Star metric, we shouldn't confuse this with another popular business book, you know, called "Good to Great." In that one, Jim Collins talks about BHAGs, which he calls Big Hairy Audacious Goals. Those are different than objectives. Okay? BHAGs are life-changing. It's like John Kennedy saying, "We're going to put a man on the moon," or Elon's goal of traveling to Mars. They're multi-year. Objectives are more in tune with now. They're typically annual goals with quarterly measurements. OKRs have been described as KPIs with soul, which kind of sounds nice. They're different than KPIs as they're meant to lead rather than indicate.
So this is an interesting approach. It's one I like a lot, and we need to talk about the fact that they're slightly different things, but how do they relate? So in this diagram, I'm describing a, an approach using KPIs versus and versus and/or together with an approach using OKRs. So if we look at the left side of the diagram here, our goal might be increasing mine safety, and we'll come up with two KPIs that are completely in alignment with that. We're going to measure the, the descriptive metric of injury frequency, how often do people get hurt, and we're going to measure our effectiveness in a prescriptive metric called safety training. You know, we might want to have goals like X number of safety trainings, how effective are we at that? Well, the OKR approach on the right is similar but different. So the goal is described as an objective: "Become the safest gold mine in West Africa." So it's a lot more bold, it's a lot more deliberate, and it's, it's a lot more, you know, bravado. There's a motivational language there. But really, it's the same goal: increase mine safety. To enable us to, to achieve this objective, we come up with two key results that we feel we can accomplish this quarter: reduce injuries by 10% in Q1, hold 12 safety training sessions in Q1. Measurable, very direct, very much in alignment. But you can see that a, a KPI called injury frequency helps us to measure our key results. Our KPI and safety training reports on on our effectiveness of holding these training sessions. Okay? So they're related. It's a great approach because it combines motivational, forward-looking views with measurements, things that we're all familiar with, KPIs.
Because I have no shame, I'm going to bring up my car analogy one more time. You're, you know, you're starting a long trip, driving from Toronto to Vancouver. The KPIs are on your instrument panel. The objective is Vancouver, and the key results are the stops along the way. I promise no more car analogies after this. Okay? So that's the OKR approach.
There's another one to we're mentioning here, which is the Balanced Scorecard approach to developing, you know, relevant KPIs. Balanced Scorecard was developed in 1992 and it's been used by many companies, uh, around the world. It usually uses four traditional perspectives, which are the internal process, for instance, measuring the efficiency of your workflow; finance, where you would measure your, your revenue; customer satisfaction, where you might ask for customer surveys; and, you know, learning and growth, perhaps that's employee surveys. At first blush, this seems to have very little to do with mining, but the Balanced Scorecard is designed to be flexible, and it's been used in a lot of non-traditional businesses like not-for-profit organizations and these sorts of things. Matter of fact, in the 2018, uh, annual report of Gold Fields Limited, they used a Balanced Scorecard approach, or they measured performance using these four different perspectives, or they established goals related to each perspective and they tracked KPIs that align with these goals. I think this approach adds a level of complexity that may not be necessary. I couldn't find any evidence that Goldfields used this approach beyond 2018, so maybe they came up with the same conclusion.
Moving on here, so the conclusion. When I looked at three good approaches for KPIs, but the conclusion comes down for another three-letter acronym. There you go. It's called GAR, right? One I've just invented. You know, if you think about all of the different approaches, I personally like the KPR approach because I think objectives should be bold, they should be motivational. You know, for some businesses out there, there's only one key metric, it's obvious, so the North Star metric approach makes sense. And some of you are really tied into the Balanced Scorecard for years, it's part of your DNA, so there's no reason to reject that. But the, the main, uh, recommendations on your KPI strategy are really three things: Spend time to determine your goals. That's the number one thing. Secondly, align and consider reporting only on those KPIs that align with those goals, and reject the urge to track more metrics just in case they're going to be valuable. You know, anything other than informed KPIs is just noise.
Okay, let's now consider some cautions. Um, what could go wrong? Well, everything. You know, there's, starting on the left there, there's a risk that your, that your data is suspect. You may have done a good job developing your goals, and the KPIs might be well aligned, but your data has errors in it. So to avoid this, I would recommend going to the source. It's, it's much better to report directly from your ERP solution than to dump data into Excel, manipulate it, because errors are far less traceable in an Excel-based approach. Secondly, you know, the KPIs you need to align, but what if one department doesn't align with the other? Well, the two approaches that I think address this the best are the North Star metric because it's obvious that everybody's aligned to one, and the OKR approach uses kind of a different way to avoid misalignment, and that is all OKRs are public. So therefore, everybody in the organization knows the objectives and key results of management and of each department. If a team is grossly out of alignment, it's very easy to identify that and take measures to correct it. Uh, thirdly, you know, overloading your KPI dashboard with lagging or descriptive KPIs is, it's kind of like a coach who only sees the bad in his players. These are the bad things that happen, but you need to have prescriptive, leading indicators in your KPI strategy that helps you determine your way out of a situation. Uh, on the, on the bottom left, we, you know, we don't operate in a vacuum. When designing your targets, consider the market, consider your peers, the industry. There's industry standards that can be easily sourced. This can serve as a reasonableness check for your KPIs and your targets. And lastly, sometimes you just can't let go of a KPI. It's a number you've used for years, and you just love this calculation, but if it doesn't align, you're measuring the wrong thing. So stop doing that.
About what you should expect from your ERP solution. You know, there are many benefits to basing all your reporting on a single source of truth, and that source should be your ERP solution. If you consider your ERP solution only as accounting software, you're really missing the point. We're way past that now. ERP means Enterprise Resource Planning, you know, not some resources, but all relevant resources. Therefore, your ERP should have a way of storing financial and non-financial data like tons, like days, like quantities, that's equally as important to report on. It should not be a stretch to say that you should have a powerful reporting engine as part of your ERP. If you don't, you're really using the wrong system. You can't keep information behind a firewall, it must be shared. A reporting engine will let you do that. When you're planning dashboards, you know, don't try to replicate the entire internet on a single dashboard. It's amazing what we've seen for dashboards with so many measures, you really can't read them. The KISS principle applies to dashboard design: Keep It Simple. Remember that each department head has different requirements, so dashboards should be suited to each user, they should be personalized.
Okay, so thanks for staying with me on that. I've gone all the way through from defining the different types of KPIs to talking about some strategies and lastly to thinking about how your ERP solution can help with that. We hope you found this useful. Please do not hesitate to, uh, reach out to us.