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What are Key Performance Indicators?

By: Lisa Koning - Updated: 6 Sep 2012 | comments*Discuss
 
What Are Key Performance Indicators?

Successful businesses have a mission; strategic objectives to help guide and shape the business and to help achieve the required results. The senior management team define a mission statement and objectives are then formulated to support the mission. The business then focuses on working as a whole to achieve these objectives.

But having objectives isn’t enough to ensure their achievement. Progress towards objectives needs to be monitored to ensure the business is still on track, and if not, remedy action can be taken.

Key Performance Indicators, or KPIs, are the key factors that indicator the health of the business and its ability to meet its objectives and mission. Originally developed in the 1960’s, by a team at McKinsey, the concept of KPIs was to identify and monitor the factors most critical to the success of the business, and therefore giving the business the ability to build and sustain a competitive advantage.

By understanding what are the key factors for success, these can then in turn be measured. KPIs are therefore a set of metrics that a business can use to assess its likelihood of meeting its mission.

Typical KPIs include Factors such as:

  • Financial figures, such as revenue and profit
  • Customer related, such as complaints, satisfaction ratings and retention
  • Process related, such as accident rates, material usage, rework rates and missed deliveries
  • Employee related, such as average sick days and employee turnover rates

Effective KPIs

For KPIs to be effective, the objectives and goals of individual functions and departments need to be aligned to the overall strategic objectives of the business. A good test of an effective KPI is to see if it is applicable for all levels of the business. KPIs should be relevant from the overall business strategic goal, down to the individual employee’s targets and objectives.

Measurable KPIs

A good KPI must be measurable. They must be specific so that progress towards their achievement can be monitoring. For example, decreasing customer complaints does not give the amount by which it should be decreased; specifying: decrease customer complaints by twenty percent, can be measured, provided historical figures are kept.

Successful KPIs

The success of measuring KPIs is dependent upon it’s current relevance to the business objectives. If the business mission has changed, and the KPIs have not been adjusted appropriately, the business can find itself in a situation where staff are being driven by KPIs which are in contraction to the business objectives. There have been instances where KPIs themselves have contracted each other, such as employees have KPIs focused on retaining existing customers, where the organisational objectives are focused on gaining new customers.

Criticisms of KPIs

Sometimes KPIs are selected because they are easy to measure, rather than because they are appropriate to the business objectives. The success of KPIs is dependent upon the right measures being selected.

If there are too many KPIs, which can often happen in large organisations, it is difficult to measure and manage, and employees struggle to understand what is most important.

KPIs do not identify weakness in process but are more focused on where individuals do not perform according to a measurement.

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