20
PLANNER'S GUIDE
CRITICAL
SUCCESS FACTORS
ritical success factors (CSFs) are the hottest
C management buzz words. But most managers
are vague about exactly what they are, how
they work, and the problems inherent in using them.
This article defines critical success factors (also
known as "key success factors") and describes how
July/August one insurance company has used them successfully
Planning Review to fine tune its business planning.
1988
THE EVOLUTION OF CSFs
John Rockard, a professor at MIT's Sloan School
of Business, has codified critical success factors as,
"Those things that must be done if a company is
to be successful." More recently, business planners
have extended the CSF concept to include external
competitive factors as well. CSFs must be:
• Important to achieving overall corporate goals
and objectives.
• Measurable and controllable by the organization
to which they apply.
By York P. Freund
• Relatively few in number—not everything can
be critical.
• Expressed as things that must be done—not
the end point of the process.
• Applicable to all companies in the industry
with similar objectives and strategies.
• Hierarchical in nature—some CSFs will pertain
to the overall company, while others will be more
narrowly focused in one functional area.
Don't confuse CSFs with the process of planning
to achieve competitive advantage. Many companies
within a given market or segment may each satisfy
their own CSFs. However, sustainable competitive
advantage is typically achieved by only one or two
companies in each niche. But, on the other hand,
competitive failure will occur if the CSFs are not
York P. Freund,a principal of Arthur Young, is based
in the firm's Chicago office.
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satisfied since the company will be unable to fulfill • Determine the CSFs for each business unit's
its corporate objectives. component functional areas. For example, a data-
Finally, CSFs should be defined for the overall processing CSF for a company with a product
organization, each business unit, and each functional innovation objective may be to "develop applications
area in a hierarchical manner. CSFs for the overall having the flexibility to launch new products in a
organization are aimed at fulfilling the corporate three-month time frame." In a less aggressive
mission and achieving objectives centered on company, data processing's success factor may be
financial, growth, and positioning issues. Companies to "provide remote users with on-line access to
with multiple business units usually establish a specified information."
specific set of CSFs that directly reflect each specific Only five to ten CSFs should be defined at each
business environment in which the company operates. level since it is extremely difficult to focus on a
They should, however, combine to support the greater number. If too many CSFs have been defined,
overall corporate objective. Finally, CSFs can be it is likely that the factors are too detailed, or that
defined for each function within a business unit, the planner has used performance indicators rather
for example, marketing, production, and sales. than success factors.
Although identifying CSFs appears to be relatively • Develop strategies to leverage competitive
simple, producing a complete corporate set is a strengths and overcome weaknesses in each area.
difficult process. One problem is that the actual By limiting the strategies developed to the critical
achievements are often confused with performance areas defined by the CSFs, management will be
(also known as performance indicators). For able to focus its resources on the areas offering
example, achieving an 8 percent increase in new maximum benefit. This will help avoid the common
business is a measure of performance, but it is not planning failure of ignoring critical success factors
a critical success factor—it is the way that results during strategic planning sessions. Companies falling
are to be measured, not a description of the things into this trap often develop strategies in less important
that must be done. A more appropriate CSF might areas and neglect to address the critical ones. When
be to "achieve and maintain critical mass size." the process is complete, the planner should be able
CSFs sometimes address the need to "successfully to illustrate graphically the relationships between
launch new products" or to "attract and retain high- the CSFs and the company's strategic thrust, as
quality management." Undoubtedly, these are well as the fact that all the strategies support the
important factors. However, they tend to be overly overall corporate needs.
generic and difficult to measure, and are therefore • Develop measurement tools that will enable
less meaningful as a management tool. managers to monitor performance against the plans.
These performance indicators should both define
IDENTIFYING CSFs the measure itself (new business generated) and the
standard against which success will be measured
Critical success factor analysis is most effective (average 15 percent higher than last year's equivalent
when done from the top down. This approach ensures period). The presentation format should be based
that each business unit's CSFs will support the on the measure's ability to illustrate trends or
company's success factors, and that, in turn, the highlight exceptions (for example, a graph of four- July/August
corporate CSFs are appropriate to both the business week moving average). There may be more than Planning Review
unit and the overall organization. Analysis begins one indicator for each CSF or strategy (one focused 1988
by identifying the corporate business objectives and on cost, another on timeliness, a third on quality).
strategies, continues through individual business units
• Finally, establish processes and procedures to
and lines of business (or both), and goes on to explore
report performance information in a timely fashion.
key functional areas within each business.
The CSF methodology that we have found to be
most successful in medium-sized and large companies THE CASE OF ABC LIFE
is to: ABC Life Insurance Company is a stock subsidiary
• Analyze the corporate mission, objectives, and of a property and casualty parent. It distributes its
strategies to pinpoint the success factors of the overall products through the parent's career agency
business. Once these factors are defined, analyze distribution network. Although ABC's volume is
each business unit to identify its specific contribution significant, it is small in comparison with the parent's
to the overall objectives. mainline property and casualty (P&C) coverages.
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As a result, agents primarily focus on P&C. Overall
marketing and distribution is driven by the parent's
property and casualty needs.
ABC's corporate mission is to provide products
that will broaden the parent's product line and enable
agents to create satisfactory compensation. While
the life company is expected to make money, its
profit objectives are not overly ambitious.
Discussions held with ABC's senior managers
concerning the company's mission and relationship
to its parent identified three overall critical success
factors:
• ABC's products must be packaged in a manner
that can be easily understood by agents not having
extensive life insurance experience.
• The product line must be sufficiently broad to
achieve critical mass through the existing agency
system.
• Management must be able to manage product,
product line, and distribution channel profitability.
Overall strategies were formulated to ensure that
ABC performed well in each critical success area.
These strategies were formulated by the senior
management team through a series of discussions
led by an outside facilitator or moderator. The
strategies were based on past experience and
innovation inspired through brain-storming sessions.
This overall approach was then analyzed by each
functional department to identify the success factors
unique to that department, and to develop a series
of functional strategies that would support the overall
strategies, CSFs, and objectives.
The business unit managers identified their own
subordinate CSFs by first reviewing the corporate
mission, objectives, and CSFs. They then discussed
the impact their market or function would have on
the success of these corporate aims. Using their
personal experience, they developed a list of "lower
level" CSFs that would support both the corporate
strategy and their specific needs.

