There is a lot of talk about key performance indicators or KPI for short but what does the phrase really mean?
What Are KPI?
Wikipedia start with this definition:
“A performance indicator or key performance indicator (KPI) is a type of performance measurement.”
I think you knew that didn’t you. It’s an unhelpful definition.
We can do better than that.
Webopedia (link now forbidden) says
“KPIs, or key performance indicators help organizations achieve organizational goals through the definition and measurement of progress.”
In his blog article, Rob Petersen quotes twelve experts on their definitions.
These are the two that I like best are:
“The selected measures that provide visibility into the performance of a business and enable decision makers to take action in achieving the desired outcomes.” – Aurel Brudan
“Measures that help decision makers define and measure progress toward business goals. KPI metrics translate complex measures into a simple indicator that allows decision makers to assess the current situation and act quickly.” – KAIZEN Analytics
The Critical Success Factors Of Key Performance Indicators
KPI should be linked to your critical success factors (CSF) – the few essential things that you must do if you’re going to achieve your overall objectives as a business, team, project or individual employee.
I was taught many years ago that CSF should be individually necessary and together sufficient to achieve your overall mission.
They should do “what they say on the tin” to use that old marketing phrase.
As I mentioned above, they should link to your critical success factors.
Their results should be important. What they show should matter and if they go up, managers should be pleased, if they go down, they should be worried.
There shouldn’t be many measures. Having too many is one of the biggest mistakes you can make when developing your KPI. If you fail to separate the important from the trivial, you will finish up confused.
It’s about what’s happening in the business or to the business and its external environment. A foreign exchange rate may be a KPI if the business is a major importer or exporter or its competitors are.
Most importantly, your KPI should be about action. Continuation of what is working and perhaps increasing it or discontinuation and change if the KPI is showing poor performance.
If you go back to the two definitions above, my choice was based on the emphasis on action.
“enable decision makers to take action”
“allows decision makers to assess the current situation and act quickly”
This is one of the key differences between accountants who stay as number crunchers and finance managers who develop a successful management career. Reporting isn’t enough, things have to change if there are problems. Accountants worry about reporting the past, finance managers think about how they can work with the management team to change the future.
That does nicely bring me on to…
The KPI you select for your business need to be meaningful.
A performance measure needs to send a clear signal about what’s good or bad on its own or combined with another.
The set of performance indicators tells your employees what aspects of your business you believe are particularly important. (a reminder, that’s the key part).
They want to look good, even if personal incentives aren’t tied to particular results. Everyone likes to be appreciated and to hear comments like “Well done” and “Great job”. This means that your KPI can be gamed where people try to play the system.
It’s frustrating but inevitable.
If the main focus is on achieving budgeted sales revenue each month and over-achievement isn’t particularly appreciated, you can expect orders to be held over from a good month to help make sure the next month gets off to a good start.
You get around this gaming problem by using detector KPI, in this case like “order backlog that is overdue”. If that creates too many measures, you can use composite measures that combine and weight a number of related measures that can be reviewed if the top level measure sends out a warning signal.
You can also get around it by having primacy of some performance measures over others. Delaying sales to the next month impacts on cash flow. If the YTD cash flow and bank balance are seen as most important, you can help guide your team to the right actions.
The next article in this series is…
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