What are Key Performance Indicators? (KPI)

What are Key Performance Indicators? (KPI)

Key Performance indicators (KPI) sometimes also referred to as Key Success Indicators (KSI) are a series of defined measures that are commonly used by an organisation to measure progress towards goals.

This helps organisations, departments or teams working on projects understand how they are performing in relation to strategic goals and objectives. KPIs can essentially show a snapshot of progress towards something that can be measured.

KPIs can vary between different companies, industries and even projects depending on the performance measures. For example if a technology company’s goal is to have the largest growth in its industry, the main KPI could be the measure of turnover over a defined period of time. In addition KPIs are often the same across industries, for example ‘Cost per Km’ allows companies to the construction Industry to benchmark against their peers.

Successful KPI components

KPIs can have various components such as volume, cost, time, customer satisfaction and quality – however the main components can be deconstructed as:

Key: what is ‘Key’ varies significantly from company to company. This could be the hourly rate charged against the operational hourly cost. This obviously would be key to the success or failure of a company. However, arguably customer satisfaction may or may not be vital to the success of an organisation.

Performance: can be evidently measured and quantified. For example sale performance would be a significant performance criterion, with a measurable target.

Indicator: is largely related to future performance. For example a company can hold a large amount of data relating to historical sales trends - an indicator would be used to evaluate a variance on future performance.

Key Performance Indicators – a working example

KPIs are constructed, implemented and recorded based on a number of simple components united for a distinct measurable purpose. For example ‘Body Temperature’ as a KPI would contain the following components.

  • It’s widely recognised and understood.
  • Everybody measures temperature the same way.
  • Very easy to collect and record.
  • Indicator of the health of the person.
  • Provides historical data for analysis.
  • Provides information for diagnostics – a high temperature needs investigation.

With this KPI recorded, alerts when a temperature goes over a threshold can be automated and historic information over time can be used to set those thresholds. The same logic can be applied to companies such as volume of sales per day.

KPIs for Benchmarking

Using your KPIs for benchmarking is a systematic and logical way of measuring your company performance against others in your industry. They can also be used for internal benchmarking against offices or even individual projects. As KPIs are becoming standard across industries it has become far easier to find and compare your performance both nationally and internationally.

KPIs and balanced scorecards

KPIs make up individual measurements of performance against targets or goals, however to view this performance as part of the overall business performance, we collate those KPIs into groups. For example these could be marketing, sales, operations, customer service.

In order to evaluate the impact of each KPI, they are given a weighting out of 100% to the overall performance

group total – for this example marketing has 5 KPIs all weighing 20% 5 * 20 = 100%.

The benefits of KPIs for business

The main benefits for using KPIs to measure business performance are:

  • It’s widely recognised and understood.
  • Everybody measures temperature the same way.
  • Very easy to collect and record.
  • Indicator of the health of the person.
  • Provides historical data for analysis.
  • Provides information for diagnostics – a high temperature needs investigation.
Learn more about KPI Benefits

Selecting your Key Performance Indicators

Firstly your KPIs should be as closely aligned to your business goals as possible, and they should be focused on areas within your business that you can control. For example you cannot use the price of oil as a KPI as there is an infinite amount of factors outside of a business control to control the price, even for the producers. However an exposure to oil prices can be controlled so this would be a good KPI to monitor.

How many KPIs

One of the biggest mistakes in introducing KPIs is producing a huge list of all the things you want to measure in your business. What really matters is finding the right KPIs and distributing them to the right people.

There have been several inspired theories on the optimal number of KPI’s but in practise 5 – 9 KPIs work well. For example an online marketing manager may use the following KPI set:

  • Qualified leads per year / month / week.
  • Conversion rate.
  • Cost per lead.
  • Number of website visitors.
  • Returning vs. new visitors.
  • Homepage bounce rate.

Setting KPI Targets

When creating a KPI target additional factors such as seasonal and external influences must be taken into account. For example a company selling hot tubs would not simply divide the annual sales (with a 10% uplift) and divide this over a 12 month period as the hot tub business is very seasonal. This is where historical trends help, in investigating historic performance you can create realistic KPI targets.

In the absence of historical data companies can adjust the targets to make them more achievable by closely monitoring trends.

Successfully recording KPIs

One of the most common methods of monitoring and recording KPIs, is through the humble spreadsheet, however the very nature of KPI recording, the amount of data recorded and the need to summarise the data across a network of individuals, offices and even countries means the spreadsheet soon displays woeful inadequacies for the task.

Online KPI software provides a cost-effective solution to track, manage and analyse your KPI’s. Armed with powerful reporting and analysis tools the solutions offer a KPI best practise system to implement KPIs.

SimpleKPI and implementing your KPI strategy

SimpleKPI offers a powerful solution to 'spreadsheet farms' and ‘static reports’. It is a comprehensive online solution for KPI reporting, tracking and analysis. It provides a platform to quickly and effectively create and distribute your KPIs and offers a variety of ‘Easy to use’ functions for you to get the most out of your KPI strategy.

Source: www.simplekpi.com

Category: Forex

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