What is the relationship between critical success factors and key performance indicators How can a manager use them to understand business operations?

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Critical success factors can help your business to focus on what really matters.

Critical Success Factors (CSFs) are every bit as important and straightforward as they sound! They are the areas of your business or project that are vital to its success.

They also give your people focus, and ensure that tasks and projects are aligned across teams and departments.

In this article, we explore how to identify your CSFs, how they should relate to your business objectives, and how they differ from Key Performance Indicators (KPIs).

What Are Critical Success Factors?

Essentially, critical success factors or CSFs are the elements of an organization or project that are vital to its success.

The concept of CSFs (also known as Key Results Areas or KRAs) was first developed by management consultant D. Ronald Daniel, in his article, "Management Information Crisis." [1]

John F. Rockart, of MIT's Sloan School of Management, built on and popularized the concept almost two decades later. He defined CSFs as: "The limited number of areas in which results, if they are satisfactory, will ensure successful competitive performance for the organization. They are the few key areas where things must go right for the business to flourish. If results in these areas are not adequate, the organization's efforts for the period will be less than desired."

Rockart also concluded that CSFs are "areas of activity that should receive constant and careful attention from management." [2]

© Quotes reproduced with kind permission of Harvard Business Review.

The Four Main Types of Critical Success Factors

Rockart identified four main types of CSFs that businesses need to consider:

1. Industry factors result from the specific characteristics of your industry. These are the things that you must do to remain competitive within your market. For example, a tech start-up might identify innovation as a CSF.
2. Environmental factors result from macro-environmental influences on your organization. For example, the business climate, the economy, your competitors, and technological advancements. A PEST Analysis can help you to understand your environmental factors better.
3. Strategic factors result from your organization's specific competitive strategy. They might include the way your organization chooses to position and market itself. For example, whether it's a high-volume, low-cost producer; or a low-volume, high-cost one.
4. Temporal factors result from your organization's internal changes and development, and are usually short-lived. Specific barriers, challenges and influences will determine these CSFs. For example, a rapidly expanding business might have a CSF of increasing its international sales.

Critical Success Factors Versus Key Performance Indicators

The term "Critical Success Factor" is often used interchangeably with the term "Key Performance Indicator." But they are actually very different.

Critical success factors are derived from your organization's mission and objectives. They set out what you need to do to be successful and tend to be universal across organizations. For example, they might include things like:

• Increasing profits.
• Improving employee engagement.
• Improving talent acquisition and retention.
• Becoming more environmentally-friendly.

Once you've identified your CSFs, you can use them to develop more specific Key Performance Indicators (KPIs). These are the specific criteria that managers and organizations use to measure performance, and they often differ from organization to organization.

KPIs provide the data that enable a business to decide whether CSFs have been met, and if goals have been achieved. KPIs can also be used at different levels of a business – they can be used to clarify strategic, business-wide targets, or even to drill down into team and personal objectives.

KPIs are typically more detailed and quantitative than CSFs. For example, the CSF "Increase sales in Asian markets" could generate the KPI "Increase sales revenue in Asian markets by 12 percent year-on-year."

Five Steps to Identify and Develop Your CSFs

To identify and develop CSFs for your organization, follow these five steps:

1. Research Your Mission, Values and Strategy

First, take some time to look through your organization's mission, values and strategy. What are the challenges and key priorities that your organization needs to be focusing on right now?

If you're unsure, or want to gain some background, do a PEST Analysis to gain a better understanding of the external market factors that are influencing your organization right now. Follow this up with a SWOT Analysis to identify how well-equipped you are at dealing with these market challenges, and to assess your organization's strengths and weaknesses. This all-round approach should help you to clarify what improvements need to be made and where.

2. Identify Your Strategic Objectives and Candidate CSFs

Identify your organization's key strategic goals – these are usually linked to your mission and values. Then, for each objective, ask yourself, "How will we get there?" There may be a number of things that need to happen for you to achieve each of your strategic objectives. These are your "candidate" CSFs.

For example, if one of your strategic goals is to "reduce waste over the next year," you will likely need a number of critical success factors to help you to achieve this, such as:

• Reducing carbon emissions.
• Investing more in renewable energy sources.
• Improving the efficiency of supply chains.
• Developing "green" offices and processes.

3. Evaluate and Prioritize Your CSFs

Now, work through your candidate CSF's and identify only those that are truly essential to your success.

As you work through each candidate CSF, you may see that some are linked or are interdependent. For example, if have two CSFs – "to increase your share of the market" and "to attract new customers," the latter would take priority, as it is only by attracting new customers that you will likely increase your market share.

Prioritizing your candidate CSFs in this way will enable you to really focus in on the areas that your business must succeed in. You may find that some candidate CSFs are not a priority at all, in which you case you can cross them off your list.

4. Communicate Your CSFs to Key Stakeholders

Once you've identified your key CSFs, you now need to think about who is best placed to help you to achieve them. What departments or people will need to be accountable for them? What activities or operations will be key in helping you to achieve your CSFs? Do any activities or roles need to be changed or developed to do this?

Once you've done this, communicate your key CSFs to the relevant people. Make sure that everyone is clear on what they are, why you need to achieve them and how you hope to succeed. Get feedback from these key stakeholders, too – they are often best placed to identify any roadblocks or issues that may need to be overcome to achieve success. They may also be able to offer some great ideas of their own about how to meet your CSFs.

