Key Performance Indicators, also known as KPI or Key Success Indicators (KSI), help an organization define and measure progress toward organizational goals.
Once an organization has analyzed its mission, identified all its stakeholders, and defined its goals, it needs a way to measure progress toward those goals. Key Performance Indicators are those measurements.
What Are Key Performance Indicators (KPI)
Key Performance Indicators are quantifiable measurements, agreed to beforehand, that reflect the critical success factors of an organization. They will differ depending on the organization. A business may have as one of its Key Performance Indicators the percentage of its income that comes from return customers. A school may focus its Key Performance Indicators on graduation rates of its students.
A Customer Service Department may have as one of its Key Performance Indicators, in line with overall company KPIs, percentage of customer calls answered in the first minute. A Key Performance Indicators for a social service organization might be number of clients assisted during the year.
Whatever Key Performance Indicators are selected, they must reflect the organization's goals, they must be key to its success,and they must be quantifiable (measurable). Key Performance Indicators usually are long-term considerations. The definition of what they are and how they are measured do not change often. The goals for a particular Key Performance Indicator may change as the organizations goals change, or as it get closer to achieving a goal.
Key Performance Indicators Reflect The Organizational Goals
An organization that has as one of its goals "to be the most profitable company in our industry" will have Key Performance Indicators that measure profit and related fiscal measures. "Pre-tax Profit" and "Shareholder Equity" will be among them. However, "Percent of Profit Contributed to Community Causes" probably will not be one of its Key Performance Indicators. On the other hand, a school is not concerned with making a profit, so its Key Performance Indicators will be different. KPIs like "Graduation Rate" and "Success In Finding Employment After Graduation", though different, accurately reflect the schools mission and goals.
Key Performance Indicators Must Be Quantifiable
If a Key Performance Indicator is going to be of any value, there must be a way to accurately define and measure it. "Generate More Repeat Customers" is useless as a KPI without some way to distinguish between new and repeat customers. "Be The Most Popular Company" won't work as a KPI because there is no way to measure the company's popularity or compare it to others.
It is also important to define the Key Performance Indicators and stay with the same definition from year to year. For a KPI of "Increase Sales", you need to address considerations like whether to measure by units sold or by dollar value of sales. Will returns be deducted from sales in the month of the sale or the month of the return? Will sales be recorded for the KPI at list price or at the actual sales price?
You also need to set targets for each Key Performance Indicator. A company goal to be the employer of choice might include a KPI of "Turnover Rate". After the Key Performance Indicator has been defined as "the number of voluntary resignations and terminations for performance, divided by the total number of employees at the beginning of the period" and a way to measure it has been set up by collecting the information in an HRIS, the target has to be established. "Reduce turnover by five percent per year" is a clear target that everyone will understand and be able to take specific action to accomplish.
Many things are measurable. That does not make them key to the organization's success. In selecting Key Performance Indicators, it is critical to limit them to those factors that are essential to the organization reaching its goals. It is also important to keep the number of Key Performance Indicators small just to keep everyone's attention focused on achieving the same KPIs.
That is not to say, for instance, that a company will have only three or four total KPIs in the company. Rather there will be three or four Key Performance Indicators for the company and all the units within it will have three, four, or five KPIs that support the overall company goals and can be "rolled up" into them.
If a company Key Performance Indicator is "Increased Customer Satisfaction", that KPI will be focused differently in different departments.
The Manufacturing Department may have a KPI of "Number of Units Rejected by Quality Inspection", while the Sales Department has a KPI of "Minutes A Customer Is On Hold Before A Sales Rep Answers". Success by the Sales and Manufacturing Departments in meeting their respective departmental Key Performance Indicators will help the company meet its overall KPI.
