What it means
An organisation can measure hundreds of things and attend to only a few. Critical success factors are the discipline of choosing: what, if it goes wrong, sinks the strategy, and what, if it goes right, carries it.
The concept was developed for executives overwhelmed by information and asks each to name the handful of areas where they must see good results to be confident the business is on track. CSFs are derived from several sources.
The industry's structure sets some: every supermarket must manage stock availability and shrinkage, every airline must fill seats and turn aircraft. The organisation's strategy sets others: a company competing on service must deliver it consistently; one competing on price must control cost.
Its competitive position sets more: a challenger must win share, an incumbent must defend it. Temporal factors add their own: a company integrating an acquisition must retain the acquired customers and staff; one in a cash squeeze must collect and conserve.
And the environment contributes: regulatory compliance in a regulated industry, supply security in a constrained market. The list is short by design, typically four to eight.
A list of twenty is a description of the business, not a set of priorities. The test for each candidate is: if this were the only thing we got right, would we still be in serious trouble, and if it were the only thing we got wrong, would we fail?
The factors that pass both tests are critical. Once identified, CSFs drive measurement.
For each factor, the organisation defines what success looks like and how it will know: the key performance indicators. A CSF of stock availability yields a KPI of on-shelf availability by store and category; a CSF of customer retention yields churn and net revenue retention; a CSF of safety yields incident rates.
The KPIs are the CSFs made measurable, and a KPI that does not trace to a CSF is a candidate for removal from the dashboard. CSFs also drive resource allocation.
Budgets, capital, management time and the best people go first to the critical factors; other areas are run adequately at the lowest sensible cost. A cost-cutting programme that reduces spend on a critical factor to protect a non-critical one has the priorities reversed, and the CSF list is the check.
The factors change. A company's CSFs in a growth phase (customer acquisition, capacity) differ from those in maturity (retention, efficiency) and in crisis (cash, credibility).
The list is reviewed with the strategy, and the management report changes with it. For finance, CSFs answer two questions.
What goes on the first page: the measures of the critical factors, with the financial results that follow from them. And what investment is essential: spending on a CSF is protected in a downturn and justified in a business case by reference to the factor, while spending elsewhere must earn its place.
In practice
Real-world examples.
Example
An airline's critical success factors are safety, on-time performance, load factor and unit cost, and its executive dashboard shows those four before any financial figure.
Example
A software company identifies developer productivity and net revenue retention as its two critical factors and protects engineering headcount and customer success in a cost-cutting round.
Example
A hospital's critical success factors include infection rates, theatre utilisation and nurse retention, and its board reviews them monthly ahead of the budget variance.
Think of it
“Critical success factors are the make-or-break elements-where you absolutely must succeed.
Formula
Calculation
CSFs are qualitative; the calculation lies in the KPIs that measure them and in the allocation that follows:
For each CSF: define the measure, the current level, the target, and the gap
Priority score (for resource allocation) = Impact on the strategy if the factor fails x Current gap to target
Resource allocation test: Share of discretionary budget going to CSFs / Share of the business's value that depends on them
Worked example. A regional chain of 25 garden centres sets its critical success factors during its annual planning.
Objective: grow profit 30% over three years while defending against a national competitor opening nearby.
Candidate factors considered: 22. After testing ("would we fail without it; would we succeed with only it"), six survive:
1. Plant quality and availability in the spring peak (60% of annual profit is made in ten weeks; a poor spring is unrecoverable)
2. Customer service and expertise (the main differentiator against the national competitor, which competes on price)
3. Café and restaurant performance (drives footfall in the off-season and 25% of contribution)
4. Stock control and shrinkage of perishable plants (waste runs at 9% of plant cost)
5. Site rents and lease renewals (three leases expire within the plan period; a lost site is a lost centre)
6. Recruitment and retention of skilled horticultural staff (the source of the service differentiator; turnover 30%)
Rejected as important but not critical: marketing spend (the centres are destination sites with loyal customers), IT systems (adequate), head office efficiency (small), product range breadth (already wide).
