What are Key Performance Indicators and Why Are They Important?
Key performance indicators (KPIs) are benchmarks used to measure results in an organization. Effective use of KPIs can drive improvement and growth in any company or business. KPIs must be relevant and streamlined to suit your type of industry or business. This article provides a brief introduction to KPIs and discusses their characteristics; it also provides relevant examples and insight on how to choose KPIs for your organization. KPIs is also a very important knowledge in order to correctly implement BI. So to make sure BI Projects are successful, in the coming months, I will cover some KPI knowledge.
A key performance indicator is a measure used by an organization to monitor and quantify the success of the strategic and operational goals it has previously set. A KPI allows a company to use metrics to analyze the success of long term strategic goals and objectives as well as the performance of projects and other operational functions like marketing, sales, production and customer care.
Characteristics of KPIs
Key performance indicators are usually used to carry out periodic assessment of the performance of the entire organization, divisions, departments and staff. Hence, they are commonly defined in a meaningful, understandable and measurable way. They are also specified in such a way that their achievement would not be hindered by extraneous factors beyond the control of the organization. In addition, all performance indicators must be based on legitimate data that is verifiable by internal and external auditors.
For KPIs to be effective, they should be defined in a S.M.A.R.T. way. SMART is an acronym for specific, measurable, achievable relevant and time bound. Therefore KPIs set for either long term strategic goals or short term projects and operations should have these characteristics:
* Specific – they should focus on a definite aspect that can be improved upon
* Measurable – they can be presented in numeric form and serve as inputs for a progress indicator
* Achievable – it should be possible to achieve, measure and evaluate the KPIs within the context of the organization’s established structure and processes
* Relevant – the KPIs should be directly related to the fulfillment or success of the organizations goals or objectives
* Time-bound – the KPIs should be measured within a particular time frame e.g. per day, week month, quarter or year.
Examples of KPIs
Organizations use different types of KPIs. This is because each organization will have its own mission and vision, goals and objectives. Therefore, the major concerns and measures of success will differ. A company can consider virtually any level of measurable change from one period to another, which will help to indicate success, as a KPI.
In sales and marketing, examples of KPIs may include new prospects per week, conversion rate of prospects to buyers, the new subscribers to an online newsletter, or the amount of revenue from existing customers. For an online store, the owners can monitor and increase their traffic, customer base and sales by monitoring these KPIs: site traffic, product page visits, time spent on the site, return rate, cart abandonment rate and average amount per order.
Procurement companies can raise their standards, improve their service to their customers and increase their profits by using these KPIs: total cost savings, quality of products and services, on-time delivery, inventory availability and contract compliance.
Organizations can also use KPIs to monitor employee performance and ensure that the management of human resources is helping to fulfill strategic objectives. Examples of human resource KPIs include return on investment from training, employee turnover rate/costs, cost per hire, and HR expense factor.
The key to success in choosing KPIs is to focus on metrics that are relevant to the business unit/division and also provide adequate data to drive strategic and operational improvements for the organization. First, business owners and managers should use the 80/20 rule to focus on critical KPIs rather than including as many KPIs as possible. Then attention must be paid to strategic objectives instead of mere performance measurement. That means that all strategic and operational objectives must be clearly defined before relevant KPIs are chosen.
In addition, it is essential to ensure that the data collection system is reliable. There is a need to validate the system and ensure that it produces values that are timely, meaningful and reliable for management decision-making. Managers should also ensure that the KPIs are selected in such a way that the personnel in charge are empowered to make needed changes for their improvement.
KPIs are powerful for monitoring, assessing and improving performance in any organization. To maximize their use, business owners and managers need to fully understand their basic characteristics and choose KPIs that will help them to achieve their strategic and operational goals. In short, KPIs provide Clarity, Focus and Improvement.
Each level of the below will have multiple KPIs in the form of measuring input, process, output and outcome. Each level will also have a very different time frame of measurement. This will be more advanced and discussed later on.