Good Key Performance Indicators vs. Bad
Bad:
Title of KPI: Increase Sales
Defined: Change in Sales volume from month to month
Measured: Total of Sales By Region for all region
Target: Increase each month
What's missing? Does this measure increases in sales volume by dollars or units? If by dollars, does it measure list price or sales price? Are returns considered and if so do the appear as an adjustment to the KPI for the month of the sale or are they counted in the month the return happens? How do we make sure each sales office's volume numbers are counted in one region, i.e. that none are skipped or double counted? How much, by percentage or dollars or units, do we want to increase sales volumes each month?(Note: Some of these questions may be answered by standard company procedures.)
Good:
Title of KPI: Employee Turnover
Defined: The total of the number of employees who resign for whatever reason, plus the number of employees terminated for performance reasons, and that total divided by the number of employees at the beginning of the year. Employees lost due to Reductions in Force (RIF) will not be included in this calculation.
Measured: The HRIS contains records of each employee. The separation section lists reason and date of separation for each employee. Monthly, or when requested by the SVP, the HRIS group will query the database and provide Department Heads with Turnover Reports. HRIS will post graphs of each report on the Intranet.
Target: Reduce Employee Turnover by 5% per year.
What Do I Do With Key Performance Indicators?
Once you have good Key Performance Indicators defined, ones that reflect your organization's goals, one that you can measure, what do you do with them? You use Key Performance Indicators as a performance management tool, but also as a carrot. KPIs give everyone in the organization a clear picture of what is important, of what they need to make happen. You use that to manage performance. You make sure that everything the people in your organization do is focused on meeting or exceeding those Key Performance Indicators. You also use the KPIs as a carrot. Post the KPIs everywhere: in the lunch room, on the walls of every conference room, on the company intranet, even on the company web site for some of them. Show what the target for each KPI is and show the progress toward that target for each of them. People will be motivated to reach those KP.
Before any Key Performance Indicators are selected, it is vital to identify what the organization’s goal is, which are in turn dependent upon the its mission and its stakeholders. Consequently, KPIs act as a measure of progress towards these goals. Whatever they may be, they must be critical to the success of the organization.
The application of Key Performance Indicators provides business executives with a high-level, real-time view of the progress of a company. They may consist of any combination of reports, spreadsheets and charts. They may be sales figures (global or regional), trends over time, supply chain information or any other long-term consideration which may be essential in gauging the health of the organization. However, it should be noted that Key Performance Indicators should not only reflect the organizational goals but should also be quantifiable.
For a Key Performance Indicator to be of any value there must be a way to accurately define and measure it. This is so because a KPI may meet the criteria of reflecting the organizational goal, which may for instance pertain to being the most popular company. However, since a company’s popularity can not be measured or compared to others, therefore the KPI would be useless.
Considerations regarding how a Key Performance Indicator is to be measured should also be established in advance. Definitions as to exactly how the indicator is to be calculated and whether it is to be measured in dollar amounts or units should also be specified. Moreover, it is imperative that the organization then sticks to these definitions from year to year in order to allow for annual comparisons.
After the Key Performance Indicator has been defined and a way to measure it has also been determined, a clear target has to be demarcated which should be understandable by everyone. The target should also be specific so that every individual can take actions towards accomplishing it.
Here it is needless to say that to achieve a particular target level of Key Performance Indicator for a company, every department has to work in synergy towards it. For this purpose, all the units of an organization need to define their respective KPIs which should in turn work towards accomplishing the overall KPIs of the organization.
It is important that after Key Performance Indicators and their relative components have been identified, they should be used as a performance management tool. Best ways to represent variance (from the target levels) should be defined, eventually making sure that everyone in the organization is focused towards meeting target levels of the Key Performance Indicators.
From India
25Once an organization has analyzed its mission, identified all its stakeholders, and defined its goals, it needs a way to measure progress toward those goals. Key Performance Indicators are those measurements.
What Are Key Performance Indicators (KPI)
Key Performance Indicators are quantifiable measurements, agreed to beforehand, that reflect the critical success factors of an organization. They will differ depending on the organization. A business may have as one of its Key Performance Indicators the percentage of its income that comes from return customers. A school may focus its Key Performance Indicators on graduation rates of its students.
