Key Performance Indicators (KPI) – Definition and Implementation

Meaning of Key Performance Indicators (KPI)

Key Performance Indicators, abbreviated as KPI, are indicators that are used in an organization to define and measure company’s progress and how all operations are being carried out towards achievement of the already set goals by the organization. By Key performance indicators (KPI), the organization can judge its most critical aspects of organizational performance, and subsequently choose how to increase this performance. KPIs are non-financial, they are frequently measured, decided by the CEO and the higher-level management, require an understanding by the staff, provide responsibility, can significantly impact the organization, and have a positive effect on other measures.

This comes in after an organization has laid down a well stated Mission and Vision. After that, goals are set whereby all the stakeholders in the organizational operations are involved. This is then followed by an analysis to see if these indicators are workable. This plays a big role in ensuring that the necessary procedures are undertaken during the starting of the goals. After this has been done, there is the need to look for effective ways through which the organization will measure its progress towards attaining its mission and stated goals. Therefore, these tools which help the particular organization measure its actions and progress towards realization of its goals is what we refer to as Key Performance Indicators (KPI). These are hence measurement tools applied by a company or an organization in monitoring the processes and operations of the business.

Some commonly used Key Performance Indicators (KPI) in organizations are listed below;

Characteristics of Key Performance Indicators (KPI)

Key Performance Indicators must always be a quantifiable sort of measurement. This is important because they should be agreed at first by all the stakeholders before their implementation is done. In that case, the KPIs will be useful in giving a reflection of the projected and critical factors that may hinder the performance of the organization towards attaining its goals. Because of this fact, these KPIs will always differ from one organization to the other depending on its nature and the kind of operations the organization is involved in. In case of a profit-oriented organization, the company may decide to apply at least one of the very many available Key Performance Indicators by determining the overall percentage of the company’s income from the customer returns. On the other hand, a school or any other learning institution may decide to focus much on the Key Performance Indicators that relate to the graduation ratios of the institution’s students. This will be very different for a Department dealing with Customer Service. Such a department may decide to have its KPI in line with the Company’s overall KPIs such as calls percentage answered in the last or first minute from the customers. With an organization rendering social services, it can have its Key Performance Indicator in looking at the number of the people or clients who have been assisted in a particular time period, like a year.

It should be necessary for every organization to ensure that its KPIs are well selected and are significant in helping the organization or firm achieve its goals. This means that the KPIs must be quantifiable and easy to analyze since they are key to the success of the organization. Another important thing concerning the KPIs is that the KPIs should be nicely designed in a way that they are long-term upon their implementation. It is also important for the managers of a given organization to understand that the KPIs definitions and the way they are measured is something that does not change whatsoever. The expectations or the final goals expected from a given KPI may change especially when the goals of that particular organization have changed.

Another important thing is that the KPIs should always be reflecting the goals of the particular organization. This is quite important because the goals of the organization are what define the KPIs going to be laid down. The goals of each particular organization should therefore be clearly stated and attainable so that the KPIs may not be misled by stating unachievable goals. In that case the goals should be aimed at giving the organization more benefits and profits in case of profit-making organizations. Another issue is that the KPI should be stated in terms of its value and be defined in a way such that it can be easily measured. It is again very important for an organization to define its KPIs and make sure all operations are in line with the KPI definition throughout the business year. For instance, if a KPI is ‘Increase Product Sales’, then the organization will be required to address all the major considerations such as whether to have sales measured in the sold units, or by the value of the dollar, or by profits.

Types of Key Performance Indicators (KPI)

There are four important types of Key Performance Indicators (KPI) which are quantitative, qualitative, directional and actionable. This sub categorization could be an extremely valuable tool for a company in the assessment of its performance.

