Key Performance Indicators, also known as KPI or Key Success Indicators (KSI), is used significantly to present or identify a few factors that organisations should focus on to be successful. This is because they serve as a powerful and meaningful tool to define and measure the progress of their pre-set goals. As such, the key impetus for using KPI was the notion that factors which get measured are more likely to be achieved versus factors which are not measured. Hence, I decided to bring it into our today's discussion, with the hope that you too equip yourself with this tool.
i) What Does Key Performance Indicators (KPI )Mean?
A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their strategic and operational goals. KPIs vary between companies and industries, depending on their priorities or performance criteria.
ii) Investopedia explains Key Performance Indicators
A company must establish its Strategic and Operational goals and then choose the KPIs which best reflect those goals.
For example, if a software company's goal is to be the fastest growing company in its industry, its main performance indicator may be the measure of annual revenue growth. You may find some KPIs in some annual reports. Also, KPIs are often refer to as the Industrial Standards, in that particular sector.
As usual, once an organization has formed its mission, identified all its stakeholders, and defined its goals, a useful tool to measure its progress toward those goals is required. And Key Performance Indicators come in to the picture, to play the role like measuring tapes.
The Key Performance Indicators selected must best 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.
I will discuss these three main issues in more depth:-
a)Key Performance Indicators must be in quantifiable measurements.
An organisation may have chosen the percentage of its income that comes from return customers as KPI. A school may focus its Key Performance Indicators on graduation rates of its students.
b) Reflect The Organizational GoalsA company has one of its goals "to be the most profitable company in our industry" will have Key Performance Indicators such as "Pre-tax Profit" and "Shareholder Equity" that measure its profit.
On the other hand, a school which is not concerned of making profit, will chose different Key Performance Indicators. KPIs like "Graduation Rate" and "Success In Finding Employment After Graduation", precisely reflect the school's mission and goal.
c) Must Be Quantifiable and MeasurableIn order for it to function, Key Performance Indicator must be translated into meaningful ratios or percentage or value, which accurately define its goal, that can be quantifiable and measurable. To make this point clearer, just take an example of a KPI such as "Be The Most Popular Company". You can see it is not clear and very subjective because there is no way to measure the company's popularity or compare it to others.
Another good example we can look at, is a general goal such as "Generate More Repeated Customers", is meaningless because it does not distinguish between new and repeat customers.
Once the Key Performance Indicators is defined, it is good to use them constantly throughout the years so that you can measure them over a longer period. To make it more meaningful, you may consider whether to breakdown into KPI components. For example a KPI of "Increase Sales", you need to consider whether to break down into units sold or dollar value of sales.
Further considerations, as append below, may need to be considered on Good Returns or discount
i) whether it needs to be deducted from sales in the month of the sales or the month of the returns?
ii) whether sales needs to be recorded at list price or at the actual sales price?
It is also a good practice to use your pre- set targets, as your benchmark, for each Key Performance Indicator.d) Must be Key To Organizational Success
KPIs must be slected from those Critical Factors that are essential to the organization reaching its goals. It may be good to keep the number of KPIs small so as to keep everyone's attention focused on achieving the same KPIs. KPIs should not be easily achievable,
It must be stressed that what is important here is that the KPIs must help the company to meet its overall objective.
Trust the above discussion have given you a good understanding of its concept and application.
Please feel free to share your view/ thought in this issue. Thanks and look forward to hearing from you.
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