Metrics used to evaluate certain factors that are considered crucial to the ongoing success of an organization are referred to as key performance indicators, or KPIs. These indicators will differ by organization; some may look at overall net revenue or customer loyalty, while others might look at unemployment or other government statistics. Whatever the industry, all organizations measure themselves in some form or fashion by key performance indicators. Also referred to as key success indicators (or KSIs), these represent a set of quantifiable measures that organizations or industries use to gauge or compare performance in terms of meeting their strategic and operational goals.
In light of this, companies must have already established and defined strategic and operational goals, so that they can choose KPIs which will best reflect their attainment. A good starting point is to identify the questions that the decision-makers, managers or external stakeholders need to have an answer to, and then define one or two so-called Key Performance Questions (KPQs) for each strategic objective. An example may be a software company whose goal is to have the fastest growth in its industry, therefore its main performance indicator may be the measure of their revenue growth year-on-year. Other types of indicators can be:
• for a website - the percentage of income that comes from return customers
• for a school - the graduation rates of its students
• for a Customer Service Department - the percentage of customer calls answered in the first minute, or
• for social service organizations the number of clients assisted during the year
KPIs are integral tools that managers use to understand whether the business is on a successful track or whether it's deviating from the planned course. Defining the right set of KPIs will shed light on the key aspects of performance and highlight areas that may need attention. Without the right set of KPIs, managers are navigating blindly. Whatever KPIs an organization choses, they must reflect the organization's goals, be key to its success, and they must be measurable. KPIs usually represent long-term considerations and the definition of what they are, and how they are measured doesn't change often.
The trouble with this though, is that there are 1000's of KPIs that organizations can choose, and many companies find it hard to select the right ones for their business. Managers struggle to identify the vital few management metrics and instead collect and report on a vast amount of everything that is easy to measure, or they simply pick the KPIs everyone else seems to be using. At the other extreme are companies, business units, project teams or individuals that have little or no KPIs defined in order to understand their performance levels. It is believed that less than 10% of all the metrics that are collected, analyzed and reported in businesses are ever used to inform decision-making and that 90% of the metrics are wasted, or worse, used to drown people in data while they are thirsting for insights.
If KPIs are going to be of any value, there has to be a way to accurately define and measure them. Simply stating a KPI as "Generate More Repeat Customers" is useless without some way to distinguish between new and repeat customers. "Being The Most Popular Company" isn't a valid KPI because there is no quantifiable way to measure the company's popularity or compare it to others. Defining a KPI of "Increase Sales" means that you need to address considerations like whether to measure by units sold or by dollar value of sales. Will returns be deducted from sales in the month of the sale or the month of the return? Will sales be recorded for the KPI at list price or at the actual sales price? All these considerations need to be addressed, agreed upon and followed in order to accurately justify a true KPI measurement. It is important to define the Key Performance Indicators that you want and to stay with the same definition from year to year.
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