Key Performance Indicators (KPI)

From F. John Reh,

Your Guide to Management.
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How an organization defines and measures progress

toward its goals
Key Performance Indicators, also known as KPI or Key Success Indicators (KSI), help an
organization define and measure progress toward organizational goals.

Once an organization has analyzed its mission, identified all its stakeholders, and defined
its goals, it needs a way to measure progress toward those goals. Key Performance
Indicators are those measurements.

What Are Key Performance Indicators (KPI)

Key Performance Indicators are quantifiable measurements, agreed to beforehand, that

reflect the critical success factors of an organization. They will differ depending on the
organization. A business may have as one of its Key Performance Indicators the
percentage of its income that comes from return customers. A school may focus its Key
Performance Indicators on graduation rates of its students. A Customer Service
Department may have as one of its Key Performance Indicators, in line with overall
company KPIs, percentage of customer calls answered in the first minute. A Key
Performance Indicators for a social service organization might be number of clients
assisted during the year.

Whatever Key Performance Indicators are selected, they must reflect the organization's
goals, they must be key to its success,and they must be quantifiable (measurable). Key
Performance Indicators usually are long-term considerations. The definition of what they
are and how they are measured do not change often. The goals for a particular Key
Performance Indicator may change as the organizations goals change, or as it get closer
to achieving a goal.

Key Performance Indicators Reflect The Organizational Goals

An organization that has as one of its goals "to be the most profitable company in our
industry" will have Key Performance Indicators that measure profit and related fiscal
measures. "Pre-tax Profit" and "Shareholder Equity" will be among them. However,
"Percent of Profit Contributed to Community Causes" probably will not be one of its Key
Performance Indicators. On the other hand, a school is not concerned with making a
profit, so its Key Performance Indicators will be different. KPIs like "Graduation Rate"
and "Success In Finding Employment After Graduation", though different, accurately
reflect the schools mission and goals.

Key Performance Indicators Must Be Quantifiable

If a Key Performance Indicator is going to be of any value, there must be a way to

accurately define and measure it. "Generate More Repeat Customers" is useless as a KPI
without some way to distinguish between new and repeat customers. "Be The Most
Popular Company" won't work as a KPI because there is no way to measure the
company's popularity or compare it to others.

It is also important to define the Key Performance Indicators and stay with the same
definition from year to year. For a KPI of "Increase Sales", you need to address
considerations like whether to measure by units sold or by dollar value of sales. Will
returns be deducted from sales in the month of the sale or the month of the return? Will
sales be recorded for the KPI at list price or at the actual sales price?

You also need to set targets for each Key Performance Indicator. A company goal to be
the employer of choice might include a KPI of "Turnover Rate". After the Key
Performance Indicator has been defined as "the number of voluntary resignations and
terminations for performance, divided by the total number of employees at the beginning
of the period" and a way to measure it has been set up by collecting the information in an
HRIS, the target has to be established. "Reduce turnover by five percent per year" is a
clear target that everyone will understand and be able to take specific action to
accomplish.

Key Performance Indicators Must be Key To Organizational Success

Many things are measurable. That does not make them key to the organization's success.
In selecting Key Performance Indicators, it is critical to limit them to those factors that
are essential to the organization reaching its goals. It is also important to keep the number
of Key Performance Indicators small just to keep everyone's attention focused on
achieving the same KPIs.

That is not to say, for instance, that a company will have only three or four total KPIs in
the company. Rather there will be three or four Key Performance Indicators for the
company and all the units within it will have three, four, or five KPIs that support the
overall company goals and can be "rolled up" into them.

If a company Key Performance Indicator is "Increased Customer Satisfaction", that KPI

will be focused differently in different departments.

The Manufacturing Department may have a KPI of "Number of Units Rejected by

Quality Inspection", while the Sales Department has a KPI of "Minutes A Customer Is
On Hold Before A Sales Rep Answers". Success by the Sales and Manufacturing
Departments in meeting their respective departmental Key Performance Indicators will
help the company meet its overall KPI.

Good Key Performance Indicators vs. Bad

Bad:
 Title of KPI: Increase Sales
 Defined: Change in Sales volume from month to month
 Measured: Total of Sales By Region for all region
 Target: Increase each month

What's missing? Does this measure increases in sales volume by dollars or units? If by
dollars, does it measure list price or sales price? Are returns considered and if so do the
appear as an adjustment to the KPI for the month of the sale or are they counted in the
month the return happens? How do we make sure each sales office's volume numbers are
counted in one region, i.e. that none are skipped or double counted? How much, by
percentage or dollars or units, do we want to increase sales volumes each month?(Note:
Some of these questions may be answered by standard company procedures.)

