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A performance indicator or key performance indicator (KPI) is a type of performance measurement. KPIs evaluate the success of an organization or of a particular activity in which it engages. Often success is simply the repeated, periodic achievement of some levels of operational goal (e.g. zero defects, 10/10 customer satisfaction, etc.), and sometimes success is defined in terms of making progress toward strategic goals. Accordingly, choosing the right KPIs relies upon a good understanding of what is important to the organization. 'What is important' often depends on the department measuring the performance – e.g. the KPIs useful to finance will differ from the KPIs assigned to sales. Since there is a need to understand well what is important, various techniques to assess the present state of the business, and its key activities, are associated with the selection of performance indicators. These assessments often lead to the identification of potential improvements, so performance indicators are routinely associated with 'performance improvement' initiatives. A very common way to choose KPIs is to apply a management framework such as the balanced scorecard.
Contents
Categorization of indicators
Key performance indicators define a set of values against which to measure. These raw sets of values, which are fed to systems in charge of summarizing the information, are called indicators. Indicators identifiable and marked as possible candidates for KPIs can be summarized into the following sub-categories:
Key performance indicators, in practical terms and for strategic development, are objectives to be targeted that will add the most value to the business. These are also referred to as key success indicators.
Identifying indicators of organization
Performance indicators differ from business drivers and aims (or goals). A school might consider the failure rate of its students as a key performance indicator which might help the school understand its position in the educational community, whereas a business might consider the percentage of income from returning customers as a potential KPI.
The key stages in identifying KPIs are:
Key performance indicators (KPIs) are ways to periodically assess the performances of organizations, business units, and their division, departments and employees. Accordingly, KPIs are most commonly defined in a way that is understandable, meaningful, and measurable. They are rarely defined in such a way such that their fulfillment would be hampered by factors seen as non-controllable by the organizations or individuals responsible. Such KPIs are usually ignored by organizations.
KPIs should follow the SMART criteria. This means the measure has a Specific purpose for the business, it is Measurable to really get a value of the KPI, the defined norms have to be Achievable, the improvement of a KPI has to be Relevant to the success of the organization, and finally it must be Time phased, which means the value or outcomes are shown for a predefined and relevant period.
In order to be evaluated, KPIs are linked to target values, so that the value of the measure can be assessed as meeting expectations or not.
Marketing and sales
Some examples are:
- New customer acquisition
- Demographic analysis of individuals (potential customers) applying to become customers, and the levels of approval, rejections, and pending numbers
- Status of existing customers
- Customer attrition
- Turnover (i.e., revenue) generated by segments of the customer population
- Outstanding balances held by segments of customers and terms of payment
- Collection of bad debts within customer relationships
- Profitability of customers by demographic segments and segmentation of customers by profitability
Many of these customer KPIs are developed and managed with customer relationship management software.
Faster availability of data is a competitive issue for most organizations. For example, businesses which have higher operational/credit risk (involving for example credit cards or wealth management) may want weekly or even daily availability of KPI analysis, facilitated by appropriate IT systems and tools.
Manufacturing
Overall equipment effectiveness is a set of broadly accepted non-financial metrics which reflect manufacturing success.
IT operations
IT project execution
Supply chain management
Businesses can utilize KPIs to establish and monitor progress toward a variety of goals, including lean manufacturing objectives, minority business enterprise and diversity spending, environmental "green" initiatives, cost avoidance programs and low-cost country sourcing targets.
Any business, regardless of size, can better manage supplier performance with the help of KPIs robust capabilities, which include:
Main SCM KPIs will detail the following processes:
Suppliers can implement KPIs to gain an advantage over the competition. Suppliers have instant access to a user-friendly portal for submitting standardized cost savings templates. Suppliers and their customers exchange vital supply chain performance data while gaining visibility to the exact status of cost improvement projects and cost savings documentation.
Government
The provincial government of Ontario, Canada has been using KPIs since 1998 to measure the performance of higher education institutions in the province. All post secondary schools collect and report performance data in five areas – graduate satisfaction, student satisfaction, employer satisfaction, employment rate, and graduation rate.
Further performance indicators
Human Resource Management
Problems
In practice, overseeing key performance indicators can prove expensive or difficult for organizations. Some indicators such as staff morale may be impossible to quantify. As such dubious KPIs can be adopted that can be used as a rough guide rather than a precise benchmark.
Key performance indicators can also lead to perverse incentives and unintended consequences as a result of employees working to the specific measurements at the expense of the actual quality or value of their work.
Sometimes the collecting of statistics can become a substitute for a better understanding of the problems so the use of dubious KPIs can result in progress in aims and measured effectiveness becoming different. For example, US soldiers during the Vietnam war were shown to be effective in kill ratios and high body counts but this was misleading when used to measure aims as it did not show the lack progress in the US aim in the conflict of increasing South Vietnamese government control of its territory. Another example would be for measuring the productivity of a software development team in terms of source lines of code which can result in large amounts of dubious code being added which adds little to a better system. A similar problem occurs when a footballer kicks a ball uselessly in a match to build up his statistics.