Key Per formance Ind icators (KPI)

From F. John Reh,

Your Guide to Management.
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How a n orga nizatio n defines and meas ures

pro gress toward i ts g oals

Key Performance Indicators, also known as KPI or Key Success Indicators (KSI), help an
organization define and measure progress toward organizational goals.

Once an organization has analyzed its mission, identified all its stakeholders, and defined
its goals, it needs a way to measure progress toward those goals. Key Performance
Indicators are those measurements.

Wh at Ar e Ke y Per fo rm an ce I nd ic at or s (KP I)

Key Performance Indicators are quantifiable measurements, agreed to beforehand, that

reflect the critical success factors of an organization. They will differ depending on the
organization. A business may have as one of its Key Performance Indicators the
percentage of its income that comes from return customers. A school may focus its Key
Performance Indicators on graduation rates of its students.

A Customer Service Department may have as one of its Key Performance Indicators, in
line with overall company KPIs, percentage of customer calls answered in the first minute.
A Key Performance Indicators for a social service organization might be number of clients
assisted during the year.

Whatever Key Performance Indicators are selected, they must 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. The definition of what they
are and how they are measured do not change often. The goals for a particular Key
Performance Indicator may change as the organizations goals change, or as it get closer to
achieving a goal.
Ke y Per fo rma nc e I nd ic at or s Re fl ec t The Org an iz at io nal Go al s

An organization that has as one of its goals "to be the most profitable company in our
industry" will have Key Performance Indicators that measure profit and related fiscal
measures. "Pre-tax Profit" and "Shareholder Equity" will be among them. However,
"Percent of Profit Contributed to Community Causes" probably will not be one of its Key
Performance Indicators. On the other hand, a school is not concerned with making a profit,
so its Key Performance Indicators will be different. KPIs like "Graduation Rate" and
"Success In Finding Employment After Graduation", though different, accurately reflect
the schools mission and goals.

Ke y Per fo rma nc e I nd ic at or s Mu st Be Qu an ti fi ab le

If a Key Performance Indicator is going to be of any value, there must be a way to

accurately define and measure it. "Generate More Repeat Customers" is useless as a KPI
without some way to distinguish between new and repeat customers. "Be The Most
Popular Company" won't work as a KPI because there is no way to measure the company's
popularity or compare it to others.

It is also important to define the Key Performance Indicators and stay with the same
definition from year to year. For a KPI of "Increase Sales", you need to address
considerations like whether to measure by units sold or by dollar value of sales. Will
returns be deducted from sales in the month of the sale or the month of the return? Will
sales be recorded for the KPI at list price or at the actual sales price?

You also need to set targets for each Key Performance Indicator. A company goal to be
the employer of choice might include a KPI of "Turnover Rate". After the Key
Performance Indicator has been defined as "the number of voluntary resignations and
terminations for performance, divided by the total number of employees at the beginning
of the period" and a way to measure it has been set up by collecting the information in an
HRIS, the target has to be established. "Reduce turnover by five percent per year" is a
clear target that everyone will understand and be able to take specific action to accomplish.

Ke y Per fo rma nc e I nd ic at or s Mu st b e Key To Org an iz at io na l

Su cc es s

Many things are measurable. That does not make them key to the organization's success.
In selecting Key Performance Indicators, it is critical to limit them to those factors that are
essential to the organization reaching its goals. It is also important to keep the number of
Key Performance Indicators small just to keep everyone's attention focused on achieving
the same KPIs.

That is not to say, for instance, that a company will have only three or four total KPIs in
the company. Rather there will be three or four Key Performance Indicators for the
company and all the units within it will have three, four, or five KPIs that support the
overall company goals and can be "rolled up" into them.

If a company Key Performance Indicator is "Increased Customer Satisfaction", that KPI

will be focused differently in different departments.

The Manufacturing Department may have a KPI of "Number of Units Rejected by Quality
Inspection", while the Sales Department has a KPI of "Minutes A Customer Is On Hold
Before A Sales Rep Answers". Success by the Sales and Manufacturing Departments in
meeting their respective departmental Key Performance Indicators will help the company
meet its overall KPI.

Go od Ke y Per fo rma nc e I nd ic at or s v s. Bad

Bad :

• Title of KPI: Increase Sales

• Defined: Change in Sales volume from month to month
• Measured: Total of Sales By Region for all region
• Target: Increase each month

What's missing? Does this measure increases in sales volume by dollars or units? If by
dollars, does it measure list price or sales price? Are returns considered and if so do the
appear as an adjustment to the KPI for the month of the sale or are they counted in the
month the return happens? How do we make sure each sales office's volume numbers are
counted in one region, i.e. that none are skipped or double counted? How much, by
percentage or dollars or units, do we want to increase sales volumes each month?(Note:
Some of these questions may be answered by standard company procedures.)

Go od:

• Title of KPI: Employee Turnover

 • Defined: The total of the number of employees who resign for whatever reason,
plus the number of employees terminated for performance reasons, and that total
divided by the number of employees at the beginning of the year. Employees lost
due to Reductions in Force (RIF) will not be included in this calculation.
• Measured: The HRIS contains records of each employee. The separation section
lists reason and date of separation for each employee. Monthly, or when requested
by the SVP, the HRIS group will query the database and provide Department
Heads with Turnover Reports. HRIS will post graphs of each report on the
Intranet.
• Target: Reduce Employee Turnover by 5% per year.

Wh at Do I Do With Ke y Per fo rma nc e I nd ic at or s?

Once you have good Key Performance Indicators defined, ones that reflect your
organization's goals, one that you can measure, what do you do with them? You use Key
Performance Indicators as a performance management tool, but also as a carrot. KPIs give
everyone in the organization a clear picture of what is important, of what they need to
make happen. You use that to manage performance. You make sure that everything the
people in your organization do is focused on meeting or exceeding those Key Performance
Indicators. You also use the KPIs as a carrot. Post the KPIs everywhere: in the lunch
room, on the walls of every conference room, on the company intranet, even on the
company web site for some of them. Show what the target for each KPI is and show the
progress toward that target for each of them. People will be motivated to reach those KPI
targets.