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Home > Performance Management Checklists > Understanding Key Performance Indicators

Performance Management Checklists

Understanding Key Performance Indicators


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Checklist Description

This checklist describes what key performance indicators are and what they are used for.

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Definition

A key performance indicator (KPI) is a way for an organization to measure its success or otherwise in reaching its defined goals or objectives. KPIs can be very useful as a means of assessing an organization’s current position and deciding on new strategies if necessary. While KPIs are sometimes used to measure progress toward meeting financial goals, such as increasing turnover by 25% within six months, KPIs are more likely to be used to evaluate activities that are normally difficult to measure—for example, levels of customer satisfaction or employee participation. KPIs are probably most effective when used to monitor knowledge-based processes.

Whatever the set goal, KPIs must be measurable. Thus, a general goal of increasing the number of returning customers would be hard to measure using KPIs, but a defined goal of increasing the number of returning customers by 25% within one year would be measurable, as the parameters are clearly set. A KPI metric generally consists of a timeframe, a target, and a benchmark, which together measure the achievability of the goal.

The KPIs used by an organization will vary depending on the nature of its business. A call center operation uses a different set of KPIs from those used by a manufacturing firm.

KPIs are usually measured in real time, but the results are usually stored so that progress can be measured on a daily, weekly, yearly, or otherwise basis—such as hourly. KPIs are often derived from raw data. There are four basic subtypes of KPI:

  • Quantitative indicators are numerical terms, such as the percentage of customers who buy widgets every year;

  • Practical indicators interface with existing processes, such as lists of employee capabilities;

  • Directional indicators demonstrate improvement or progress (or not), such as comparing last month’s sales to this month’s;

  • Actionable indicators reflect an organization’s ability to effect change, such as KPIs showing that the company would do better by outsourcing some processes.

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Advantages

  • KPIs show an organization where it is going wrong, enabling management to make the necessary changes to turn things around.

  • KPIs give an organization an edge over its competitors.

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Disadvantages

  • KPIs can be expensive to use, or even impossible (you cannot quantify staff morale, for example).

  • KPIs have limitations to the exactness of results, which often may only be a rough guide rather than a concrete measurement.

  • Once designed, KPIs can be difficult to change unless you are prepared to disregard carefully built-up comparison yardsticks, such as year-on-year customer satisfaction levels.

  • KPIs may be difficult to compare among peers—competitive analysis may be best left to an external specialist.

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Action Checklist

  • Make sure you design each KPI carefully and include all necessary factors to achieve measurable results.

  • Only use KPIs that focus on whether an organization is achieving its goals or living up to its mission.

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Dos and Don’ts

Do

  • Ensure that everyone in the organization is aware that KPIs are in use.

  • Focus on meeting the outcomes.

  • Use KPI results as a carrot to motivate staff, where you can be reasonably sure they can actually carry out change.

Don’t

  • Don’t use too many KPIs at the risk of staff spreading their focus too thinly.

  • Don’t attempt to use a KPI to measure something that cannot be measured at all.

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Further reading

Books:

  • Franceschini, Fiorenzo, Maurizio Galetto, and Domenico Maisano. Management by Measurement: Designing Key Indicators and Performance Measurement Systems. Berlin: Springer, 2007.
  • Parmenter, David. Key Performance Indicators: Developing, Implementing, and Using Winning KPIs. Hoboken, NJ: Wiley, 2007.

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