The following table illustrates several of the overall and departmental critical
success factors and strategies that were defined during this analysis.
Critical Success Factor Strategies
Ability to achieve critical mass volumes • Develop closer ties with agents.
through existing brokers and agents. • Telemarket to brokers.
• Realign agent compensation.
Be able to introduce new products within six • Underwrite strategic joint ventures.
months of industry leaders. • Copy leader's product.
Be able to manage product and product line • Segment investment portfolio.
profitability. • Improve cost accounting.
• Implement near-GAAP accounting.
• Closely manage loss ratio.

Each functional area and business unit was analyzed to determine both their
individual success factors and their impact on the company's overall success. A
July/August portion of the defined strategies and their relationship to the CSFs are illustrated
tanning Review below:
1988
CSF/Overall Strategy Functional Strategy
Be able to support new products
• Data Processing • Develop an integrated, flexible application
architecture.
• Train analysts in business concepts.
• Utilize prototyping tools.
• Underwriting • Upgrade underwriter skills.
• Standardize underwriting data
requirements.
• Claims Processing • Maintain competitive cost of service levels.

Performance indicators were then identified for
each success factor and strategy to link actual
performance and expected results. These indicators
were arranged in a hierarchical manner to facilitate
top management's quick identification of problem
areas, while maintaining the detail needed for lower
management to troubleshoot these problems.
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Whenever possible, "higher" level indicators were
displayed in graphic format to highlight trends and
exceptions, as well as to provide perspective. Since
"lower" level indicators were more detailed, they
tended to be presented in tabular form.
Each indicator was defined in terms of how it
was to be measured and the performance expected.

Critical Success Factor or Strategy Performance Indicators

Achieve critical mass through existing brokers/ • Policies in force.
agents. • New business written.
• Closer ties. • Percent business with existing brokers.
• Telemarket.
• Agent compensation.
Follow leader's product within six months. • Elapsed time to introduce.
• Strategic joint ventures. • Percent of products introduced within 6
• Copy leaders' products. months.
• Underwriting skills. • Percent underwriters having additional
• Application architecture. certification.
• Elapsed time to complete systems
development.
Manage product and product line profitability. • Actual product cost/revenues versus plan.
• Segment investments. • Return on portfolio segments.
• Improve cost accounting. • Loss ratio versus competitors.
• Near GAAP.
• Manage loss ratio.

WHAT CAN GO WRONG

Our experience shows that the ten most common problems in identifying and
implementing CSF strategies are:
Symptom Probable Cause(s)
Too Many CSFs. • Defined at too low a level of detail.
• Confusing CSFs with performance
indicators.
Incorrect CSFs. • Unrealistic view of marketplace.
• Solving "political" problems.
• Strategies defined before CSFs are
identified become self-fulfilling July/August
prophecies. Planning Review
1988
Weak Performance Indicators. • Improper linkage to CSF.
• Boss sees data, but subordinate doesn't.
Management Frustration. • Insufficient front-end training for
participants.
• Insufficient time allowed.
• Planning process overly complex.

HOW TO DO IT RIGHT
Critical success factors can be an effective way of focusing strategic direction
and investment. Using this top-down approach enables management to focus on
the most critical areas, and this whole process becomes an effective tool for
communicating with and unifying the strategic approach of the organization. □