5. Monitor and Measure Your Progress

Think about how you will monitor and measure each of your CSFs. This can be tricky as CSFs are often very broad and may require input from several different departments and stakeholders across the business.

One way to effectively monitor and measure your progress is by setting a number of different KPIs against each of your Critical Success Factors. For example, if one of your CSFs is to reduce your carbon emissions, you might create a KPI to fill in some detail, such as "Reduce carbon emissions by 30 percent by 2035."

It's also a good idea to put in place monitoring systems to keep track of your progress. This might mean assigning accountability for this task to a specific person or department. This person will be responsible for gathering data and regularly monitoring the organization's progress toward specific CSFs and KPIs.

So, you would need to think about how this person would gather data on your organization's carbon emissions going forward, where they should store that data, and how regularly they would need to update it.

Although there's no absolute rule, it's a good idea to limit the number of CSFs to five or fewer. This will help to ensure that each CSF has maximum impact and gives clear direction on priorities to other elements of your business.

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Anyone who works in business would be forgiven for feeling like they had acronym fatigue. The business world is full of them! Two common acronyms you probably hear a lot about are KPIs (key performance indicators) and CSFs (critical success factors). Often, they’re used interchangeably – although, as we’ll see in this article, the two are not the same thing.

The difference in a nutshell

The difference between KPIs and CSFs is the difference between cause and effect:

• CSFs are the cause of success, i.e. they set out what you need to do to be successful. These are often quite universal across the business world, and include things like good leadership, engaged employees, strong profits and so on.
• KPIs are the effects of your actions, i.e. they measure whether you are successful or not. KPIs typically differ from company to company, depending on the business’s strategic priorities and goals.

As you can see, although they’re different, the two are intrinsically linked and reliant on each other.

Understanding CSFs

CSFs are all those variables that play a vital role in the success of the business. While your overarching strategy sets out the company’s mission and goals (i.e. what you want to achieve), CSFs pinpoint how you will achieve it.

Most businesses across most industries will have the same sorts of CSFs, such as increasing cash flow, boosting sales, improving customer satisfaction, hiring people with the right skills, and boosting productivity.

Some helpful questions for identifying your own CSFs include:

• What factors are likely to lead to our desired outcome?
• What conditions must exist to create that outcome?
• What tools do we need to achieve our goals?
• What skills do we need to achieve our goals?

By defining your CSFs, you create a common point of reference for what the business needs to do to achieve its goals. In this way, CSFs provide much-needed context for people in the organisation by focusing everyone’s attention on the essential activities that must be performed and the priorities that must be met. CSFs should be something everyone can understand and get behind.

Digging into KPIs

In very simple terms, a KPI is a metric for measuring how well individuals, teams or entire companies are performing. Using such metrics, management can understand whether the business (or team or individual) is on the right track and where improvements might be needed.

The very best KPIs are those that are linked to your strategic goals and priorities. There are literally thousands of KPIs out there and if you measured everything, it would be an utterly meaningless (not to mention expensive and time-consuming) exercise. So you need to be choosy, focusing your efforts on those areas that really matter to the business. For example, if you’re focused on building a strong brand, then you’ll want KPIs that measure brand equity and brand awareness. Therefore, think of KPIs as a way to easily quantify the organisation’s goals and priorities into measurable metrics. Using these metrics, you can assess the performance of the company (or individual, or business unit, and so on).

KPIs tend to be quantitative in nature, often using straightforward numbers, percentages or ratios to measure performance. Which makes them easy to use and easy to interpret. But what most standard KPIs don’t do is tell you the why. They don’t tell you why only 30% of customers would recommend your business, for example, or pinpoint how you can improve in future. In fact, KPIs don’t do anything to improve performance – they only tell you if you’re achieving what you want to.

In addition, a too-rigid focus on KPIs can skew behaviours and even have a detrimental effect on the business. Remember, quantity isn’t the same thing as quality. For example, say you manage to meet a target of increasing traffic to your website by 20% by publishing lots more free content. But the quality of that content has gone down because your team has less time to spend on each article or blog. So, although you’re getting more visitors, the average amount of time visitors spend reading your content has dropped. Overall, sales and leads haven’t increased – even though, according to that one KPI, you’ve been successful. 

Therefore, it’s important to use KPIs in an intelligent way that links to your strategic priorities.

Combining KPIs and CSFs in practice

When I work with a company to measure and improve performance, I never start with KPIs, CSFs or raw data. Instead, I start by working with the leadership to define the company’s goals and strategy. CSFs then help define the factors that must be in place to deliver those goals. And KPIs help us track how things are going, so we can see whether the company is performing as it needs to.

Clearly, KPIs and CSFs are important parts of the performance puzzle. But, in my experience, too many companies focus on them at the expense of taking action. Far too many strategy documents forget to map out the specific initiatives and actions that will take the business towards its goals – and without action, the whole exercise is pretty much pointless. Therefore, alongside mapping out your CSFs and KPIs, be sure to map out the activities and initiatives that will get you where you need to be.

Where to go from here

If you would like to know more about KPIs and performance measurement, check out my articles on:

Or browse the KPI Library to find the metrics that matter most to you.