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 (such as projects, programs, products and other initiatives) 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), 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 deemed 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.
Categorization of indicators
Key performance indicators define a set of values against which to measure. These raw sets of values, which can be fed to systems that aggregate the data, are called indicators. There are two categories of measurements for KPIs.
- Quantitative facts without distortion from personal feelings, prejudices, or interpretations presented with a specific value - objective- preferably numeric measured against a standard.
- Qualitative values based on or influenced by personal feelings, tastes, or opinions and presented as any numeric or textual value that represents an interpretation of these elements.
An 'indicator' can only measure what 'has' happened, in the past tense, so the only type of measurement is descriptive or lagging. Any KPI that attempts to measure something in a future state as predictive, diagnostic or prescriptive is no longer an 'indicator' it is a 'prognosticator' - at this point, it is analytics (possibly based on a KPI).
Points of measurement
Performance focuses on measuring a particular element of an activity. An activity can have four elements: input, output, control, and mechanism. At a minimum, an activity is required to have at least an input and an output. Something goes into the activity as an input; the activity transforms the input by making a change to its state; and the activity produces an output. An activity can also have to enable mechanisms that are typically separated into human and system mechanisms. It can also be constrained in some way by a control. Lastly, its actions can have a temporal construct of time.
- Input indicates the inputs required of an activity to produce an output.
- Output captures the outcome or results of an activity or group of activities.
- Activity indicates the transformation produced by an activity (i.e., some form of work).
- Mechanism is something that enables an activity to work (a performer), either human or system.
- Control is an object that controls the activity's production through compliance.
- Time indicates a temporal element of the activity.
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.
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 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.
Some examples are:
- Percentage of overdue invoices
- Percentage of purchase orders raised in advance
- Number of retrospectively raised purchase orders
- Finance report error rate (measures the quality of the report)
- Average cycle time of workflow
- Number of duplicate payments
Marketing and sales
- 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 that 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.
- OEE = availability x performance x quality
- Availability = run time / total time, by definition this is the percentage of the actual amount of production time the machine is running to the production time the machine is available.
- Performance = total count / target counter, by definition this is the percentage of total parts produced on the machine to the production rate of machine.
- Quality = good count / total count, by definition, this is the percentage of good parts out of the total parts produced on the machine.
- Cycle time ratio (CTR) = standard cycle time / real cycle time
- Capacity utilization
- Rejection rate
Most professional services firms (for example: management consultancies, systems integration firms, or digital marketing agencies) use three key performance indicators to track the health of their businesses. They typically use professional services automation (PSA) software to keep track of and manage these metrics.
- Utilization rate = the percentage of time employees spend generating revenue
- Project profitability = the difference between the revenue generated by a project and the cost of delivering the work
- Project success rate = the percentage of projects delivered on time and under budget
- Earned value
- Cost variance
- Schedule variance
- Estimate to complete
- Manpower spent / month
- Money spent / month
- Planned spend / month
- Planned manpower / month
- Average time to delivery
- Tasks / staff
- Project overhead / ROI
- Planned delivery date vs actual delivery date
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
Human Resource Management
- Employee turnover
- Employee performance indicators
- Cross-functional team analysis
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 of progress towards the US goal of increasing South Vietnamese government control of its territory. Another example would be to measure the productivity of a software development team in terms of lines of source code written. This approach can easily result in large amounts of dubious code being added, thereby inflating the line count but adding little of value in terms of systemic improvement. A similar problem arises when a footballer kicks a ball uselessly in a match in order to build up his statistics.
- Carol Taylor Fitz-Gibbon (1990), "Performance indicators", BERA Dialogues (2), ISBN 978-1-85359-092-4
- Key Performance Indicators – What Are Key Performance Indicators or KPI
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