What is Key Performance Indicators ?
Key Performance Indicators (KPI) or Key Success Indicators (KSI) are the determinants that facilitate an organisation in defining and measuring its progress towards the achievement of predetermined goals. The companies need to measure the progress after setting-up the mission statement, identifying the company's stakeholders and defining the goals.
The key performance indicator is thus a business metric which a firm uses to measure progress against the identified goals. These goals are based on the understanding of customers, competitors, stakeholders. KPIs differ from . organisation to organisation.
Key Performance Indicators Examples, for Dominos, the key performance indicators are price and mass coverage, and for Pizza Hut, the performance indicators are variety, taste, ambience and differentiated marketing. KPIs thus involve analyzing data in the form of outcomes against each goal or objective.
It is very important for a company to identify the performance indicators for every critical success factor.
M.G. Dolence has defined key performance indicators as “numbers that can be used to indicate the effectiveness and efficiency of 'strategy and tactics." There is a significant difference between a critical success factor and key performance indicator. While the success factors are the essential conditions for success, the performance indicators help to measure the progress. While the critical success factors are based on a small set of factors that include soft and external data, the performance indicators are based on a bigger set of factors related to the internal data. In order to implement the performance indicators, a company needs to evaluate the current practices to measure and report them. There also needs to be a mechanism of constant review of the KPIs and monitoring of the same. The firm should make a list of issues and present them, but an efficient system needs a level of flexibility to add or remove some of the issues in early stages. Some of the most important data to be analysed can be yearly figures about an issue, budget data, trade-b offs, etc.
KPIs prove to be a very useful tool in strategic planning process of organisations. Organisations use KPIs to benchmark their implementation against the set yardsticks. Top management uses KPIs to make their strategic planning process more objective and scientific. This reduces the chance for human error and also makes the process more transparent and fair. Businesses track key performance indicators over time to gauge the success of their strategy and also the need to change the same if the desired results are not at par with the expectations.
Characteristics of Key Performance Indicators
The characteristic features of KPIs are as follows:
1) Non-Financial Measures :
Key performance indicators are the non-financial measures and cannot be expressed in monetary terms.
For example : the sale in rupees generated by a firm is an outcome. However, it results from many other factors like number of calls made, how many calls were productive, number of new customers added, number of customers lost, product performance and acceptance by customers. The monetary sales value is thus not a Key Performance Indicators as it is an outcome of these other factors.
2) KPIs are Measured Frequently :
KPIs are measured continuously or periodically (daily, weekly, etc.). Some KPIs should be monitored on an hourly or daily basis. On the other hand, some other KPIs can be measured on a weekly basis. Measuring the same on a monthly basis will not serve any purpose as the event cannot be controlled if the performance data related to the Key Performance Indicators is not received on time. Another property of KPI is that they have to be current or futuristic in nature. Measuring an activity that has already occurred as a KPI will not serve any purpose.
3) Monitored by the Top Management :
The involvement of the top management in monitoring the KPIs is quite essential. This is because Key Performance Indicators have a purpose. They need to be analysed and seen if the objective is being met. In case the KPI is not meeting the expectation of the management, then changes should be made in the strategy. These changes can only be done by top management.
4) KPIs are understood by Staff :
KPIs should be absolutely clear to all the staff members. There should be no ambiguity in the way they are framed. All the staff members should be in synchronization and in congruence with the objective of the KPIs.
5) KPIs have a Significant Effect on the Organisation :
Critical success factors and perspectives of balance score-card are affected by the KPIs. If the CEO focuses on the implementation of the KPI with the support of the employees, then the organisation is sure to achieve its pre-determined objectives.
6) Indicates the Actions to be Taken :
KPIs indicate the required actions to be taken. These factors tell the staff what to understand and measure.
Steps for Building Effective Key Performance Indicators
For building effective KPIs, following steps / Functions of Key Performance Indicators are needed to be followed:
Step 1 : Identify the Objectives :
It is very important for the owner of the business to be clear on what kind of goals he wants to set for the company. To do this, the top management needs to have a very good understanding of the existing state of the business and in what direction they want the company to develop. The goals that they want to set for the company have to be realistic yet ambitious.
For example, the business owner may want the company to grow at 25% p.a. but is that kind of growth rate possible in the industry considering the present market scenario? Will this require the company to make compromises in terms of product quality or customer satisfaction? The goals of the company also have to be relative to its functional areas. Also some goals need to be given a higher priority. Hence, the objectives of the company should consider all the related aspects and should be appropriately prioritized. Identifying the objectives requires knowing and determining many facets such as :
- Vision and mission of the company,
- Short-term and long-term objectives,
- Other social and environmental objectives, etc.
