- Key Performance Indicator
On Key Performance Indicators (KPIs)
Measurement as a human activity is not new. It emerged in early history as a mean for discovery and sense making. Archaeologists consider the first measurement tool used in human history to be the Lebombo bone, a baboon fibula containing 29 cut notches. Dated 35,000 BC, this tally stick was discovered in the Lebombo mountains in Swaziland.
Evaluation, as a form of measurement was used as early as the 3rd Century AD, when emperors of the Wei Dynasty rated the performance of the official family members. The biased nature of individual performance evaluation was noticed by Chinese philosopher Sin Yu, who reportedly criticized a rater employed by the Wei Dynasty with the following words: “The Imperial Rater of Nine Grade seldom rates men according to their merits, but always according to his likes and dislikes”.
A major milestone in making the connection between measuring as a human activity and performancewas in 1494, when Luca Pacioli published in Venice ‘Summa de arithmetica, geometrica, proportioni et proportionalita’ (‘Everything on arithmetic, geometry, proportions and proportionality’). It detailed a practice the Venetian sailors had in place to evaluate the performance of their sailing expeditions, which became the basis of the double-entry accounting system.
The subjective nature of individual performance evaluations and the dominance of financial indicators for evaluating enterprise performance became stepstones for performance management in human activities.
The industrial revolution added to this combination the “organization as a machine” metaphor that played a major role in driving improvements in efficiencies and effectiveness. The result was an organizational performance management model based on mechanistic, command-and-control thinking, driven by subjective individual assessments and financial indicators and crowned by pay-for-performance arrangements.
Did it work? To a certain extent, yes. Many organizations flourished and matured based on this model.
Does it have flaws? Many. And while historical circumstances attenuated them in time, today’s environment amplifies and exposes them at an accelerated rate.
Is there a better way? Yes, but it is not simple. It requires a change at multiple levels, from the underlying philosophy of performance, to mentalities and processes. This is not easy.
Over time, the use of Key Performance Indicators (KPIs) became synonym to performance measurement and management. KPIs are the link between the old and the new in performance management. Their use, however, is much richer and rewarding in an environment based on organic performance architecture principles:
Organizations are echo-systems in their own right. They vary in terms of maturity and the environment in which they operate. As such, their use of performance management systems should reflect their own “personality”. You can try an igloo in Sahara, but it won’t work. The performance architecture of each organization needs to be unique and to reflect its internal and external environment.
System thinking provides a much richer context for understanding and improving performance. Command-and-control worked in time for the army, for increasing productivity of unskilled workers during the industrial revolution and for organizing large organizations (such as the public service). Today, knowledge workers form the majority of the workforce in developed economies, operate in a much more interconnected environment and have to make decisions at an accelerated pace. Understanding the systems in which we operate, analyzing flow and learning based on data become ever more important today, and complement the traditional simplistic managerial approach of executing orders from above.
KPIs should be used primarily for learning. The role of KPIs should be the one of providing the required information to assist in navigating towards the desired results. The same principle is used by ants, who leave pheromone trails to assist each other in navigating towards the food source. Similarly, the nerve impulses travel through the different points of the nervous system, transmitting information. KPIs results should travel through the organization, facilitating communication, providing a base for analysis /synthesis and ultimately decision making across all levels of the organization.
Data accuracy in human administration is an elusive desideratum. Niels Bohr once said: “Accuracy and clarity of statement are mutually exclusive”. Accuracy is a challenge in exact sciences and even more in human administration. Striving to obtain any KPI data is a challenge in itself for many organizations and data accuracy is an even bigger ask. The use of KPIs should acknowledge this aspect and be oriented towards making the most out of existent data, oftentimes by using variance intervals. This approach is used by the human body. If the temperature drops under a safe limit, we shiver. If the temperature increases, we sweat. Both are performance improvement initiatives of the body, aimed to regulate its temperature back to safe limits. The KPI here is the temperature. While it is not a constant, its trend is good when within certain safe limits.
The use of KPIs for rewards and punishment should be limited and driven by self-assessment. Purposeful oriented behavior is a characteristic of living organisms. For humans and many other species, this behavior is amplified by rewards and punishment. Along with this amplification, risks are amplified, too. Gaming of results, lack of cooperation, decreased morale and work accidents are some of the undesired consequences. On the other hand, the majority of nerve impulses in the human body transmit general information. Only in particular situations, pleasure or pain signals. Similarly, the use of KPIs for rewards and punishment should be the exception to the rule, rather than the norm.