A Customer Service Department may have as one of its Key Performance Indicators, in line with overall company KPIs, percentage of customer calls answered in the first minute. A Key Performance Indicators for a social service organization might be number of clients assisted during the year.
Whatever Key Performance Indicators are selected, they must reflect the organization's goals, they must be key to its success,and they must be quantifiable (measurable). Key Performance Indicators usually are long-term considerations. The definition of what they are and how they are measured do not change often. The goals for a particular Key Performance Indicator may change as the organizations goals change, or as it get closer to achieving a goal.
Key Performance Indicators Reflect The Organizational Goals
An organization that has as one of its goals "to be the most profitable company in our industry" will have Key Performance Indicators that measure profit and related fiscal measures. "Pre-tax Profit" and "Shareholder Equity" will be among them. However, "Percent of Profit Contributed to Community Causes" probably will not be one of its Key Performance Indicators. On the other hand, a school is not concerned with making a profit, so its Key Performance Indicators will be different. KPIs like "Graduation Rate" and "Success In Finding Employment After Graduation", though different, accurately reflect the schools mission and goals.
Key Performance Indicators Must Be Quantifiable
If a Key Performance Indicator is going to be of any value, there must be a way to accurately define and measure it. "Generate More Repeat Customers" is useless as a KPI without some way to distinguish between new and repeat customers. "Be The Most Popular Company" won't work as a KPI because there is no way to measure the company's popularity or compare it to others.
It is also important to define the Key Performance Indicators and stay with the same definition from year to year. For a KPI of "Increase Sales", you need to address considerations like whether to measure by units sold or by dollar value of sales. Will returns be deducted from sales in the month of the sale or the month of the return? Will sales be recorded for the KPI at list price or at the actual sales price?
You also need to set targets for each Key Performance Indicator. A company goal to be the employer of choice might include a KPI of "Turnover Rate". After the Key Performance Indicator has been defined as "the number of voluntary resignations and terminations for performance, divided by the total number of employees at the beginning of the period" and a way to measure it has been set up by collecting the information in an HRIS, the target has to be established. "Reduce turnover by five percent per year" is a clear target that everyone will understand and be able to take specific action to accomplish.
Many things are measurable. That does not make them key to the organization's success. In selecting Key Performance Indicators, it is critical to limit them to those factors that are essential to the organization reaching its goals. It is also important to keep the number of Key Performance Indicators small just to keep everyone's attention focused on achieving the same KPIs.
That is not to say, for instance, that a company will have only three or four total KPIs in the company. Rather there will be three or four Key Performance Indicators for the company and all the units within it will have three, four, or five KPIs that support the overall company goals and can be "rolled up" into them.
If a company Key Performance Indicator is "Increased Customer Satisfaction", that KPI will be focused differently in different departments.
The Manufacturing Department may have a KPI of "Number of Units Rejected by Quality Inspection", while the Sales Department has a KPI of "Minutes A Customer Is On Hold Before A Sales Rep Answers". Success by the Sales and Manufacturing Departments in meeting their respective departmental Key Performance Indicators will help the company meet its overall KPI.
Good Key Performance Indicators vs. Bad
Bad:
Title of KPI: Increase Sales
Defined: Change in Sales volume from month to month
Measured: Total of Sales By Region for all region
Target: Increase each month
What's missing? Does this measure increases in sales volume by dollars or units? If by dollars, does it measure list price or sales price? Are returns considered and if so do the appear as an adjustment to the KPI for the month of the sale or are they counted in the month the return happens? How do we make sure each sales office's volume numbers are counted in one region, i.e. that none are skipped or double counted? How much, by percentage or dollars or units, do we want to increase sales volumes each month?(Note: Some of these questions may be answered by standard company procedures.)