The business goals are also required to be split into. short-term and long-term business goals. The primary aim of most companies is profit maximization and long-term sustainability. Hence, once the current position of the business is identified, the KPIs can be set and customized to the specific needs of the organisation.
Step 2: Establish Relevant KPI Metrics :
Until and unless relevant KPI metrics are established, it is not possible for the organisation to measure its performance accurately. A business owner cannot operate on gut feel and whimsical statements like "I feel the progress is ok”. Progress needs to be tracked through solid measures which can be found out if the organisation is making the desired progress on the set KPIs. KPI metrics provide quantifiable data which is used to compare the actual performance against the set standards To establish meaningful and relevant KPIs, following questions are required to answer:
- What is the time duration to achieve the target?
- Is there any threshold limit to achieve the goal each time?
- What are the financial aspects related to goal achievement?
- Are the operating expenses of the company in line with the sales revenue being generated or do they need to be reduced?
It is thus very important to identify the related aspects that are needed to achieve the target, and boost the performance to match the standard consistently.
Step 3: Formulate an Action Strategy :
Once the objectives have been identified and the KPI metrics have been established, the last step is to formulate an action strategy that can assist in achieving the goals. The action plan also has to be dynamic as the KPIs are likely to change with the changes in the environment. It is very, important that the organisation does.not get too bothered by the details as by doing so it may miss out the ultimate objective. The action plan will lay the foundation and build a roadmap for the organisation. This will force the business owner to stick to the vision that the organisation has made and at the same time allow him to adapt with the changes in the environment. To analyse the changes in business needs, companies
use SWOT analysis Opportunities, and Threats) for assessing the changes required to be adopted. This will also highlight the gaps that the comnpany has vis-a-vis the business goals. The strategic leaders also have to be flexible as the strategies which were helpful in the past may no longer be relevant because of the changes in the company's environment. (Strengths, Weaknesses, Following questions should be asked when checking the performance:
- What was the target for last week or month?
- How was the performance of the company?
- What difference is needed to achieve the goal?
- Are the changes and adjustments necessary?
Changes are necessary to make in KPIs as it helps the business to survive in the competitive market. But it should be noted that the changes should neither be too drastic that company cannot adjust to, nor it should remain stagnant without any change; rather Changes should be up to a level that the business can handle easily.
Benefits of Key Performance Indicators
The benefits of KPls are as follows:
1) Improves Productivity :
KPIs direct financial and human resources of the organisation towards the achievement of common goals. KPIs help the Companies to achieve the goals as they convert the general goals into quantifiable terms which provide a clearer vision-'to staff regarding the achievement of targets. This helps in increasing the productivity of the organisation and reducing wastage of efforts.
2) Improved Sales :
Like all other departments, Key Performance Indicators help the sales department in having clear knowledge about the goals of the organisation. This leads to a greater focus on the sales efforts. It encourages the salespeople to chase the pre- defined goals more efficiently. This also leads to a healthy competition among the sales teams, as the manager whose performance is better, gets better rewards.
3) Better Evaluation of Performance :
The KPI helps in separating the good performing sectors or employees from the ones who are not performing well. Implementing KPIs allows the top management to evaluate the performances in a better way. It helps the management to know the causes for poor performance and provide adequate support to them for their improvement. This creates a performance based appraisal system which is more transparent and fair.
4) Easy to Understand :
The company employees better understand the KPIs because they are quantified and measurable. This enables the staff to take appropriate actions regarding the issues.
For example, if the CSF is defined as the percentage of rooms occupied (occupancy rate), then the KPI will be the number of rooms occupied divided by total number of rooms. Management can measure this on a daily or weekly basis and take appropriate action when the room occupancy is low.
5) Indicates Common Goals :
If KPIs are communicated properly, it can bring the attention of all the staff members to the common organisational goals. Since, it is not always easy to manage and coordinate all the departments, the KPIs are needed to be implemented as these variables convert the complex data regarding vision, mission, and CSFs, etc., into easily understandable metrics. This helps everyone in the organisation in staying aligned towards achieving common objectives.
6) Improves Organisational Performance :
If the KPIs are implemented and monitored regularly and constantly, the organisational performance gradually improves. The information obtained from monitoring and evaluation provides the opportunity to formulate strategies for future. This makes the organisation proactive, which helps in dealing with contingencies.
7) Incentives for Personal Performance :
KPIs separate the performers from the non-performers. It is therefore linked to the incentive management system of the organisation. Teams and individual are given targets. (based on KPIs), and if they achieve or overachieve, they qualify for incentive schemes of the company. KPIs. thus provide employees with information to plan their performance and achieve incentive schemes.