Embedding KPIs in organizations through visualization and communication of KPIs results is the key to maximizing their value added. Variations in the KPIs used by the human body are felt by our senses as their impact is sensory rich. Similarly, KPIs used in an organizational context should be embedded in everyday use and be a part of the working experience. The most important aspect of communicating KPI results is their visual representation. This is key, both in terms of optimizing the layout of the data representation and the presence of visual displays in the working environment. The range of media is diverse today: posters, whiteboards, banners, LED and LCD monitors should be combined to bring results to life across the organization. KPI results should not be restricted to paper reports and computer screens anymore.
New philosophy of performance, driven by self-assessment and purposeful achievement as a mean to happiness. While happiness means many things to many, a common expression of this feeling is the result of the purposeful achievement of a desideratum. Achieving something we want, while shared with others, is about us and reverberates strongly in our inner self. Transposing this powerful catalyst of performance in both our personal and organizational life is facilitated by a new paradigm: Happiness is driven by achievement. Achievement is an expression of performance. If we want to be in control of our happiness, we should be in control of our performance.
Self-assessment of performance results is not easy. However, if more emphasis is placed on building this capability in each employee, organizations can benefit by creating a rewarding environment conducive to happiness. In this environment, managers can focus on understanding and improving the working system, while employees can focus on self-assessment of the results’ achievement, learning and communicating. Purposeful achievement of results in a well-structured working system would bring both individuals and organization much closer to happiness and fulfilment compared to the payment of bonuses in the current command-and-control driven dominant paradigm.
KPIs are here to stay. The question we have to answer is how do we want to use them: mechanistically or naturally?
Measure, Metric, Performance Indicator or Key Performance Indicator?
In many domains of human activity, the use of tools is essential for the achievement of results. Measurement and evaluation make no exception, being equipped with both conceptual and physical tools. Of the first category, at the core of any performance measurement and management system are the measures, metrics, indicators or KPIs used.
Both academic and practitioner literature uses interchangeably these terms, oftentimes even within the same organization. At smartKPIs.com, we have adopted the following definitions for these terms:
Measure - A number or a quantity that records a directly observable value or performance. All measures are composed of a number and a unit of measure. The number provides magnitude (how much) for the measure, while the unit gives number a meaning (what). Examples of unit measures are: dollars, hours, meters, inches, etc.
Indicator - Indicators are defined in many ways but the common sense for all of them is that they refer to specific information. Thus, the Organisation for Economic Co-operation and Development (OECD) defines an indicator as “a qualitative or quantitative factor or variable that provides a simple and reliable means to measure achievement, to reflect changes connected to an intervention, or to help assess the performance of a development actor”.
Metric, Performance Measure or Performance Indicator - A generic term encompassing the quantitative basis by which objectives are established and performance is assessed. It helps quantify the achievement of a result, the quantifiable component of an organization's performance. In the context of measuring and managing performance these terms are used interchangeably.
Key Performance Indicator (KPI) - A selected indicator considered key for monitoring the performance of a strategic objective, outcome, or key result area important to the success of an activity and growth of the organization overall. KPIs make objectives quantifiable, providing visibility into the performance of individuals, teams, departments and organizations and enabling decision makers to take action in achieving the desired outcomes. Typically, KPIs are monitored and distributed in dashboards, scorecards and other forms of performance reports.
While on paper the terms listed above can be differentiated, in practice the difference the difference between them is blurred and at some extent irrelevant. As long as their purpose and use is clear and understood by members of the organization, whether they are called performance measures or KPIs is a matter of preference.
What is a smartKPI?
At smartKPIs.com, we assess each example entered in the online database and label it as measure, performance indicator or KPI. It is an empirical and subjective approach to catalogue each entry based on relevance. Ultimately, all entries in the online database are considered KPI examples. In addition, to single out the entries that stand out in terms of relevance, we introduced a new label:
smartKPI - A Key Performance Indicator example available on smartKPIs.com, that is recommended as being the most relevant and truly "Key" for organizational performance. They are selected by the editorial team of the website based on criteria such as:
- Listing in academic and practitioner publications that analyze their usefulness;
- Frequency of use by Functional area / Industry;
- Fulfillment of the criteria of how good KPIs should be defined and used.
Performance measurement terminology popularity
Regarding the popularity of performance measurement terminology, as of March 2011, www.google.com searches illustrated the following results:
- “kpi” = 7,520,000 results
- “kpis” = 7,330,000 results
- “key performance indicator” = 298,000 results
- “key performance indicators” = 1,690,000 results
- “performance measure” = 891,000 results
- “performance measures” = 6,180,000 results
- „performance indicator” = 420,000 results
- „performance indicators” = 10,700,000 results
Types of KPIs – A taxonomy
The following list provides an explanation of several popular terms characterizing KPIs
Leading KPI - Drive the performance of the outcome measure, being predictor of success or failure.. Examples of leading indicators are: “%Employees involved in the innovation process”, “% Conversion rate”, or “%Inventory quality ratio (IQR).
