What is a Key Performance Indicator (KPI)?
A Key Performance Indicator (KPI) is a performance measure usually associated with organisational performance rather than individual performance. KPIs are frequently used to determine progress towards strategic goals and objectives. They can also be used to monitor the ‘repeated’ success of an operational goal. In either instance it is vital to understand that a KPI is connected to a goal or objective and KPIs have little value when used in isolation.
Systems like QuickScore can be used to manage and monitor Key Performance Indicators.
KPIs used in sales will be very different to KPIs used in operations. It is important to select a consistent set of KPIs that work both for the owning department and contribute to an organisations goals and strategy. This is usually achieved through the use of a management framework methodology such as the Balanced Scorecard. Key Performance Indicators should not be confused with general business metrics. The clue is in the use of the word Key. The thing that makes a KPI different to a metric is that it is ‘key’ to the success of the objective or goal that is being measured.
A Key Performance Indicator is something that can be counted and compared; it provides evidence of the degree to which an objective is being attained over a specified time.
The definition above includes a set of words that need further explanation to ensure the statement is fully understood:
Counted: This may seem a little trite, however, counted means that a quantity can be assigned. That is, a number or value. It does not mean a percentage achievement. One of the most frequent mistakes in setting performance measures is to create a project and assess its success through how much work has been done. Just because an e-mail marketing campaign has been active for 3 weeks out of four does not mean it has been a success. Success is dependent on the outcome not the activity.
Compared: A number or value may be interesting but it only becomes useful when it is compared to what is optimal, acceptable or unacceptable. Every performance measure must have a comparator or benchmark. Using an industry benchmark gives an objective quality to the comparator, objectivity is not required, but it is desirable.
Evidence: The evidence will fall out by counting and comparing correctly. It is important to strive for a measure that will be observed in the same way by all stakeholders. The evidence should be clear and have specific meaning.
Objective: A performance measure only has significance if it is contributing to an objective. If there is no objective, why is it being measured in the first place? This does not mean we should ignore all operational measures; they still need to be in place, but even as sub-measures they should still contribute to the objective.
Specified Time: Everything is time bound; progress towards meeting an objective and therefore a strategy must be measured over a specified period of time.
The golden rule: Key Performance Indicators are based on objectives/goals. If a KPI exists and it is not based on an objective or a goal then it is serving no useful purpose. Let’s be clear here though. There may be many other metrics in the organisation that provide information, for example cost metrics as part of a profit and loss statement, but these are not KPIs.
Why is it important to make the distinction?
When running a business or organisation, whether big or small, it is impossible to keep track of everything. The executive team has to be selective. First and foremost the executive team has a duty to ensure the health and longevity of the business. This being the case they must look at the key indicators that contribute to the objectives and goal.
Much in the same way a doctor will look at the key indicators such as pulse and temperature and blood pressure to determine the health and longevity of a patient. In both cases this may result in drilling-down to underlying information if the key indicator is not within prescribed tolerances.
This brings us neatly to an area that is often forgotten when creating KPIs: setting comparative thresholds. The actual value of the measure has to be compared to what would be considered good, bad or indifferent. The thresholds could be based on previous performance or on a notional future performance or even a made-up value. By providing thresholds, alerts can be set if a upper or lower thresholds are breached. More meaningful historical data can be kept, providing all important trend information to help in any decision making process.
Where to start? Don’t start with key performance indicators! Good KPIs come as a result of understanding where to take an organisation or business. It is imperative to understand where you want to go before deciding how you will get there. Once clear objectives and goals have been agreed, then meaningful KPIs can be generated.
For information on how to create clear objectives and goals and how to design meaningful key performance indicators, download our guide:
If all you need is a list of KPIs classified by industry or role, please feel free to download our Sample KPI Document. It contains lists of KPIs as used by real companies and organisations: