Business journals have devoted much coverage to key performance indicators, and "KPI” has become as much a thrown-around buzzword as any other in discussions about business performance. It is important not to lose sight of the essence of KPIs and what they are about.
A key performance indicator is a measure of whether an employee, a team, or a business unit’s agreed-upon performance goals or results have been achieved or not. KPIs are high-level snapshots based on specific, predefined measures. They are clear and quantifiable measures for the critical factors of success for an organization. KPIs let organizations know if they are on track and how well they are performing in relation to their strategic targets and objectives.
KPIs typically include any combination of reports, spreadsheets, dashboards, and charts that show information critical to an organization’s success. KPIs may include any of the following:
- Global or regional figures and trends over a period of time
- Personnel statistics and trends
- Real-time logistical, supply management, and supply chain information
- A selected core objective with KPIs to support and ensure the success of that objective.
Many experts label only the most important metrics as key performance indicators and keep the number to within three to five that clearly link to an organization’s business objectives.
The objectives of a KPI program are learning and empowerment, better decision-making, and improved organizational performance. They are not about controlling staff.
However, numerous challenges block KPI programs from being effective change-makers as intended. They include the need for organizations to commit sufficient time to identify the most effective measurements, collect accurate information, and report it in a regular and consistent time frame. Organizations also need to provide verifiable documentation to support KPIs, cover all significant areas of work in the business, and strike a balance between the amount of information collected and the costs.
Developing Key Performance Indicators Takes Steps
Users or developers must carefully define target performance levels as well as how to best represent variances from that target in the most impactful way. Bar charts, graphs, pie charts, histograms, and Pareto charts using colors to show comparisons permit an understanding of the information at a glance.
Some KPI programs include Intranet portals that give executives easy access to critical indicators on how the organization is doing.
Selecting KPIs is a collaborative effort that includes everyone who is involved, with a focus on learning and growing employees. Any KPI project is a formal initiative that requires a lot of groundwork. It includes clearly documenting each indicator with the method used to calculate it, where the indicator comes from, and the data format that is used. KPIs are about doing the right things and doing them right.
There are critical guidelines that ensure KPI program success. They start with making sure that the key metrics conform to an organization’s strategy and are the most meaningful. A program must also allow for actions that can be influenced after looking at the impact on areas of the organization and its staff. The program must share results and explain what has happened and how changes can be influenced.
KPI programs are intended to improve accountability while being robust to withstand organizational changes and individuals leaving. They are also supposed to be integrated into the organization, easy to understand, and cost-effective.
KPIs are useful when they can show everyone the path to success and are balanced, which means giving a picture of what the organization is doing, covering all significant areas of work, and being meaningful to the stakeholders likely to use them.
Reporting Framework Can Have Different Forms
The reporting of KPIs must accommodate the requirements of different organizational levels through a cascading effect, and reporting frequency must support timely decision-making.
Dashboards are a favorite graphical depiction of KPIs and should be one-page displays. Dashboards may take on various layouts and formats. Other formats are the balanced scorecard, TQM (total quality management) framework, performance prisms, and Tableau du Bord.
Important key performance indicators include:
- Customer satisfaction and dissatisfaction
- Customer retention
- Product and service quality
- Capacity
- Operation efficiency
- Net profit before tax
- Return on capital employed
- Cash flow
- Expenses as a ratio of revenue
- Health and safety
- Employee satisfaction.
The KPI of customer satisfaction or dissatisfaction should be measured at least every three months by using statistical samples and focusing on the top 10 to 20 percent of the organization’s customers. The capacity information of key machines and plant components should go forward at least five to 12 months so that capacity limitations are identified and capital expenditure decisions are made proactively. Cash flow graphs should go back at least 12 months and project out at least six months forward.
Here are important questions to ask in the KPI design template:
- Which strategic objective is an indicator relating to?
- What is the data collection method?
- What is the source of the data?
- What is the assessment method?
- How often, when, and how long do we collect the data?
- Who collects the data?
- What is the target or performance threshold?
- How well is the indicator measuring performance?
- What are the costs of collecting the data?
- What problematic behavior could this indicator trigger?
- Who are the primary audience and secondary audience for this indicator?
- What is the reporting frequency?
- What is the reporting channel?
- What is the reporting format?
Key performance indicators measure the right things the right way. The right way includes timely information to track progress so that it can be used quickly and appropriately. KPI program success includes collecting information that is accurate for its intended use, comparable with either past periods or similar programs elsewhere, and verifiable and supported by clear documentation.