Lagging KPI - Type of indicator that reflect the success or failure after an event has been consumed. Examples include: “$ Operating profit per room”, “$ Earnings before interest and taxes (EBIT)”, or “$ Cost avoidance savings”.
Input KPI - Reflects assets and resources invested in or used to generate business results. Examples include: "# Headcount", "$ Cost per broadcast hour" and "# Knowledge materials distributed to employees".
Process KPI - Refers to the efficiency or productivity of a business process. Examples include: "# Product-repair cycle time," "% On time delivery" "# Conflicts arose during the project", "# Average call handling time", and “# Mean time to repair".
Output KPI - Measures the financial and nonfinancial results of business activities. Examples include: "$ Bonus payout", "# New customers acquired", or “$ Revenue per successful call”
Outcome KPI - Reflects overall results or impact of the business activity in terms of generated benefits, as a quantification of performance. Examples include: “% Customer retention”, “% Employee turnover” or “% Brand awareness”
Qualitative KPI - A descriptive characteristic, an opinion, a property or a trait. The most common ones gauge customer or employee satisfaction through surveys. While the survey data itself is quantitative, the measures are based on a subjective interpretation of a customer’s or employee’s opinions.
Quantitative KPI - A measurable characteristic, resulted by counting, adding, or averaging numbers. Quantitative data is most common in measurement and therefore forms the backbone of most KPIs. Operational systems that manage inventory, supply chain, purchasing, orders, accounting, financial systems, all gather quantitative data by means of KPIs. Other examples of quantitative KPIs are “# Employee tenure”, “# Units per man-hour” or “# Maintenance backlog”
Functional area KPI - A KPI that is relevant for an organizational main capability and is valid across multiple organization typed and industries.
Industry KPI - A KPI that is specific for a particular line of operations or industry
Note: The management of a particular situation, however, will often require a combination of more than one of the above. Performance indicators should be actionable in the sense that when an indicator reflects a situation or change that exceeds a pre- agreed tolerance, managerial intervention or corrective actions should be possible.
All KPIs are based upon measurement. There are different types of measurements with the use of KPI.
- Binary or absolute: these are in effect ‘yes’ or ‘no’ KPIs, and they are indicators of whether a ‘desired state’ is present or not.
- Comparative: these KPIs take the situation as it is and measure it to against a relevant and anticipated state:
- comparisons of cost, savings, efficiency gains, etc actual against budgets or plans
- comparison of system development progress with pre-approved schedule
- comparison against industry or sector benchmarks
- comparison against known result for the organization for a similar period or event or project.
- Trend based: these KPIs require the collection and presentation of comparative information across a period of time:
- systems performance
- software development performance against schedule
- software maintenance backlog
A KPI taxonomy by Functional Area and Industry
KPIs by Functional Area
- Accounting Systems KPI
- Cash Management KPI
- Control KPI
- Cost Analysis KPI
- Planning and Reporting KPI
- Transactions / Accounts Payable / Accounts Receivable KPI
Corporate Services KPI
- Administration / Office Support KPI
- Corporate Travel KPI
- Facilities / Property Management KPI
- Legal Services KPI
CSR / Sustainability / Environmental Care KPI
- Corporate Social Responsibility KPI
- Environmental Care KPI
- Asset / Portfolio management KPI
- Financial stability KPI
- Forecasts & Valuation KPI
- Liquidity KPI
- Profitability KPI
Governance, Compliance and Risk KPI
- Compliance and Audit Management KPI
- Governance KPI
- Risk Management KPI
Human Resources KPI
- Compensation and Benefits KPI
- Efficiency and Effectiveness KPI
- Recruitment KPI
- Retention KPI
- Service Delivery KPI
- Talent Development KPI
- Workforce KPI
- Working Environment KPI
Information Technology KPI
- Application Development KPI
- Enterprise Architecture KPI
- IT - General KPI
- IT - Security KPI
- Network Management KPI
- Service Management KPI
Knowledge and Innovation KPI
- Innovation KPI
- Knowledge Management KPI
- R & D KPI
Marketing & Communications KPI
- Advertising KPI
- Marketing KPI
- Public Relations KPI
Online Presence - eCommerce KPI
- eCommerce KPI