Good:
Title of KPI: Employee Turnover
Defined: The total of the number of employees who resign for whatever reason, plus the number of employees terminated for performance reasons, and that total divided by the number of employees at the beginning of the year. Employees lost due to Reductions in Force (RIF) will not be included in this calculation.
Measured: The HRIS contains records of each employee. The separation section lists reason and date of separation for each employee. Monthly, or when requested by the SVP, the HRIS group will query the database and provide Department Heads with Turnover Reports. HRIS will post graphs of each report on the Intranet.
Target: Reduce Employee Turnover by 5% per year.
What Do I Do With Key Performance Indicators?
Once you have good Key Performance Indicators defined, ones that reflect your organization's goals, one that you can measure, what do you do with them? You use Key Performance Indicators as a performance management tool, but also as a carrot. KPIs give everyone in the organization a clear picture of what is important, of what they need to make happen. You use that to manage performance. You make sure that everything the people in your organization do is focused on meeting or exceeding those Key Performance Indicators. You also use the KPIs as a carrot. Post the KPIs everywhere: in the lunch room, on the walls of every conference room, on the company intranet, even on the company web site for some of them. Show what the target for each KPI is and show the progress toward that target for each of them. People will be motivated to reach those KP.
Before any Key Performance Indicators are selected, it is vital to identify what the organization’s goal is, which are in turn dependent upon the its mission and its stakeholders. Consequently, KPIs act as a measure of progress towards these goals. Whatever they may be, they must be critical to the success of the organization.
The application of Key Performance Indicators provides business executives with a high-level, real-time view of the progress of a company. They may consist of any combination of reports, spreadsheets and charts. They may be sales figures (global or regional), trends over time, supply chain information or any other long-term consideration which may be essential in gauging the health of the organization. However, it should be noted that Key Performance Indicators should not only reflect the organizational goals but should also be quantifiable.
For a Key Performance Indicator to be of any value there must be a way to accurately define and measure it. This is so because a KPI may meet the criteria of reflecting the organizational goal, which may for instance pertain to being the most popular company. However, since a company’s popularity can not be measured or compared to others, therefore the KPI would be useless.
Considerations regarding how a Key Performance Indicator is to be measured should also be established in advance. Definitions as to exactly how the indicator is to be calculated and whether it is to be measured in dollar amounts or units should also be specified. Moreover, it is imperative that the organization then sticks to these definitions from year to year in order to allow for annual comparisons.
After the Key Performance Indicator has been defined and a way to measure it has also been determined, a clear target has to be demarcated which should be understandable by everyone. The target should also be specific so that every individual can take actions towards accomplishing it.
Here it is needless to say that to achieve a particular target level of Key Performance Indicator for a company, every department has to work in synergy towards it. For this purpose, all the units of an organization need to define their respective KPIs which should in turn work towards accomplishing the overall KPIs of the organization.
It is important that after Key Performance Indicators and their relative components have been identified, they should be used as a performance management tool. Best ways to represent variance (from the target levels) should be defined, eventually making sure that everyone in the organization is focused towards meeting target levels of the Key Performance Indicators.
From India
hi
thanks for your input and good examples.
You may already be aware that ISO9001 certified cos use the "departmental objectives" and "process measurement criteria" for the same purpose.Many don't do it in the true spirit. YOUR POST WILL HELP PEOPLE TO ACHIEVE MORE CLARITY ON THIS SUBJECT
regards
veera
From India, Thrissur
thanks for your input and good examples.
You may already be aware that ISO9001 certified cos use the "departmental objectives" and "process measurement criteria" for the same purpose.Many don't do it in the true spirit. YOUR POST WILL HELP PEOPLE TO ACHIEVE MORE CLARITY ON THIS SUBJECT
regards
veera
From India, Thrissur
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Cpm - Key Performance Indicators - D Parmenter (John Wiley & Sons) - 2007 [0470095881]-1. pdf
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