Key Performance Indicators (KPIs)

Performance indicator is a type of performance measurement and is expressed as quantified amount, cost, or result of any process for indicating how much and how well the products or services are provided to customers during a given time.

Performance measurement involves determining what to measure, identifying data collection methods, collecting the data, and analysis of data. The major expected benefits for measuring performance are:

• To learn and improve 
• To control and monitor people & process 
• To report externally and demonstrate compliance 
  
 

Being in a digital era we have opportunity to access virtually unlimited data and several parameters which may or may not be useful to us. In case of business performance, there should be the indicators which can quantify performance of process and people and help management to plan, control and monitor improvement activities. Such selective indicators are called Key Performance Indicators (KPIs).

Key Performance Indicators (KPIs)

One part of the performance management process is to translate the future state of affairs into long and short-term objectives, output and outcome performance indicators and targets against which performance and progress can be measured (Mackie, 2008).

 

Key Performance Indicators (KPIs) are instruments / tools used in performance management that monitor the performance of key result areas of business activities, which are absolutely critical to the success and growth of the business (smartKPIs.com, 2010).

Nowadays, key performance indicators (KPIs) are common management tools that enable managers to better understand their business and improve performance. Although their terminology may vary from one company to another (performance indicators, performance measures or KPIs), in essence all these terms have the same meaning. According to The KPI Institute, a key performance indicator is a measurable expression for the achievement of a desired level of results in an area relevant to the evaluated entity’s activity.

The field of performance management is a relatively new area, where tools and techniques may not be very well structured and terminology is sometimes ambiguous. Bringing more clarity in regards to key concepts can reveal a more efficient way of using KPIs.

Selecting KPIs is an important step in the process of measuring performance. In order to ensure the right KPIs are chosen for each objective, managers should have a wide understanding on what KPIs are. KPI typologies present various ways to look at performance indicators and create logical clusters. Grouping KPIs on specific criteria provides more clarity in regards to what is measured in relation to the objective assigned.

In terms of developing a strategy for formulating KPIs, the team should start with the basics and understand what  organizational objectives are, what is the plan on achieving them, and who can act on this information. This should be an iterative process that involves feedback from analysts, department heads and managers. As this fact finding mission unfolds, team will gain a better understanding of which business processes need to be measured with a KPI dashboard and with whom that information should be shared.

 

The development and use of the KPIs should form the basis for the analysis of an organisation’s current performance, its future requirements and the improving strategies required for ongoing success.

 

The anatomy of a structured KPI includes:

 

• A Measure – Every KPI must have a measure. The best KPIs have more expressive measures.


• A Target – Every KPI needs to have a target that matches your measure and the time period of your goal. These are generally a numeric value you’re seeking to achieve.


• A Data Source – Every KPI needs to have a clearly defined data source so there is no gray area in how each is being measured and tracked.


• Reporting Frequency – Different KPIs may have different reporting needs, but a good rule to follow is to report on them at least monthly.

Why using KPIs?

• Perspective: KPIs indicate the health, improvement and / or success of an organisation’s strategy, project, process or area of service delivery


• Focus: KPIs are focused, relevant, measurable, repeatable and consistent


• Evaluation: measurement of critical success factors


• Management: support decision making process for performance management


• Strategy implementation: KPIs create a powerful linkage between the strategy and the initiatives / activities.

 

Typology

The usage of KPIs can range from measuring the achievements of a department in relation to a business area or the enterprise overall. Based on the impact stage, we can have:

 

• Input KPIs: used as input elements within a process or project, such as financial or human resources.


• Process KPIs: used to improve a process, its efficiency and results: time variance, budget variance, employees training etc. 


• Output KPIs: cost of a specific deliverable or functionality relative to plan, budget or benchmark, functional capacity relative to plan, budget or benchmark, usage factors, system downtime expressed as a percentage for all time and/or peak business hours etc.


• Outcome KPIs: customer satisfaction, stakeholder satisfaction - used as benchmark comparisons with comparable agencies or private sectors organizations.

 

Various attributes can be used in examining, selecting, designing and using KPIs:

• Financial / non-financial


• Customer / process / learning and growth (Balanced Scorecard perspectives)


• Lagging / leading / coincident


• Inputs / process / outputs / outcomes


• Binary / absolute / comparative / trend based

Example of a  KPI typologies is:

Qualitative vs quantitative – this is probably one of the most popular approach to defining KPIs. Usually, KPIs that measure personal traits and perceptions are considered qualitative, while the rest are quantitative. In practice, it all comes down to quantitative data when measuring a KPI, even if this data reflects qualitative aspects, such as opinions.

Examples:

• Qualitative: # Customer satisfaction index, # International corruption index, # Service quality rating;


• Quantitative: # Transactions processed per hour, % Orders delivered on time, # Production cycle time.

 

Rules for using KPIs

KPIs are a particular category of Performance Indicators and provide an organization with quantifiable measurements of factors that are important for long-time success. The skill in applying KPIs is in the selection of the optimum number and appropriateness of KPIs. This maximizes the benefit of using them whilst minimizing the cost of using them.

 

During the use and application of KPIs, certain principles should be taken in consideration:

• KPIs should not be an end in themselves, but be considered as an aid to management. They are a start to a proper informed debate that should lead to a plan for improvement.


• KPIs should be seen within their local context and have more a meaning as a comparison over time than as a comparison between organisations.


• A set of KPIs should be balanced. For example, measures of efficiency should be set against measures of effectiveness and measures of cost against quality and user perception.


• After being proposed and applied, KPIs should be reviewed and updated. The review determines the management utility of each indicator and the feasibility of getting source data for continuing use.


• The targeted performance description, which is described in measurable terms through the KPIs, must be deployed to the organisational level that has the authority and knowledge to take the necessary action (smartKPIs.com, 2010).

 

References

• Mackie, B. (2008), Organisational Performance Management in a Government Context: A Literature Review, available at: http://www.scotland.gov.uk/Resource/Doc/236340/0064768.pdf (accessed 12 December 2010). 


•  smartKPIs.com (2010), KPIs, KRIs, PIs, metrics and measures, available at: http://www.smartkpis.com/pages/context/info-i8.html (accessed 16 August 2010).


• smartKPIs.com (2010), Using KPIs, available at: http://www.smartkpis.com/pages/context/info-i13.html (accessed 16 August 2010).
• www.integratingperformance.com