Key performance indicator

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Key Performance Indicators (KPI) are financial and non-financial metrics used to help an organization define and measure progress toward organizational goals^[1]. KPIs are used in Business Intelligence to assess the present state of the business and to prescribe a course of action. The act of monitoring KPIs in real-time is known as business activity monitoring. KPIs are frequently used to "value" difficult to measure activities such as the benefits of leadership development, engagement, service, and satisfaction. KPIs are typically tied to an organization's strategy (as exemplified through techniques such as the Balanced Scorecard).

The KPIs differ depending on the nature of the organization and the organization's strategy. They help an organization to measure progress towards their organizational goals, especially toward difficult to quantify knowledge-based processes.

A KPI is a key part of a measurable objective, which is made up of a direction, KPI, benchmark, target and time frame. For example: "Increase Average Revenue per Customer from £10 to £15 by EOY 2008". In this case, 'Average Revenue Per Customer' is the KPI.

KPIs should not be confused with a Critical Success Factor. For the example above, a critical success factor would be something that needs to be in place to achieve that objective; for example, a product launch.

1 Identifying indicators
2 Marketing KPIs
3 KPIs for Manufacturing
4 Categorization of indicators
5 Problems
6 See also
7 References
8 External links
9 Further reading

[edit] Identifying indicators

Performance indicators differ from business drivers & aims (or goals). A school might consider the failure rate of its students as a Key Performance Indicator which might help the school understand its position in the educational community, whereas a business might consider the percentage of income from return customers as a potential KPI.

But it is necessary for an organization to at least identify its KPI's. The key environments for identifying KPI's are:

Having a pre-defined business process.
Having clear goals/performance requirements for the business processes.
Having a quantitative/qualitative measurement of the results and comparison with set goals.
Investigating variances and tweaking processes or resources to achieve short-term goals.

When identifying KPI's the acronym SMART is often applied. KPI's need to be:

Specific
Measurable
Achievable
Result-oriented or Relevant
Time-bound

[edit] Marketing KPIs

Among the marketing KPIs top management analyzes are:

Customer related numbers:
1. New customers acquired
2. Status of existing customers
3. Customer attrition
Turnover generated by segments of the customers - these could be demographic filters.
Outstanding balances held by segments of customers and terms of payment - these could be demographic filters.
Collection of bad debts within customer relationships.
Demographic analysis of individuals (potential customers) applying to become customers, and the levels of approval, rejections and pending numbers.
Delinquency analysis of customers behind on payments.
Profitability of customers by demographic segments and segmentation of customers by profitability.

Many of these aforementioned customer KPIs are developed and improved with customer relationship management.

This is more an inclusive list than an exclusive one. The above more or less describe what a bank would do, but could also refer to a telephone company or similar service sector company.

What is important is:

KPI-related data which is consistent and correct.
Timely availability of KPI related Data.

Faster availability of data is beginning to become a concern for more and more organizations. Delays of a month or two were commonplace. Of late, several banks have tried to move to availability of data at shorter intervals and less delays. For example, in businesses which have higher operational/credit risk loading (that involve credit cards, wealth management), Citibank has moved onto a weekly availability of KPI related data or sometimes a daily analysis of numbers. This means that data is usually available within 24 hours as a result of automation and the use of IT.

[edit] KPIs for Manufacturing

Overall equipment effectiveness, or OEE, is a set of broadly accepted non-financial metrics which reflect manufacturing success.

[edit] Categorization of indicators

Key Performance Indicators define a set of values used to measure against. These raw sets of values fed to systems to summarize information against are called indicators. Indicators identifiable as possible candidates for KPIs can be summarized into the following sub-categories:

Quantitative indicators which can be presented as a number.
Practical indicators that interface with existing company processes.
Directional indicators specifying whether an organization is getting better or not.
Actionable indicators are sufficiently in an organization's control to effect change.

Key Performance Indicators in practical terms and strategy development means are objectives to be targeted that will add the value to the business most (most = KEY INDICATORS OF SUCCESS).

[edit] Problems

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Please improve this article if you can. (February 2007)

In practice, organizations and businesses looking for Key Performance Indicators discover that it is too expensive, difficult or impossible (eg staff morale may be impossible to qualify with a number) to measure the performance indicators exactly required to a particular business or process objective. Often a business metrics with history that is similar is used to measure that KPI. In practice this tends to work but the analyst must be aware of the limitation of what is being measured which is often a rough guide rather than an exact measurement.

Another serious issue in practice is that once a KPI is created, it becomes difficult to change them as your yearly comparisons with previous years can be lost.

Furthermore you should be aware that if it is too inhouse, it may be extremely difficult for an organization to use its KPIs to get comparisons with other similar organizations.