Key performance indicators (KPIs) are tools for performance measurement that help organizations define and evaluate progress toward goals or objectives. These quantifiable measures are used to gauge or compare performance in terms of meeting these goals.
KPIs vary by industry and company, depending on what criteria is being measured. They are also sometimes referred to as key success indicators, or KSIs.
Strategic and operational goals must first be established before KPIs can be chosen. For example, growth in the company may be measured by revenue (i.e. 5 million dollars in revenue for 2014) or other industry-wide standards. Goals must be specific and quantifiable to be measured by KPIs. “To have the best customer service in the state” is not a measurable or specific goal. Instead, a company can strive to have a specific percentage of customer complaints resolved within 24 hours. This type of goal can notably be achieved or monitored.
KPIs must have certain qualities and do not change often. KPIs may change as goals change or are achieved. KPIs can be marked progress toward strategic or operational goals. Choosing good KPIs requires a good understanding of what is important to the organization.
Key performance indicators must be:
- Quantifiable measurements
- Accurately and precisely definable
- Clear and specific
- Agreed upon beforehand
- Reflective of the critical success factors of an organization
- Relevant to long-term considerations
- Small in number (to retain everyone’s focus on achievement)
- Result-oriented and achievable
KPIs define the measurements and values required to summarize necessary information. These values are called indicators, which are identifiable and can be broken down into these categories:
- Quantitative indicators: Measured with numbers
- Qualitative indicators: Not measured with numbers
- Leading indicators: Can predict an outcome
- Lagging indicators: Presented as success or failure after the process
- Output indicators: Results of the process
- Input indicators: Resources used during the process
- Process indicators: Measures the efficiency or productivity of the process
- Directional indicators: Specify whether the organization is improving
- Practical indicators: Interface with existing processes
- Financial indicators: Looks at an operating index
- Actionable indicators: In an organization’s control to affect change
Once KPIs are defined and measured, it is important to use the results as management tools. These measurement devices give everyone a clear view of goals and give employees motivation to work toward this set of common standards.
KPIs also allow for easy review of company or department performance by compiling evidence of progress toward specific targets. KPIs should be evaluated on a regular basis (quarterly or at least semi-annually) in order for people to track their progress based on these indicators. Planning for the future will also be easier when you have the numbers and the results to back you up.
Once a company has analyzed and defined goals, measuring progress toward these goals may be done in a number of ways. Some examples of these key performance indicators are:
- A school may measure success by graduation rates or test scores.
- A retail operation may measure the percentage of income that comes from repeat customers.
- A company can analyze a goal of customer service improvement by measuring a percentage of calls answered in the first minute.
- A business may measure reduced turnover rate by the number of voluntary resignations divided by the number of employees at the beginning of the period.
- Manufacturing companies may measure customer satisfaction by reducing the number of units rejected by quality control.
- Customer relationship improvement can be measured by the percentage of bad debts collected.
- IT operations can improve processes by measuring the average time of repairs.
For more examples of what types of KPIs you should consider tracking, click here.