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KEY PERFORMANCE INDICATORS (KPI)

A Key Performance Indicator (KPI) is a tool with which an organization can “take guesswork out of strategy” and gauge its performance. Tagged as being very critical to any business, company or organization’s running, KPIs can always be employed to analyze and understand how they are progressing in relation to their set out strategic goals and objectives.

Defining KPIs, monitoring them and then establishing organizational decisions on the KPI results obtained, are all critical parts of any professional performance-management process. By means of the indicators and their results, managers and decision makers will be able to answer the three very important business appraisal questions: "What have we achieved in minimum?" "What are we behind or ahead on?" and "How far behind or ahead are we?"

Usually, the nature of the organization or business will determine the type or model of KPI examined. Two companies existing in the same business environment and industry may enlist varied sets of performance indicators, choice depending on their current situation, strengths, weaknesses, opportunities, and threats.

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Selecting Key Performance Indicators

There are various components to a successful KPI, which could be grouped as:

  • Key – These so-called could be the key to success or failure of any organization, and vary significantly from company to company. An example is hourly rate charged against operational hourly cost.
  • Performance – Measureable and quantifiable criteria, for example, a company’s sale performance with measurable target.
  • Indicator – A predictor mostly associated with future performance. A company can compile its past data and sales trends to envisage future performance.

A valuable KPI must have an accurate way to define and measure it. However, because a thing is measurable does not make it key to business success. Your company’s set of KPIs must very much align closely with your business’ goals and take into account mainly those components, which can be controlled to a great extent. It is also important to have all indicators associated with targets.

Setting KPI Targets

In setting up KPIs and targets, one must take into consideration components such as external and seasonal factors. For example, a company dealing in a seasonal sales product may not simply add their annual sales up and divide by the 12-month period to investigate annual sale performance for such item. Instead, their historical data would be of better significance in defining performance and creating a more realistic KPI target.

Also, an active KPI may be differently applicable from one department to the other in the same company with the understanding that improvements in the various departmental KPIs will help the overall company’s performance. For example, a KPI based on "Customer Satisfaction" at manufacturing could be read as: "number of units rejected by quality inspection," while at sales may be determined as "time a customer has to hold before getting attended to be a rep."

Key Performance Indicators – as working example

KPIs are established and implemented based on a number of components put together for a measurable purpose. For example, the 'Body Temperature' as a KPI for a person’s health would have the following components.

  • Easy to collect and record.
  • Widely recognized and understood.
  • Measured the same way.
  • Provides information for diagnostics (a high temperature needs investigation).
  • Provides historical data for analysis.

With the ability to automate the collection of temperature as a KPI, notifications can be set for when the reading goes over a specific threshold, such that, historic information collected over time can be used to set now predict future thresholds. This same logic can be applied to companies such as volume of sales per day.

Some KPI Examples

To measure financial performance:

  1. Net Profit
  2. Net Profit Margin
  3. Gross Profit Margin
  4. Operating Profit Margin
  5. EBITDA

To gauge your market and marketing efforts:

  1. Market Growth Rate
  2. Market Share
  3. Brand Equity
  4. Cost per Lead
  5. Conversion Rate

To measure your operational performance:

  1. Six Sigma Level
  2. Process Waste Level
  3. Order Fulfilment Cycle Time
  4. Innovation Pipeline Strength (IPS)
  5. Return on Innovation Investment (ROI2)

To understand your employees and their performance:

  1. Human Capital Value Added (HCVA)
  2. Revenue Per Employee
  3. Employee Satisfaction Index
  4. Employee Engagement Level
  5. Employee Churn Rate

To measure your environmental and social sustainability performance:

  1. Carbon Footprint
  2. Water Footprint
  3. Energy Consumption
  4. Supply Chain Miles
  5. Waste Reduction Rate