Good:

 Title of KPI: Employee Turnover

 Defined: The total of the number of employees who resign for whatever reason,
plus the number of employees terminated for performance reasons, and that total
divided by the number of employees at the beginning of the year. Employees lost
due to Reductions in Force (RIF) will not be included in this calculation.
 Measured: The HRIS contains records of each employee. The separation section
lists reason and date of separation for each employee. Monthly, or when requested
by the SVP, the HRIS group will query the database and provide Department
Heads with Turnover Reports. HRIS will post graphs of each report on the
Intranet.
 Target: Reduce Employee Turnover by 5% per year.

What Do I Do With Key Performance Indicators?

Once you have good Key Performance Indicators defined, ones that reflect your
organization's goals, one that you can measure, what do you do with them? You use Key
Performance Indicators as a performance management tool, but also as a carrot. KPIs
give everyone in the organization a clear picture of what is important, of what they need
to make happen. You use that to manage performance. You make sure that everything the
people in your organization do is focused on meeting or exceeding those Key
Performance Indicators. You also use the KPIs as a carrot. Post the KPIs everywhere: in
the lunch room, on the walls of every conference room, on the company intranet, even on
the company web site for some of them. Show what the target for each KPI is and show
the progress toward that target for each of them. People will be motivated to reach those
KPI targets.

iedex recommends a 5 step process for developing KPIs.

What you measure is what you get

iedex recommends a 5 step process for developing KPIs:

Step 1: Confirm the outcomes required

Given that "what you measure is what you get" it is critical that the KPIs selected
support the outcomes you want to achieve. (If you get these wrong, everything that
follows will be out of alignment).

For example:
External

 Improving service levels to customers

 Strengthening stakeholder relations

Internal
  Reducing operating costs to international benchmark levels
 Improving team work, morale and integration].

The timeframe for this step will depend on the magnitude of the requirements.

Step 2: Establish goals and test

The requirements identified in Step 1 are used to create a suite of specific goals. The
general test for the comprehensiveness of these goals is "If these goals are achieved
will we be seen as completely successful by customers and all our major
stakeholders?"

Step 3: Develop KPIs and test

How will the goals (Step 2) be measured? The KPI system used by iedex is based on:

 Establishing KPIs as outcomes and drivers of these outcomes. This enables

managers to act on relevant performance drivers when performance
outcomes are not satisfactory.
 Establish a balance between lead and lag indicators of performance
 Measure the "big" elements of each goal, not all elements (keeping KPIs to a
reasonable number)
 Modifying KPIs to suit the existing management information system, and
deciding where this system needs to be improved to generate better KPIs in
the future.

The outcome is tested through a "gaps and gluts" analysis. That is, when all KPIs are
assembled, the management team judges where there are too many or too few
measures.

Step 4: Establish KPI accountability framework

Each KPI should be allocated single point accountability. This requires special
attention, especially if the outcome is the result of cooperative effort between
different people, teams or organisational divisions.

Step 5: Launch of the KPI system

This step has 4 major phases:

Goals down/plans up
This requires the high level KPIs to be cascaded down to each operational team. As
its name implies, the process presents the high level KPIs as "goals" and allows
teams to develop their relevant KPIs through the "plans" they create to achieve
these goals.

Finally, all plans are checked for consistency and modified as necessary.

Develop individual performance plans

On the basis of the new suite of plans, the CEO, Divisional, section and team leaders
create their personal performance plans by selecting the most critical KPIs from the
relevant organisational plan. Once developed, they are signed off at the appropriate
level.

Documentation development
All KPIs, Divisional, team and personal plans are logged with the appropriate
organisational unit and a process for updating through the next planning cycle
decided.

Training in hard and soft skills

To support all staff in their effort to achieve the KPIs for which they are accountable,
it is essential that comprehensive training options be made available. These should
be broken into group training (where corporate-wide development is needed) and
individual training (from which individuals can select as required). Training should
cover technical/functional performance (hard issues) as well as behavioural
performance (soft issues).

Resources required
The resources required for the task of developing a comprehensive KPI framework
will vary according to the magnitude of the task - is the system is to apply to the
whole organisation or a team? An internal project leader will be required, full time or
part time. This person will plan the process, and coordinate internal and consulting
resources. The key objective is to blend expertise with ownership.