A key performance indicator, or KPI, is a business management tool used to measure the performance of processes that drive an organisation's long-term goals. Key performance indicators identify gaps between current and desired performance and highlight where action must be taken to improve.
An effective KPI measures performance and puts that performance in context using targets (such as 5 per cent new customers per month) or ranges (upper and lower ranges of performance).
KPIs reflect an organisation's unique business objectives, therefore they differ from one organisation to the other.
Familiarise yourself with the organizational goals for your organisation. Your key performance indicators must be aligned with these.
Map the operational business processes of your organisation using a flow diagram. For example, a flower shop would map the following: take call, provide assistance, take order, select or order supplies, assemble order, deliver.
Establish leading indicators. Ask yourself what steps need to be taken to ensure the business achieves its goals. For example, the receptionist takes a call, provides assistance and takes orders.The florist selects or orders supplies and assembles the order. Dispatch arranges for delivery of order. Delivery person ensures delivery. In the example above, completing deliveries to schedule impacts lead time, which impacts stock levels, purchasing levels and customer satisfaction. Therefore, on-schedule delivery is a leading indicator of a wide range of performance indicators.
Set the key performance indicators. Remember that these should be key, measurable and specific. For example, the flower shop may note, in the analysis of its leading indicators, that the bulk of its profits comes from repeat customers. An important key performance indicator for this company would therefore be its number of repeat customers.
Ensure that all stakeholders understand KPIs. Stakeholders must know what is measured, how it is calculated, and, more importantly, what they must do to positively impact the key performance indicator.
Review on a regular basis. Constantly monitoring your key performance indicators will ensure eventual success.
- Use SMART criteria in setting your key performance indicators. S = Specific: clear and focused with a specific purpose for the business M = Measurable: can be quantified and compared to other data A = Attainable: achievable under expected conditions R = Realistic: fits into the organisation's constraints and is cost effective. T = Time phased: doable within the predefined time frame given.
- Checklist. If you can answer "Yes" to the following questions, you have created winning KPIs: Are your KPIs consistent with current strategies and vision? Do your KPIs have the potential to make a significant, positive impact on the business? Have the KPIs been discussed with all relevant stakeholders? Are there less than 10 KPIs? Have you used nonfinancial measures? Are your KPIs logically achievable? Do the KPIs make sense to the team and stakeholders? Can these KPIs be measured frequently?
A key performance indicator is not a goal, a key result area (KRA), or a critical success factor. These terms are often used interchangeably with key performance indicator. Many organisations set these as their KPIs and as a result, performance is not actually measured or managed.