KPIs assigned:
1. Spring availability: on-shelf availability of the top 200 lines, weekly, target 97% (current 91%); spring like-for-like sales growth
2. Service: mystery shopper score, target 85 (current 74); customer satisfaction survey; repeat visit rate
3. Café: contribution per centre, target $180,000 (current $140,000); covers per week; food margin
4. Shrinkage: plant waste as a percentage of plant cost, target 5% (current 9%)
5. Leases: renewals secured, target 3 of 3, with rent increases below 5%
6. Staff: horticultural staff turnover, target 15% (current 30%); training hours per employee
Resource allocation: the discretionary budget of $2,400,000 is allocated 70% to the six factors (a spring stock and logistics investment $600,000; service training and a staff retention scheme $450,000; café refurbishments $400,000; a stock system for perishables $220,000) and 30% elsewhere. The marketing budget is held flat despite the sales director's request for a 40% increase, on the reasoning that marketing is not a critical factor and the money is better spent on the service that the marketing would promise.
Financial linkage: the finance director models the value of each factor. Spring availability from 91% to 97% on $18,000,000 of spring sales at a 45% margin: about $1,080,000 of recovered sales, or about $490,000 of additional contribution. Waste from 9% to 5% on $9,000,000 of plant purchases: $360,000. Café contribution up $40,000 per centre across 25: $1,000,000. Staff turnover from 30% to 15%: recruitment and training savings of about $200,000 plus the service effect. Together the six factors account for about $2,050,000 of the $3,000,000 profit increase in the plan; the rest is general growth. The board pack's first page shows the six KPIs with targets and trends; the financial results follow on the second.
Review after year one: availability 95%, service score 81, café contribution $162,000, waste 6.5%, two leases renewed (one at a 12% increase, flagged), turnover 22%. Profit up 14%. The factors are retained; the lease factor is elevated because the third renewal is proving difficult, and a site search is funded as a contingency.Case study
Seen in the real world.
A manufacturer of specialist industrial coatings had a monthly board pack of 60 pages and a strategy document listing fourteen priorities. Its results had drifted for three years. A new chairman asked the executive team to name the five things the company had to get right, and after an uncomfortable day they agreed on: formulation quality (the product's performance in the customer's process, which drove retention), technical service (the engineers who solved customers' application problems, which drove pricing power), raw material supply security (two key resins from single sources), regulatory compliance (chemical registrations in three jurisdictions), and cash conversion (the company had been funding growth with debt).
The board pack was rebuilt around five measures: customer-reported defect rate, technical service response time and customer satisfaction, dual-sourcing status for critical resins, registration status and renewal dates, and cash conversion of profit. The investment programme was reordered: the planned new head office was cancelled, a second resin supplier was qualified at a cost of $400,000, two technical service engineers were hired, and the sales incentive plan was changed to reward retention over new accounts.
Profit grew 20% in the following year with lower revenue, because the company had stopped spending on things that did not matter and had fixed two of the things that did. The chairman's comment was that the company had known its critical success factors all along and had never written them down, which was why it had never protected them.
Watch out
Common mistakes.
- Listing everything important as critical, which produces a description of the business rather than a set of priorities and leaves management attention where it was.
- Identifying critical success factors and not tying KPIs, budgets and incentives to them, so that the list is a document and the organisation runs as before.
- Cutting investment in a critical factor to protect discretionary spending elsewhere, usually because the discretionary item has a louder sponsor.
Questions
People also ask.
How many critical success factors should an organisation have?
Four to eight. Fewer than three usually means something has been missed; more than ten means the test was not applied.
What is the difference between critical success factors and key performance indicators?
CSFs are the areas where success is essential; KPIs are the measures that show whether the CSFs are being achieved. Each CSF should have at least one KPI; each KPI should trace to a CSF.
Do critical success factors change?
Yes, with strategy, competitive position and circumstances. They should be reviewed with the strategy, at least annually, and the measures and budgets should follow the changes.
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