- Email Marketing KPI
- Online Advertising KPI
- Online Publishing - Weblogs KPI
- Search Engine Optimization (SEO) KPI
- Web Analytics KPI
Portfolio and Project Management KPI
- Benefits Realization Management KPI
- Portfolio Management KPI
- Project Management KPI
Production & Quality Management KPI
- Maintenance KPI
- Production KPI
- Quality Management KPI
Sales and Customer Service KPI
- Customer Service KPI
- Sales KPI
Supply Chain, Procurement, Distribution KPI
- Contract Management KPI
- Inventory Management KPI
- Logistics / Distribution KPI
- Procurement / Purchasing KPI
- Supply Chain Management KPI
KPIs by Industry
- Crops KPIs
- Forestry and Logging KPIs
- Livestock, Hunting and Fishing KPIs
Arts and Culture KPIs
- Event Production and Promotion KPIs
- Libraries and Archives KPIs
- Museums KPIs
Construction & Capital Works KPIs
- Civil Engineering KPIs
- Construction of Buildings KPIs
Education & Training KPIs
- Academic Education KPIs
- Training and Other Education KPIs
Financial Institutions KPIs
- Banking, Mortgages and Credit KPIs
- Insurance KPIs
- Investments KPIs
Government - Local KPIs
- Budget and Finance KPIs
- Community - Quality of Life KPIs
- Culture, Recreation and Entertainment KPIs
- Economic & Business Affairs KPIs
- Environment KPIs
- General Local Administration KPIs
- Public Safety KPIs
- Public Services KPIs
- Social Services KPIs
Government - State / Federal KPIs
- Agriculture, Fisheries and Forestry KPIs
- Education KPIs
- Employment and Workplace Relations KPIs
- Finance / Treasury KPIs
- Foreign Affairs and Trade KPIs
- General State Administration KPIs
- Healthcare KPIs
- Human / Social Services KPIs
- Law and Justice KPIs
- Military, Security and Defense KPIs
- Resources and Energy KPIs
- Tourism KPIs
- Transportation and Infrastructure KPIs
- Emergency Response / Ambulance Services KPIs
- Healthcare Support Services KPIs
- Hospitals KPIs
- Medical Laboratory KPIs
- Medical Practice KPIs
- Preventive Healthcare KPIs
- Veterinary Medicine KPIs
Hospitality & Tourism KPI
- Food and Beverage Service KPIs
- Hotel / Accommodation KPIs
- Tour Operator KPIs
- Travel Agency KPIs
Infrastructure Operations KPIs
- Airports KPIs
- Ports KPIs
- Railways KPIs
- Roads KPIs
- Broadcasting (TV and Radio) KPIs
- Film and Music KPIs
Non-profit / Non-governmental KPIs
Postal and Courier Services KPIs
Professional Services KPIs
- Accounting Services KPIs
- Business Consulting KPIs
- Engineering KPIs
- Legal Practice KPIs
- Recruitment / Employment Activities KPIs
Real Estate / Property KPIs
- Property Management KPIs
- Real Estate Development KPIs
- Real Estate Transactions KPIs
- Coal and Minerals Mining KPIs
- Oil and Gas KPIs
- Sustainability / Green Energy KPIs
Sport Management KPIs
- Coaching / Training KPIs
- Sport Club Management KPIs
- Sport Event Organization KPIs
- American Football KPIs
- Badminton KPIs
- Baseball KPIs
- Basketball KPIs
- Cricket KPIs
- Football / Soccer KPIs
- Rugby KPIs
- Tennis KPIs
Telecommunications / Call Centre KPIs
- Call Centre KPIs
- Telecommunications KPIs
- Airlines KPIs
- Land Transport (Road & Rail) KPIs
- Local Public Transport KPIs
- Marine Transport / Shipping KPIs
- Electricity KPIs
- Natural Gas KPIs
- Water and Sewage KPIs
KPIs formulation and selection
The saying “What gets measured gets done” illustrates the importance of the right things being measured and inappropriate things being left out. The choice of KPIs will have a major impact on the operation and direction of the organization, and knowledge of the factors driving behavior and influencing performance becomes crucial.
An organization tackling the task of developing a suite of KPIs needs to address a couple of questions like:
- What topics should the KPIs focus on? and
- What aspects should be measured with KPIs?
Focus on the right topics
KPIs should focus on aspects that are important for the organization. This means that the organization should be at all-time clear about what is seeking to achieve – its core objectives- and how is going to achieve them. KPIs should focus on the actions and services provided at each level in the organization to achieve its objectives. High level KPIs will address corporate issues while lower level KPIs will look at operational and day to day matters. Also an important rule is that organizations should be careful to avoid the common pitfall of measuring that which is easily measured, rather than that which should be measured.
Focus on the right KPIs
It is important to develop a balanced set of KPIs that reflect all the aspects of the service. There are several different frameworks that can be used to do this.
