Few organisations really monitor their true key performance indicators (KPIs) and few have explored what a KPI actually is. This article answers three fundamental questions:
1. What is a KPI?
2. What are the characteristics of KPIs?
1. What is a KPI?
KPIs represent a set of measures focusing on those aspects of organisational performance that are the most critical for the current and future success of an organisation. There are only a few KPIs in an organisation (no more than ten), and they have certain characteristics.
2. What are the characteristics of KPIs?
KPI characteristics include the following.
- KPIs are non-financial measures
KPIs are not expressed in monetary figures. When you put a pound sign to a measure you have not dug deep enough. Sales made yesterday will be a result of sales calls made previously to existing and prospective customers, advertising, amount of contact with the key customers, product reliability, etc.
Any sales indicators expressed in monetary terms are result indicators.
In many organisations, a KPI may rest with certain activities undertaken with your key customers, who often generate most, if not all, of your profit.
KPIs should be monitored and reported 24/7, daily, and a few, perhaps, weekly. A KPI can't be measured monthly as this is shutting the stable door well after the horse has bolted.
KPIs are current or future measures, as opposed to past measures. Most organisational measures are past indicators, measuring events of the last month or quarter. These indicators cannot be and never were KPIs. That is why a satisfaction percentage (e.g. 65%) from a customer satisfaction survey performed every six months can never be a KPI.
- KPIs are acted upon by the CEO and senior management
All good KPIs that make a difference should have the CEO's constant attention, with daily calls to the relevant staff. Having a potentially career-limiting discussion with the CEO is not something staff want to repeat.
A KPI should make clear what action is needed. In the case of an airline that was having a problem with late planes, a KPI communicated immediately to all staff that there needed to be a focus on recovering the lost time. Cleaners, caterers, ground crew, flight attendants and liaison officers with traffic controllers would all work some magic to save "a minute here and a minute there" while maintaining or improving service standards.
- KPIs are the responsibility of individuals
A KPI is deep enough within an organisation to be tied down to an individual. In other words, the CEO can ring someone and ask "why?" Return on capital employed has never been a KPI as it cannot be tied down to a manager; it is a result of many activities under different managers.
Can you imagine the reaction if a general manager was told one morning by the CEO: "John, I want you to increase the return on capital employed today"?
- KPIs have a significant effect on the organisation
A KPI will affect most of the critical success factors (CSFs) and more than one balanced scorecard perspective. In other words, when the CEO focuses on the KPI and the staff follow, the organisation scores goals in all directions.
- KPIs have a positive effect on other measures
A KPI has a flow-on effect on other performance measures. Reducing late planes would improve performance measures around improved service by ground staff as there is less "firefighting" to distract them from a quality and caring customer contact.
3. What are the different types of performance measure?
There are four types of performance measure:
- Key result indicators (KRIs) give an overview of past performance and are ideal for the board as they communicate how
management has done in a CSF or from a balanced scorecard perspective.
- Performance indicators (PIs) tell staff and management what to do.
- Result indicators (RIs) tell staff what they have done.
- KPIs (KPIs) tell staff and management what to do to increase performance dramatically.
The relationship between these four performance measures can be likened to the structure of an onion. The outside skin describes the overall condition of the onion; how much sun, water and nutrients it has received; and how it has been handled from harvest to supermarket shelf. The outside skin is thus a key result indicator.
The inner layers represent the various performance and result indicators, and the core is where you find the KPIs.
The 10/80/10 rule of performance measures
An organisation should have around 10 KRIs, up to 80 PIs and RIs, and 10 KPIs. Very seldom do there need to be more performance measures than these, and in many cases fewer can be used.
Key result indicators (KRIs)
The common characteristic of key result indicators is that they are the result of many actions. KRIs give a clear picture of whether you are travelling in the right direction and of the progress made toward achieving desired outcomes and strategies. KRIs do not, however, tell management and staff what they need to do to achieve desired outcomes. Only performance indicators and KPIs can do this.
Key result indicators are performance measures that have often been mistaken for key performance indicators. Key result indicators include:
- customer satisfaction
- net profit before tax
- profitability of customers
- employee satisfaction
- return on capital employed.
A car's speed provides a useful analogy. The board will simply want to know the speed the car (the organisation) is travelling at. Management needs to know more information because the car's speed is a combination of what gear the car is in and the engine RPMs. In fact, management might be concentrating on something completely different, such as how economically it is driving – e.g. a gauge that shows fuel efficiency or how hot the engine is running. These are two completely different performance indicators.
Separating out KRIs from other measures has a profound impact on the way performance is reported. There is now a separation of performance measures into those affecting governance (up to ten KRIs in a dashboard) and those affecting management.
Performance indicators and result indicators
The 80 or so performance measures that lie between the key result indicators (KRIs) and the key performance indicators (KPIs) are the performance indicators and result indicators (PIs and RIs).
The performance indicators, while important, are not key to the business. The PIs help teams to align themselves with their organisation's strategy. PIs complement the KPIs and are shown with them on the organisation, division, department and team scorecards.
PIs could include:
- percentage increase in sales to the top 10% of customers
- number of employees' suggestions implemented in the last 30 days
- customer complaints from key customers
- sales calls organised for the next one to two weeks
- late deliveries to key customers.
RIs could include:
- net profit on key product lines
- sales made yesterday
- week's sales to key customers
- debtor collections in week
- bed utilisation in week.
Key result indicators replace outcome measures, which typically look at activity over months or quarters. PIs and KPIs are now characterised as past, current or future measures. What the new concept calls "current measures" are those monitored 24/7 or daily. You will find that the real KPIs in your organisation are either current or future measures.