What is a Key Performance Indicator (KPI)?


By Kevin Dwyer


A Key Performance Indicator (KPI) is neither a Goal, nor a Key Result Area (KRA), nor a Target, nor a Result nor a Critical Success Factor. And yet these terms are often used interchangeably with a KPI.

A KPI defines itself, to a large extent, by its name; it is a performance indicator, i.e. the performance of the process it is measuring should be clearly indicated by the KPI.

This should clarify that the purpose of a KPI is not, for example, to measure the risk of a process, nor its age, nor its length, but its performance.

Further, a KPI should be key, not just any casual measure of a process (or a business as a whole); this can be taken as the KPI being closely correlated with the objectives of the process being measured.

An important and often overlooked aspect of a KPI not contained within its name is that it measures a continuous or discrete but repeated process.

Typical continuous processes include manufacture (toothpaste production, widget manufacture) and service where the dimensions are large (credit management for large public utilities, help desk for large IT installations).

Sometimes services which look to be custom when considered at an individual level (your neighbour's knee surgery operation) can also be considered as almost continuous when considered at a coarse enough level of granularity (knee surgery in Australia in the ‘90s).

Typical discrete, repetitive processes include service (PC installation, car sales and hotel check-in).

All of this ought to be self-evident, but it is common to see. For example, Target Completion Dates or Product Specifications (or both) labelled as KPIs.

Where the intention is to measure once-off performance of a project, or as part of a business plan, a specification or target date (or both) will suffice; labelling it a KPI is both unnecessary and confusing.

Moreover, developing only one off measures as a proxy for real KPIs puts a business at risk.

The implication of using one off performance measures in lieu of key performance indicators is that many organisations do not know how well they are performing. That is, until, a significant universal lagging KPI such as profitability or lost time injury frequency ratio reaches unacceptable levels.

Lag, Current and Lead

Timing of KPIs, relative to achievement of corporate goals, is fundamental in choosing good candidate KPIs. Financial results, such as last quarter's revenue, are typically lagged by 2+ months. Annual results, especially fiscal year results, can be much more delayed.

With such lags, the problem arises as to what action might be appropriate to alter the direction of the department's performance, when the KPIs are measuring results in the past.

A correction may be inappropriate when the current performance has already significantly altered from that measured some time ago and may result in overcorrection.

Lag indicators should rarely be considered as a KPI as the benefit of KPI is to adjust processes and behaviour to get better performance.

KPIs measuring current performance are more useful. Examples include today's bookings, sales or production level. As always, care must be taken not to allow instant results to result in instant reactions which, in turn, reinforce the original problem.

Other KPIs are of the leading type; their measures are predictive of desired results at the next higher level.

An example of such a leading indicator for market share is customer satisfaction with the organisation's products and service. It is important to note though, that customer satisfaction survey output is a lagging indicator of customer service.

The primary difficulty with leading KPIs is to be sure that they are strongly correlated with the required corporate goals; modelling and understanding of key business drivers is necessary.

The corollary, of course, is that taking the time and effort to determine the key business drivers will result in a useful KPI rather than a number which is reported on monthly but caused no action to happen even when it strays outside its range of limits.

More than the nature and the design, a KPI must be understood by all staff. Further, all staff must know the corrective action to be applied. The corrective action must impact the KPI.

For example, completing plant production runs to schedule for a manufacturing plant impacts lead time which impacts stock levels, purchasing levels, in-full delivery, employee satisfaction and customer satisfaction. The deviation from production schedule of production is a leading indicator of a wide range of performance indicators.

Understanding that deviation from production schedule is key enables all people in the plant to apply corrective action to keep to the schedule. The resultant improvement in lead time improves many other dependent indicators including productivity.

Choosing an indicator like productivity as key only has an impact on costs and few people would understand what to do other than work faster or spend capital on automation.

KPIs in most organisations are actually targets, key project dates, key result areas or tasks. As a result, performance is not actually managed.

Having well thought through KPIs and acting on them with the confidence that action will cause a change in performance is well worth the investment in time and corporate brain-power it takes to develop, select and test Key Performance Indicators.

