Key performance indicator (KPI) is industry jargon for a type of performance measurement. KPIs are commonly used by an organization to evaluate its success or the success of a particular activity in which it is engaged. Sometimes success is defined in terms of making progress toward strategic goals, but often success is simply the repeated achievement of some level of operational goal (for example, zero defects, 10/10 customer satisfaction, etc.). Accordingly, choosing the right KPIs is reliant upon having a good understanding of what is important to the organization. 'What is important' often depends on the department measuring the performance - the KPIs useful to finance will be quite different than the KPIs assigned to sales, for example. Because of the need to develop a good understanding of what is important, performance indicator selection is often closely associated with the use of various techniques to assess the present state of the business, and its key activities. These assessments often lead to the identification of potential improvements; and as a consequence, performance indicators are routinely associated with 'performance improvement' initiatives. A very common way for choosing KPIs is to apply a management framework such as the balanced scorecard.
Categorization of indicators
Key performance indicators define a set of values used to measure against. 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:
- Quantitative indicators which can be presented as a number.
- Practical indicators that interface with existing company processes.
- Directional indicators specifying whether an organization is getting better or not.
- Actionable indicators are sufficiently in an organization's control to affect change.
- Financial indicators used in performance measurement and when looking at an operating index.
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.
Some important aspects
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.
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.
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:
- Having a pre-defined business process (BP).
- Having requirements for the BPs.
- Having a quantitative/qualitative measurement of the results and comparison with set goals.
- Investigating variances and tweaking processes or resources to achieve short-term goals.
A KPI can 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.
Some examples are:
- New customers acquired
- 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.
Overall equipment effectiveness, is a set of broadly accepted non-financial metrics which reflect manufacturing success.
- Cycle Time – Cycle time is the total time from the beginning to the end of your process, as defined by you and your customer. Cycle time includes process time, during which a unit is acted upon to bring it closer to an output, and delay time, during which a unit of work is spent waiting to take the next action.
- Cycle Time Ratio (CTR) – CTR = Standard Cycle Time / Real Cycle Time
- Rejection rate
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:
- Automated entry and approval functions
- On-demand, real-time scorecard measures
- Rework on procured inventory.
- Single data repository to eliminate inefficiencies and maintain consistency
- Advanced workflow approval process to ensure consistent procedures
- Flexible data-input modes and real-time graphical performance displays
- Customized cost savings documentation
- Simplified setup procedures to eliminate dependence upon IT resources.
Main SCM KPIs will detail the following processes:
- Sales forecasts
- Procurement and suppliers
- Reverse logistics
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.
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
- Duration of a stockout situation
- Customer order waiting time
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.
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 Indicator 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 organization's goals change, or as it gets closer to achieving a goal.
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.
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.