- The 3Es framework: use the three dimensions of economy, efficiency and effectiveness
- The Balanced Scorecard: suggests that four perspectives are needed in an KPI set to present a comprehensive view of the performance of the organization (service, user perspective; internal management perspective; learning perspective and financial perspective)
- Best Value KPI
Focus on KPIs formulation
The formulation of the right KPIs should follow certain specific steps. First of all, avoid reinventing the wheel. The World Wide Web gives access to a vast range of KPIs and may therefore be great help in a first orientation.
Secondly, attempts to formulate a complete indicator straight away seldom results in good quality KPIs. Therefore, based on the characteristics of SMART KPIs (Specific, Measurable, Achievable, Relevant, Time-bound) during the formulation of a KPI, the following questions need to be asked:
- What? (brainstorm on the variables, which may provide means to measure change in the objectives or phenomena)
- How much? (to define the magnitude of the change we want to achieve)
- Who? (in order to clarify who belongs to the target group)
- Where? (specific information on the intervention area)
- When? (definition of the time frame)
A taxonomy of sources used for KPI selection
Working with Key Performance Indicators (KPIs) requires selecting a group of relevant KPIs first. There are many options for this: start with a blank page, review other sources, or get someone else (such as a consultant) to do this for you among others.
Some of the general rules to follow on embarking on such a journey are:
- Do your research. Selecting KPIs is a learning experience, a journey in itself. There are many insights to gain by taking it step by step instead of just getting to the destination. Research is an important component of this journey.
- Acknowledge the uniqueness of your environmental settings. While some KPIs are widely used across organizations (i.e. % Satisfied customers, $ Sales revenue and % Profit rate), others are unique to each organizations as they reflect their strategy and specific conditions of operating. Each organization should select the KPIs based on their relevance and not on their popularity.
- Clarify what you want to achieve. If you want to improve things and learn from KPIs, you should not avoid selecting challenging KPIs, difficult to measure or difficult to improve. The easy choice is selecting KPIs that make you look good. While this may serve some purpose on the short term, on the medium to long term it will impact the relevance and credibility of KPIs in the organization.
Having these general rules in mind, the question is: “Where do we do our research to inform the KPI selection process?”. The main sources of information can be grouped in three categories:
- Front-line employees input – they are at the core of the value generation chain and know what matters for operational success.
- Input from managers – due to their perspective across the value generation process, role in shaping strategy and their relationship with various stakeholders.
- Board input – in many instances they mandate the use of specific KPIs and their selection in strategic / operational is non-negotiable.
- Input from suppliers – their insight in the supply chain is valuable as they can bring an external perspective to what needs to be measured and improved
- Customer input – their opinion matters.
- Strategic development plan (3-5 years)
- Annual business/strategic plan
- Annual reports
- Internal operational reports
- Competitor review reports
- Printed catalogues (books such as: Performance Prism)
- Online catalogue (www.smartKPIs.com)
- Annual reports of other organizations (a good repository is KPIs in Practice)
- Expert advice (recommended lists such as the one in Performance Architect Update 35)
- Questions in discussion forums (such as LinkedIn or Answers)
Individually or in combined, these sources can generate a list of prospective candidates for KPI selection, anchored to organizational objectives. Ultimately the decision on which KPIs will be used should be based on discussions within the organization to determine the most relevant ones. Consultants can be useful in this process as facilitators, but not necessarily as “fountains of truth”. Their role should be more as guides on this journey, providing tools, information and advice, but not developing the final list of selected KPIs in an ivory tower.
KPIs are the measures that monitor the performance of key result areas of business activities, which are absolutely critical to the success and growth of the business. The development and use of the KPIs should form the basis for the analysis of an organization’s current performance, its future requirements and the improving strategies required for ongoing success.
Getting the most from your KPIs
The ultimately purpose of performance management being to drive future improvements in performance, there are two main ways you can use KPIs to achieve this kind of management power.
The first is to use your KPIs to spot potential problems or opportunities. Remember, your KPIs tell you what's going on in the areas that determine your business performance. If the trends are moving in the wrong direction, you know you have problems to solve. Similarly, if the trends move consistently in your favor, you may have greater scope for growth than you had previously forecast.
The second is to use your KPIs to set targets for departments and employees throughout your business that will deliver your strategic goals.
During the use and applications of KPIs certain principles should be taken in consideration:
- KPIs should not be an end in themselves, but be considered as an aid to management. They are a start to a proper informed debate that should lead to a plan for improvement.
- KPIs should be seen within their local context and have more a meaning as a comparison over time than as a comparison between organizations.
- A set of KPIs should be balanced. For example, measures of efficiency should be set against measures of effectiveness and measures of cost against quality and user perception.
