Understanding Critical Success Factors and Indicators in Business
The world of business is filled with words, terms, phrases, and acronyms that can be confusing. In particular, the terms: Key Performance Indicators (KPI), Critical or Key Success Indicators (KSI) and Critical Success Factors (CSF) are often used interchangeably and erroneously. The purpose of this article is to clarify the meaning of the phrases: Critical Success Factors and Critical/Key Success Indicators and to describe their importance and use in business.
Definition and Examples of Critical Success Factors (CSFs)
Critical Success Factors are those variables or circumstances necessary to enable a positive outcome for a business program or strategy. The CSFs are the expected causal variables of a particular desired outcome. Examples include:
- A project team identified the need to gain training on Agile methodologies to replace their reliance on traditional the critical path project approach as a critical success factor with the complicated new software development initiative.
- The general manager supported the team's recommendation for investment in a new customer relationship management software system as part of the plan to strengthen overall customer satisfaction. The new software was identified as one critical success factor for gaining the ability to better track and respond to inquiries from their customers.
- The senior management team identified three critical success factors in enabling their new strategy in the marketplace: identifying and hiring the right skill sets; defining and implementing a strategy execution approach that captured lessons learned in the market; and the ability of marketing to gain the attention of a critical group of early adopters in the targeted markets.
- The sales manager understands that training, follow-up and the use of a defined sales process all contribute to increasing sales. She measures and monitors a set of indicators that tell her whether her representatives are engaging in the behaviors that enable growth in sales.
Identifying Critical Success Factors
Management and project teams work hard to discern between variables that simply correlate with outcomes and those that have a causal effect. In many circumstances, the identification of CSFs is an outcome of research and exploration, financial or statistical modeling and informed discussion and debate. When a situation does not lend itself to rigorous statistical analysis, the identification of the CSFs becomes an exercise in identifying and making assumptions.
Issues to consider when striving to identify CSFs includes:
- What variables or factors are likely to impact our desired outcome?
- Are we able to perform statistical analysis based on past data?
- What changes in behavior must occur to create the desired outcomes?
- What conditions must exist or change to create the desired outcomes?
- What skills do we need to add or acquire to achieve success?
- What tools must we add or master to allow us to achieve our goals?
Critical or Key Success Indicators (CSIs)
While Critical Success Factors are the cause in a cause and effect relationship, CSIs are the measures that link the actions or causes to the outcomes. A Critical Success Indicator is analogous to the stopwatch readings of a marathon runner or the readings of fuel economy in an automobile. Consider:
The marathon runner understands that she must maintain a particular pace to finish with a time that will place her in the top ten runners in her category. The readings do not impact her success directly. However, they offer guidance on whether she might increase her pace to keep up with the competition or slow her pace to conserve energy for the final leg of the race. The critical success factors for her running success included her training regimen, diet, and mental preparation. The readings are simply indicators of her progress toward her goals.
Critical success indicators can be developed for each of these CSFs.
A driver focused on maximizing fuel economy is dependent upon readings from the car's computer to understand how he is doing. The critical success factors for maximizing fuel efficiency include such factors as average speed and the pace of starting as well as the frequency of stopping. The economy readings are simply indicators suggesting whether his actions are yielding the desired result.
The timing or reading itself does not impact the outcome or success. However, the CSI offers guidance on whether the actions are yielding the outcomes that enable increased sales.
Developing Key Success Indicators (CSIs)
After careful identification of CSFs, the manager or professional works to identify measures that translate actions into meaningful measures or proxies of the CSFs. If you reference the CSI examples above, you can envision the indicators the marathon runner must monitor, including training time and effectiveness, dietary management and sleep.
Effective managers measure and monitor and strive to correlate their measures with their CSFs over time. The process of developing Key Success Indicators or CSIs is an ongoing, iterative process where frequent adjustments and refinements are required based on actual experience.
The Bottom Line
The identification of Critical Success Factors and their supporting Critical Success Indicators is an important part of improving the probability of success for an initiative or program. However, beware the adage of: "what gets measured gets done." Astute managers watch very carefully to correlate indicators to CSFs and to identify and substantiate that the CSFs have causal relationships with desired outcomes. It is a process that requires both art and science.
Update by Art Petty.