Key Performance Indicators Explained

There has been a lot of talk about Key Performance Indicators (KPI) in the business world, however, many businesses are not able to effectively identify and use their KPI’s resulting in a possible loss that they may not know about. It’s time to understand and make KPI’s work to the company’s advantage.

Key Performance Indicators

Before understanding how to identify and use KPI’s, it is important to understand what they are. Essentially, a KPI is an economic or non-economic measurement tool that is used to quantify various processes within an organization.

Keep in mind that KPI’s differ from organization to organization as not all organizations have the same needs, goals and objectives.

How to Identify KPI’s

In an organization, KPI’s are essentially everything that the business can monitor and review in order to ensure that it is making a profit or if it is meeting its goals and objectives. Keep in mind that when identifying KPI’s, it is important to consider the non-financial indicators as well. Below are some of the factors that should be considered when a company is identifying its KPI’s:

  • The identified KPI should represent some sort of a business process
  • The process must be labelled with a clear goal or performance requirement
  • The process must be quantifiable and should be comparable with past and future results
  • There must a method to identify and manage any processes that change during business operation

Examples of KPI’s

While there are literally hundreds of KPI’s that can be used in a business, the most commonly used key performance indicators are mentioned below:

  • Gross profit indicator
  • Overhead indicator
  • Liability and debtor indicator
  • Customer survey index
  • % of customers lost and converted
  • % of labour at work
  • Cost of supplies
  • Delivery status and times
  • Employee satisfaction index

How Are the KPI’s Used in an Organization?

The KPI’s of a business are basically used as a benchmark. They provide a sense of direction for the organization. They are the goals and targets that the company must work towards. With the help of a KPI, a business can focus on where it is lacking and therefore improve the overall profitability and success of the business.

Suppose a business objective is to “improve the customer satisfaction index by 20% by the end of 2011”. The company can use the customer satisfaction index KPI along with other customer related KPI’s to help achieve this goal and measure its progress along the way.

Key Performance Indicators are an essential part of any business organization. They help measure and track performance and provide a direction to a company so that it is able to reach its organization goals and objectives.