1. In quantitative indicators, it is used to measure quantity or expressed it as in a form of numbers. Depending on the data being used and involved, they can be expressed in a number ways. It could be in the form as whole number, decimals, ratios, fractions, percentages and monetary values. This type of indicator is easy to use and compare and it benefits us when it come to comparing data. For example, an organization can use the data to compare a scientific indicator throughout a period of time in order to understand the business trends or the position of a company against the competitor. As an example of quantitative indicators in business world are number of invoices processed, turnaround time, number of payments posted, number of reconciliations completed, number of journal entries posted, annual sales, annual expenditures and etc.
2. In qualitative indicators, it does not show the numeric measures but the depict the status of something which is in more qualitative terms. These indicators are not seem to be appealing but there are some things which are better as compared to the quantitative indicator. For example, how much a poor community is empowered may not be measurable in strict quantitative terms. But they can be graded based on qualitative findings. Whether a cooperative body is properly functioning or not, can be assessed in qualitative terms and then it can be graded.
3. Directional indicators are used to provide the necessity data for a company in order to get a pulse around whether they wish to improve, remain the same or failing. It will be used to help in identifying the improvement or progress as such in comparing last month’s and this month’s sales. Directional indicators are extremely helpful to identify the areas which are not performing effectively or efficiently and also to track and corrective action which is taken in a timely manner or it can be the mean difference in between a company success and failure.
4. Actionable indicators are used to assist in a company to identify area which they can be changed effectively by taking action. As an example that could be shown is a company would do better by the outsourcing processes. In this, the true benefit can be realized when a company or organization analyzes the indicators in place and take appropriate action. Company’s performance could be assist by these indicators because it is a valuable tool for them in order to stay ahead of the company competitors. If this indicator is being use to their fullest, it will make a great difference in between a highly successful company or whether the company is barely only maintaining.

If a small company or organizations which wish to identify their own company performance, it will be appropriate to use quantitative indicator as it will be easier to understand and view by them. It will be more appropriate and easy to view since the data all will be shown in the form of numbers and it can be clearly seen through the graphs or tables. For company which wants to know about their performance as in the total of sales or profit without the intention to against their competitor, quantitative indicator will be the best indicator to be used. However, for a company or organization that wants to improve in their performance or sales, it will be useful to use directional indicator. This is because in directional indicator, it can help an organization to identify the improvement or the progress of their performance such as their sales or rundown of the company from time to time. This will ease them in looking or identifying what is the reason or factors of the success. It can be the same for them to identify their problems as well if there happen to be a loss rather than profit so they could identify the problem and solve it before it leads to another crisis of an organization or company. It is not a comparison or competition in between the types of indicators but rather depends on own perspectives values and respective importance by an organization or company. Depending on their goal to get from the performance indicators and select which is the one that suits them using it.

Implementation of Key Performance Indicators (KPI) in Organizations

There are a number of major Performance Indicators that can be applied to any organizations. Such indicators are necessary because they help predict the missions that should be laid down and also ensure that all the already stated goals can be realized. It will hence be noted that a number of institutions are implementing an inexhaustible list of Key Performance Indicators (KPI) all aimed in increasing the organizations’ chances of achieving their goals within the stipulated time.

There are six steps that have been highlighted over the years in helping in the success of any KPI.

1. The first step involves the identification of the KPI and the expected outcome of the performance.
2. Step two involves the determination of the key actions that will be applied in achieving the expected outcome.
3. The next step is to identify the key individuals who are to perform these key actions and also ensure that there is integrity in communication and documentation of the expected outcomes.
4. Step number four requires the organization to determine all the necessary resources and requirements in order to achieve these expectations.
5. The next step is to establish the required time period and the overall progress of any Performance Indicator.
6. Finally it is necessary to validate the alignment.

In order for a given KPI to be of great value in an organization, it is important that there should be a way of defining and measuring the KPI accurately. The reason for this strategy during the implementation of a KPI is to enable the learning institution to meet its criteria in the reflection of the organization’s goals. Another important thing is that there must be enough considerations in the way the KPI are to be measured. There should also be definitions on how the indicators are exactly calculated and in what values they are to be calculated. It would also be important that the tertiary learning institution sticks to the key definitions behind successful KPI implementations from time to time. After this it should eventually give an annual comparison of the already met goals and the ones yet to be met. Over the last few years, KPIs have been used in many different types of project managements. Also, it is important that the target is specific in order to ensure that each individual in the organization plays a key role towards the accomplishment of the goals.

In practice, managing Key Performance Indicators (KPI) has proven to be difficult and expensive for very many organizations. In that case, many officers and administrators tend to lose their morale along the way. Another issue that has been raised over the years is that, once a KPI has been created, it is usually hard to adjust a given goal and hence most of the KPIs created tend to be dubious and out of order. In that connection, all organizational analysts should keep in mind all the requirements towards an intelligent KPI. This means that all the departments in all institutions must work hard towards that KPI. It will hence be agreed that any successful implementation of Key Performance Indicators (KPI) in any organization will result in the improvement of organizational performance. This is so because all the available resources are put into consideration when mentioning the goals. This means that the relationship between the goals and Key Performance Indicators (KPI) is very significant.