Key performance indicators or KPIs are basically success indicators that are used in evaluating the effectiveness and success of different functions within the organization.
Although used interchangeably, the key Performance indicators should not be confused with business metrics. KPIs are based on critical objectives and are constantly reviewed for positive influence on the outcome.
- Employee turnover or employee engagement metrics; utilized by the human resources to fill open positions
- Total revenues and a total number of new customer capture by the sales team when assessing progress toward meeting revenue targets.
- Sales-leads resulting from advertisement and total revenues generated; utilized by the marketing department in analysing the effectiveness of advertising.
- Other quality metrics that measure efficiency as may be utilized by different departments within the organization.
Managers and departmental heads monitor the KPIs over time and adjust programs and plans as may be needed in the general support of the organization’s strategic goals. The three types of Key performance indicators are;
- The Overall Business KPIs; they involve the whole business and are based on broad metrics that every manager or employee understands and identifies with.
- Individual KPIs; they measure individual performances and are mostly attached to performance appraisals. When choosing individual KPIs, measures that encourage collaboration and team play are always considered as opposed to those that judge on individual performances
- Team/Departmental KPIs; in as much as the organization needs overall KPIs for a common goal, departmental KPIs draw business guidelines at a departmental level.
The above three key performance indicators can either lead or lag;
- Leading Performance Indicators; they not only indicate results of completed tasks but also offer guidance on future results. E.g. improved employee engagement forecasts improvement in customer satisfaction, improved team performance and innovativeness.
- Lagging Performance Indicators; they only indicate results of completed tasks. They do not predict future outcome or performances.
Both KPIs play the same role of identifying meaningful measures essential in leading the organization towards set goals. It is therefore good to have the right balance of both lagging and leading KPIs.
Challenges in Developing KPIs
It takes a lot of input to develop top quality KPIs. Experts and managers work together to come up with consolidated measures that need to be observed. This process, however, faces a lot of challenges some of which are explained below;
- Measures considered important by others may be irrelevant to others
- It is not easy to identify leading indicators
- Some indicators e.g. financial indicators are over relied upon. This creates an imbalance and an untrue picture on the overall condition of the organization
- If the organization’s objectives and strategies are unclear, consideration is shifted to financial outcomes
- With limitations that come with internal systems reporting, sometimes it is difficult to come up with desired, quantifiable and accurate measures.
- Conflict of interest will always arise if compensation is linked to key targets.
Identifying key indicators is a long process that requires the input of all stakeholders. Identified measures need to be revisited and revised constantly as per the ever dynamic business environment.
Utilization of key performance indicators;
After constant reviews, well developed KPIs should be implemented and utilized. Positive results are desired but diligent managers and stakeholders should assess the impact the positive results bring to the organization and seek new alternatives that will strengthen the already in place measures.
KPIs are a form of communication and abide by best practices like other communication forms. Therefore, any indicators given should be acted upon. As they say; KPIs are as valuable as the action they inspire.
For successful KPI utilization, basic organizations’ objectives should be well understood, plans of achieving them well set and KPIs developed based on an interactive process by relevant stakeholders. Relevant performance indicators should incorporate the SMART approach i.e.
- It should take into consideration the Specific objectives
- It should Measure progress towards achieving the set targets or goals
- The measures and goals should be Attainable, Relevant and with Time-Frame
The SMART approach can be modified to SMARTER by adding Evaluate and Re-Evaluate. These two steps ensure constant assessment of the already laid down measures in relation to constant changes in the business environment. E.g. if revenue targets have been exceeded, is it because low targets were set or other factors came into play?
With actionable Performance Indicators, therefore, stakeholders are able to make timely and systematic adjustments so as to attain inevitable growth and development. Other reasons to embrace KPIs include;
- Focus on the main picture; coming up with departmental and individual KPIs ties all stakeholders and team members to the overall goal ensuring that every individual and department contributes to the overall success.
- Unit of measurement; lots of factors contribute to the overall success of the company. The most critical factors have to be identified and tracked. Monitoring these key drivers helps decision makers in knowing what needs to be done, when and how.
- Responsibility and Accountability; it is always difficult to hold people responsible for the final results since everyone thinks the other person is responsible and therefore no one is solely responsible. KPIs provide a yardstick through which results are measured. Individual KPIs measure individual contributions while departmental KPIs measure departmental contributions to the overall pool of organizational outcomes thus every contribution no matter small is identified and well accounted for.
The number of Key Performance Indicators
It is important for an organization not to have too many performance indicators as that might lead to loss of focus on important actions that are required for the overall business success. It’s always advisable to have as few KPIs as possible; In fact, one KPI easily unites every team member to the same focus as complemented by the departmental and individual KPIs. Again, the business metrics should also be considered as key players in supporting the overall business KPI