Kevin Dwyer is the founder of Change Factory. Change Factory helps organisations who do do not like their business outcomes to get better outcomes by changing people's behaviour. Businesses we help have greater clarity of purpose and ability to achieve their desired business outcomes. To learn more or see more articles visit http://www.changefactory.com.au or email kevin.dwyer@changefactory.com.au ©2006 Change Factory


More Resources

Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exiting

More Management Information:

Related Articles


Competion or Cooperation?
It has been said, there is no better way to hone your skills and improve your performance, than competition. Competing with others, or even with your self, fosters continued improvement, striving for even higher goals, and an ongoing sense of achievement.
Culture Management and Creativity
Many concepts in the fields of managing creativity are very much applicable to culture management in general. The same concepts that foster creativity and innovation also maximise human capital potential, increase productivity, reduce costs and maintain competitive advantage etc.
One Simple Idea to Grow Your Business
Perhaps the most common theme I've heard in working with business owners or managers is that they rarely have time to plan for the future. They are so busy with day to day tasks and responsibilities, just getting through their weekly "To Do" list or fighting fires consumes all their time and energy, and then some.
The Seven Cs: Partnership Danger Signs - Conflict Becoming the Norm - Part 1
A series of articles exploring the seven critical areas that can indicate a partnership is in trouble.Conflict Becoming the Norm - Part 1Dr.
Driving of work trucks
Each time you or one of your work crews cruises down the road, people see the vehicle. It is logo'ed and that advertising is there to be noticed.
Managing the Human Resource Project
We obtain strategic results by aligning HR mission, vision and values. The following overview highlights a macro approach to project management.
Micromanagement and Delegation
Recently I had a long discussion with a friend of mine about Managers and managing. She is a former HR Manager for several major companies and was bemoaning the fact that training for managers has been cut back so significantly in recent years and that managers no longer receive the type of help, guidance and assistance that they received just a few short years ago.
Miracle Max On Market Breakthroughs
Successful enterprise building requires seven elements. These are:1.
Preventative Maintenance of Company Delivery Vehicles
If you have company delivery vehicles at your small or medium sized business you should have a preventative maintenance schedule and procedures for employees who are drivers of these vehicles. When discussing preventative maintenance over the years with business owners the first thing which comes to mind is 'Oil change' and usually the business owner who is on the hook for the loans on these vehicles is more than aware of that fact.
Building the Trust in Your Employees - 12 Easy Tips
In Stephen Covey's great book, "The Seven Habits of Highly Effective People", he talks about the 'emotional bank account', where you have to build a credit in your relationship with the individuals who you work with (and everyone else as well!).If what you do isn't 'trustworthy', then all you have done in your gentle listening and asking great and interested questions to build, is to 'debit' your account.
Innovation Management - Measuring Failure!
Creativity can be defined as problem identification and idea generation whilst innovation can be defined as idea selection, development and commercialisation.There are distinct processes that enhance problem identification and idea generation and, similarly, distinct processes that enhance idea selection, development and commercialisation.
Leadership Skills Means Turnover is Not a Problem
"Ha!" you say. "For someone to make a statement like that, they obviously haven't worked in the real world and certainly have never had to run a company.
Creativity and Innovation Management - Competition versus Collaboration
There is much confusion as to whether competition or collaboration is most beneficial to creativity and innovation. Though there are negatives to collaboration and it is not easy separating the effects of time pressure and group activity, in general collaboration beats competition.
Creativity Management and Behaviour
What behaviour maximises the chances of thinking of great ideas? What behaviour maximises the ability to nurture ideas until they begin to reveal their potential?To begin answering the above questions we will briefly explore five areas:a) Creativity versus innovation. It is correct that the above questions are separated, as they refer to two distinct disciplines - defining problems and generating ideas (creativity) and selecting those ideas, developing and then commercialising them (innovation).
Understanding Every Aspect of Your Organization
GET TO KNOW YOUR ORGANIZATION: If you don't understand an aspect of the organization or a procedure within it, ask. If you still don't understand, ask again.
Develop Your Managers and Keep Your Staff
Following on from the last edition of The Organised Times where we spoke about developing the people in your business, this week we're focussing on the importance of the continual development of your managers.Leadership comes from the top down.
Virtual Assistance: A Money Saving Opportunity For Employers
What is a Virtual Assistant? A Virtual Assistant is a highly skilled, independent entrepreneur who provides business services in a remote or virtual environment. Some have used terms like telecommuter or working from home.
The Retailers Calendar
The Julian calendar we use to pass the time every day, every week, every month and every year is the one most commonly used by businesses. Its general availability and familiarity make it a natural selection.
Setting a Pitiful Example: Twenty-six Warnings to Heed *
TO: All Parents [and Employers and Managers]From: Your Child and/or EmployeeDate: The present timeRe: Don't Spoil me; Teach Me1. Don't spoil me.
Vampire Meetings and How To Slay Them
Meetings can be like mythical vampires - sucking the life out of intelligent and creative people. And sucking the funds out of businesses.