Key Performance Indicator (KPI)

Key Performance Indicators
KPIs (Key performance indicators)

Definition: KPI are quantifiable measurements, agreed to beforehand, that reflect the critical success factors (of the company, department, project.)

Also Known As: Key Performance Indicators, Key Success Factors, KSIExamples: One of the Sales Department's KPIs is number of new customers and the goal for the second quarter is 5 per salesperson.

A KPI defines itself, to a large extent, by its name; it is a performance indicator, i.e. the performance of the process it is measuring should be clearly indicated by the KPI.In fact, among all the tools available to executives to change the organization and move it in a new direction, KPIs are perhaps the most powerful.

KPIs focus employees' attention on the tasks and processes that executives deem most critical to the success of the business. KPIs are like levers that executives can pull to move the organization in new and different directions. Without KPI an organization will not perform to its maximum.

There are two major types of KPIs: leading and lagging indicators. Leading indicators measure activities that have a significant effect on future performance, whereas lagging indicators, such as most financial KPIs, measure the output of past activity.To do this, leading indicators either measure activity in its current state (i.e., number of sales meetings today) or in a future state (i.e., number of sales meetings scheduled for the next two weeks), the latter being more powerful because it gives individuals and their managers more time to influence the outcome.

Characterstics of a good KPI

KPI is always connected with the corporate goals
A KPI is decided by the management
It belongs to an individual who is accountable for its outcome
They are leading indicators of performance desired by the organization
Easy to understand
A KPI leads to action
Few in number
It should be balanced not undermine each other
Users can gauge their progress overtime
KPI’s loses its value overtime so they must be periodically reviewed and refreshed

A KPI is associated with a specific process and is generally represented by a numeric value.

A KPI may have a target and allowable margins, or lower and upper limits, forming a range of performance that the process should achieve. A KPI can be thought of as a metric with a target. An example of a simple KPI is: Average time for response to a customer inquiry is less than two days.

As more detailed example, say that an organization sets the following business objectives:

*Orders must be processed within three days compared to the current average of five days

*Average amount of an order must increase by 10%

*Average order amount KPI: For the Customer Order process, track the average amount of each order

KPIs can be made up of one or more metrics. The calculated results of the metrics during process monitoring are used to determine whether the target of the KPI has been met. For example, tracking the average time to shipment might include the following metrics:

*Elapsed time for order completion
*Elapsed time for order approval
*Number of orders received
*Working duration of each task in the process
*Percentage of orders automatically approved