- After being proposed and applied, KPIs should be reviewed and updated. The review determines the management utility of each indicator and the feasibility of getting source data for continuing use.
- The targeted performance description, which is described in measurable terms through the KPIs, must be deployed to the organizational level that has the authority and knowledge to take the necessary action.
Every initial proposal for KPIs is expected to be imperfect. However, it is important for the organizations to understand and apply the appropriate KPIs so that they can develop some experience in using them from which they can derive real expertise.
KPI visualization and enabling software
The premise behind data visualization is that looking directly at the numbers is not always the best way to understand the data. Data visualization is the process of converting raw numerical or tabular data into a graphical depiction of the data. One of the main goals of data visualization is to support decision making through the use of properly designed graphical representations of information. When information is presented in a visual format, it allows users to more quickly perceive patterns or properties that may not have been anticipated or even discovered had the data been displayed differently - allowing users to draw valuable conclusions more intuitively, holistically and rapidly. In relation with KPI visualization and representation graphical approaches adopted by the public and private sector include:
This is an analogue of a vehicle dashboard or aircraft cockpit display. The intention is to provide the person with a graphical representation of KPIs that enable them to take action. Techniques applied include digital, ribbon and dial displays, moving bar graphs, and ticker tape analogues. Dashboards, which provide graphical depictions of up-to-the-minute KPIs across a company, are becoming increasingly vital. Customized information relating to the KPIs can be integrated from multiple components into a unified display. The goal is to respond faster to change and put out fires before it is too late. Dashboards may be customized in a multitude of ways to display various data points and provide a powerful way of monitoring the organization's performance in real time.
By visualizing data through the use of charts, graphs and maps, properly designed dashboards provide a high-level view combined with the ability to drill down into underlying information thus making it easier to identify trends and locate exceptions to the trends The proper use of color in a dashboard cannot be underestimated. For example, some managers might like a display that looks similar to a series of stoplights, which is populated with KPIs such as daily sales or hourly factory output. If all systems are green, the situation is fine. If one turns red, there is a problem that needs immediate resolution. Thousands of separate measurements can be abstracted into relatively simple representations. Drill down allows the decision-maker to dig into the red light details without getting bogged down with departments which are working fine.
When reviewing KPIs, color signals, are used to visualize the difference between the current situation when it is compared to the desired outcomes. This is an effective tool for communication. Red signals visualize that immediate action is necessary, while yellow is used to express that close attention is needed. Green is used when the relationship between current and target measures are satisfying.
These are particularly useful where the KPI is most informative when viewed as part of a trend or when compared with other linked or comparable factors.
Characteristics of good KPIs
There are a number of general characteristic that can help to ensure that proposed KPIs will be useful and effective.
A KPI should be relevant to the organization. One way of helping to ensure the relevance is to relate the KPI to the strategic goals and objectives of the organization or of a specific service area. KPIs should ideally also be relevant to the people providing the data and to the users of the KPIs, but it may not be possible for a single KPI to be relevant to all users due to differences in perspectives and interests.
A KPI should have a clear and intelligible definition in order to ensure consistent collection and fair comparison. Vague descriptions can lead to misinterpretation and confusion. To tight or to broad definitions could also create problems.
Easy to understand and use
It is important that KPIs are described in terms that the users of the information will understand, even if the definition itself have to use technical terminology. KPIs focused on the public should avoid management jargon, or abstract concepts.
A KPI should ideally be comparable on a consistent basis both between organizations and over time. An essential aspect of the comparability of KPIs is the inclusion of the context within which the comparison is taking place. External and internal circumstances can differ to such a degree that comparison is invalid.
A KPI also needs to be collected and calculated in a way that enables the information and data to be verified. The KPI should be based on robust data collection systems, and it should be possible for managers to verify the accuracy of information and the consistency of the methods used.
Another important criterion is to balance the cost of collecting information with its usefulness. Where possible, a KPI should be based on information already available and linked to existing data collection activity.
Service managers should be able to influence the performance measured by the KPI. If this is not the case, the incentives for making an effort to improve performance will diminish, and the KPIs may be regarded as unfair, and discourage staff and managers.
A KPI should be responsive to change.
The definition of a KPI ought not to deter organizations from developing innovative processes or coming up with alternative methods, systems or procedures to improve service delivery. KPIs should ideally be constructed to allow such innovations take place.
All KPIs should be statistically valid.
The KPIs should be based on data that are available within a reasonable time scale. This time scale will depend on the use made of the data. Some data is collected on a weekly or even a daily basis, as it is needed in the operation management of the services, whereas other is available once a year for more strategic and long term purposes.
*Adapted from East Dorset District Council (2003), Assessing ICT Performance, Information and Communications Technology Fundamental Service Review Team, Public Report, Agenda Item No 6.
KPI framework review and assessment
Data driven decision making is at the core of scientific management. The ability to select the right data points and collect accurate data sets is a key enabler of organizational performance management systems.
Assessing the organizational performance measurement capability represents a reality check that assists in developing a roadmap for improvement. The review and analysis methodology can be based on a Performance Measurement Maturity Model and usually takes in consideration 5 important dimensions:
- KPI Identification & Selection – The selection of right KPIs has a major impact on the organizational strategic directions. KPIs should focus on actions and services provided at each organizational level in order to achieve the organizational strategic objectives. Most important it must be considered at all times the measurement of what is important and not necessarily easy.
- KPI Documentation and Alignment – The process of KPIs documentation secures that the selected indicators are actionable, by establishing definitions, purpose, calculation formulas, targets, methods of data collection and reporting and data owners and custodians.
- KPI Collection and Interpretation – The process of KPIs collection and interpretation needs to be supported by a well-defined and optimized system solution that responds to the performance measurement collection needs of the organization. Responsible for data gathering must be identified and it must be assured data availability for each KPI tracked in the Performance Scorecards and Dashboards.
- KPI Reporting & Visualization – Regardless of the parties involved in the performance reporting process it must be assured that the process is effective and efficient. An inefficient and ineffective reporting system will not generate any significant positive effect on improving the performance of an organization. Another important part of the measurement process is data visualization. Data visualization involves processing information in a graphic description of it in order to be understood and transmitted more easily, faster and more efficiently.
- KPI Feedback and Re-alignment – This process is one of the most important parts of the performance measurement cycle. It secures that the KPIs are kept on track and aligned with the organizational strategy, in order to provide with valuable information that will allow improved organizational practices
10 KPIs recommended by smartKPIs Performance Architect
smartKPIs.com contains over 6,400 KPI examples from 14 functional areas and 24 industries. A question raised by many is: ‘If you are to pick a handful, which ones would stand out?’
Selected below are 10 KPI examples of what we consider to be smartKPIs: they are widely used and relevant, the superstars of KPIs. This is not to say any company should use them. Simply, a list of 10 KPI examples anyone should take note of:
% Net profit rate – A profitable business is a sustainable business. It is however important to have realistic expectations. Returns of over 30% may be speculative, while in some economies returns of under 5% are lower than interest rates.
$ Revenue – Growing revenue is an expression of having the right product/service mix, supported by the right team delivered at the right time. Converting opportunities in sales is the essence of a sustainable business.
% Profitable customers – Getting the balance right is the basis for financial success. Although oftentimes it is difficult to track, it is ads a great deal of insight and informs decision making. Activity based costing is key to getting this KPI right.
# Net Promoter Score – Having customers that are not only satisfied, but are actively endorsing a company/product/service. Recently it has become a favorite KPI of customer satisfaction, due to its simplicity and relevance.
% On-time delivery – An operational focused KPI with wide reaching implications. It can be used in a variety of industries and functional areas, as time is an important resource to anyone. Oftentimes it acts as a bottleneck as it is influenced by many KPIs and it impacts a great deal of other KPIs.
% Projects on time, on budget and according to specifications – getting the triangle right is difficult and priorities may vary from one project to another. It is however a useful base to start from. The KPI can be customized as per the preference of project boards and project managers to cover only specific aspect of the triangle.
% Processes optimized – One key managerial responsibility is creating the right environment for the staff members to operate in. This includes using a management system that is well thought of and refined. Mapping and improving work processes is key to using a performance oriented architecture.
# Employee engagement – Some say money can’t buy it. It is that extra level of commitment that is induced by motivating purposes, inspiring leaders and working environments that facilitate happiness in the professional life.
# Proposed improvement ideas per employee – inspired by H.W. Heinrich’s work in the 1930s or “the Pyramid Theory” as some call it. They main results are visible at the top, but you need to monitor the base to ensure the right outcomes are achieved.
$ Investment in learning per employee – Not the ideal KPI of training impact, but a widely used substitute. It monitors both training spend and the wide allocation of funds to avoid serial trainees.
An issue with KPI examples is that names don’t tell the complete story. To find out more about each of these examples and thoroughly understand them a separate blog post would be required for each, complemented by a complete KPI documentation form. In the meantime, www.smartKPIs.com is available to further explore relevant and well documented KPI examples.
Top 10 KPIs of 2010
Key Performance Indicators (KPIs) are today some of the most popular management tools. From the National Museum of Australia, to the First Bank of Nigeria, from the Panama Canal Authority to Rolls Royce, from the Ministry of Education in Brunei Darussalam to the American Medical Association, KPIs are used to understand, learn and improve performance across industries, departments and teams.
In this environment marked by the coming to age of KPIs as management tools, smartKPIs.com represents the go to place for information about the use of KPIs across the world. As a research driven online platform for performance management knowledge integration, the website contains over 6400 examples of KPIs used at organizational and individual level, pre-populated Strategy Maps, KPI Dashboards and Scorecards, interviews with practitioners, consultants and academics and references 1000 reports illustrating the use of KPIs and organizational objectives in practice. At its core is the largest online database of thoroughly documented KPI examples from 14 business functional areas and 24 industries. The smartKPIs.com research program is supported by a community formed of tens of thousands of members from over 190 countries and territories.
Interest in KPIs and their use across industries in on the rise around the world, driven by both government regulations and by the benefits they bring in terms of accountability, transparency and achievement of results. This trend was reflected in 2010 by the hundreds of thousands of visits to the smartKPIs.com website and the many KPIs visited, bookmarked and rated by members of the smartKPIs.com community.
The Top 10 KPIs of 2010 report is a synthesis of what smartKPIs.com is all about: it brings together an overview of how KPIs are used in practice today, by combining input from the smartKPIs.com community with research and analysis from the editorial team.
In 2010, the list of the most viewed KPIs in smartKPIs.com was dominated by KPIs specific to functional areas (8 out of 10), which was expected considering their pervasiveness across industries:
10) # Maintenance backlog
Monitoring and measuring maintenance backlog is one of the most effective ways for managing maintenance workload, as an accurate managed backlog has a direct impact to effectively planning and scheduling the production activities. These aspects were acknowledged by many organizations throughout 2010, who acknowledged and maintenance backlog as a leading indicator for customer satisfaction.
9) # Inventory to sales ratio
Keeping the right balance between the inventory value and volume of sales is one of the major challenges for organizations. Especially in times of economic downturn, when the demand levels seem to drop down behind the offer levels, organizations must stay alert and keep a close eye of their inventory to sales ratio.
8) # Earned man-hours
One of the best ways tracking project progress and productivity is to measure the level of earned man hours. Delivery of projects as planned is always a challenge and the use of KPIs for managing project performance is now common in many project management methodologies. Due to the universal presence of projects in business, the listing of a project management KPI in Top 10 most visited KPIs of 2010 is not surprising.
7) # Management to staff ratio
In 2010, many organizations suffered major structural changes, which oftentimes had an impact on headcount and managerial structure. The use of this KPIs is necessary the right balance is maintained in terms of work coordination. A healthy span of control has positive effects both on staff morale, stress levels and organizational productivity.
6) # Employee turnover
This KPI is closely linked to employee engagement and satisfaction in the workplace, as unhappy employees are more likely to leave. In 2010 personnel fluctuation was in the spotlight, but in an atypical way, due to the worldwide increase in unemployment, as many organizations had to let go a part of their employees.
5) # Units per man-hour
One of the most common KPIs used to measure productivity levels in most of the industries. Especially in the construction and manufacturing industries,it represents one of the two basic reporting methods used along with the volume of units produced. As productivity is at the core of traditional performance measurement, this KPI is bound to remain one of the most popular KPIs used in operations management.
4) % Realization rate
Tracking the realization rate was in 2010 one of the major focus areas for organizations delivering professional services. In challenging economic times, discounted rates are common practice, however they put further pressure on profit rates. Professional services companies achieving high realization rates usually have a strong company presence on the market and are recognized for their service quality.
3) # Berry ratio
Companies use profitability ratios in order to measure their ability to generate returns through effective allocation and use of available resources. A favorite for tax and transfer pricing analysts, the Berry ratio stands out as the most popular financial ratio in 2010. It has a long history and its name comes from Dr. Charles Berry (1930-2007), a specialist in industrial organization and applied microeconomics and professor at the Princeton University.
2) % Slow moving stock
Slow moving stocks are one of the most significant issues organizations have to deal with as such stocks can become obsolete and generate financial losses. In turbulent times, such as economic downturns, closely monitoring stock turnover is essential to ensure cashflow.
1) % Hospital bed occupancy rate
Topping the list of the most popular KPIs in 2010, this healthcare KPIs reflects the high level of interest in the sector in improving the performance of healthcare facilities. Driven by increasing pressure from patients for improved quality and volume of service and government regulatory compliance requirements, the use of KPIs in the healthcare industry makes it one of the most measured in the professional spectrum. Naturally, a healthcare KPI received by far the highest number of visits in 2010 on smartKPIs.com and continues to lead in popularity.
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