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A performance indicator or key performance indicator (KPI) is a type of performance measurement.[1] KPIs evaluate the success of an organization or of a particular activity (such as projects, programs, products and other initiatives) in which it engages.[2] KPIs provide a focus for strategic and operational improvement, create an analytical basis for decision making and help focus attention on what matters most.[3]

Often success is simply the repeated, periodic achievement of some levels of operational goal (e.g. zero defects, 10/10 customer satisfaction), and sometimes success is defined in terms of making progress toward strategic goals.[4] Accordingly, choosing the right KPIs relies upon a good understanding of what is important to the organization.[5] What is deemed important often depends on the department measuring the performance – e.g. the KPIs useful to finance will differ from the KPIs assigned to sales.

Since there is a need to understand well what is important, various techniques to assess the present state of the business, and its key activities, are associated with the selection of performance indicators. These assessments often lead to the identification of potential improvements, so performance indicators are routinely associated with 'performance improvement' initiatives. A very common way to choose KPIs is to apply a management framework such as the balanced scorecard.

The importance of such performance indicators is evident in the typical decision-making process (e.g. in management of organisations). When a decision-maker considers several options, they must be equipped to properly analyse the status quo to predict the consequences of future actions. Should they make their analysis on the basis of faulty or incomplete information, the predictions will not be reliable and consequently the decision made might yield an unexpected result. Therefore, the proper usage of performance indicators is vital to avoid such mistakes and minimise the risk.[6][7]

KPIs are used not only for business organizations but also for technical aspects such as machine performance. For example, a machine used for production in a factory would output various signals indicating how the current machine status is (e.g., machine sensor signals). Some signals or signals as a result of processing the existing signals may represent the high-level machine performance. These representative signals can be KPI for the machine.

Categorization of indicators

Key performance indicators define a set of values against to which measure. These raw sets of values, which can be fed to systems that aggregate the data, are called indicators. There are two categories of measurements for KPIs.

An 'indicator' can only measure what 'has' happened, in the past tense, so the only type of measurement is descriptive or lagging. Any KPI that attempts to measure something in a future state as predictive, diagnostic or prescriptive is no longer an 'indicator', it is a 'prognosticator' – at this point, it is analytics (possibly based on a KPI) but leading KPIs are also used to indicate the amount of front end loading activities.

Points of measurement

Performance focuses on measuring a particular element of an activity. An activity can have four elements: input, output, control, and mechanism.[citation needed] At a minimum, activity is required to have at least an input and an output. Something goes into the activity as an input; the activity transforms the input by changing its state, and the activity produces an output. An activity can also enable mechanisms that are typically separated into human and system mechanisms. It can also be constrained in some way by a control. Lastly, its actions can have a temporal construct of time.

Identifying indicators

Performance indicators differ from business drivers and 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 returning customers as a potential KPI.

The key stages in identifying KPIs are:

Key performance indicators (KPIs) are ways to periodically assess the performances of organizations, business units, and their division, departments and employees. Accordingly, KPIs are most commonly defined in a way that is understandable, meaningful, and measurable. They are rarely defined in such a way that their fulfillment would be hampered by factors seen as non-controllable by the organizations or individuals responsible. Such KPIs are usually ignored by organizations.[citation needed]

KPIs should follow the SMART criteria. This means the measure has a Specific purpose for the business, it is Measurable to really get a value of the KPI, the defined norms have to be Achievable, the improvement of a KPI has to be Relevant to the success of the organization, and finally it must be Time phased, which means the value or outcomes are shown for a predefined and relevant period.[5]

KPIs should be set at a senior level within an organization and cascaded through all levels of management.[8] In order to be evaluated, KPIs are linked to target values, so that the value of the measure can be assessed as meeting expectations or not.

Key performance indicators are mostly the non-financial measures of a company's performance [8] – they do not have a monetary value but in a business context they do contribute to the company's profitability.[9]

Examples

Accounts

These are some of the examples:

Marketing and sales

Many of these customer KPIs are developed and managed with customer relationship management software.

Faster availability of data is a competitive issue for most organizations. For example, businesses that have higher operational/credit risk (involving for example credit cards or wealth management) may want weekly or even daily availability of KPI analysis, facilitated by appropriate IT systems and tools.

Manufacturing

Overall equipment effectiveness (OEE) is a set of broadly accepted nonfinancial metrics that reflect manufacturing success.

Professional services

Most professional services firms (for example, management consultancies, systems integration firms, or digital marketing agencies) use three key performance indicators to track the health of their businesses. They typically use professional services automation (PSA) software to keep track of and manage these metrics.

System operations

Project execution

Supply chain management

Businesses can utilize supply chain KPIs to establish and monitor progress toward a variety of goals, including lean manufacturing objectives, minority business enterprise and diversity spending, environmental "green" initiatives, cost avoidance programs and low-cost country sourcing targets. Suppliers can implement KPIs to gain a competitive advantage. Suppliers have instant access to a user-friendly portal for submitting standardized cost savings templates. Suppliers and their customers exchange vital supply chain performance data while gaining visibility to the exact status of cost improvement projects and cost savings documentation.

Any business, regardless of size, can better manage supplier performance and overall supply chain performance,[10] with the help of KPIs' robust capabilities, which include:

Main KPIs for supply chain management will detail the following processes:

In a warehouse, the manager will use KPIs that target best use of the facility, like the receiving and put away KPIs to measure the receiving efficiency and the putaway cost per line. Storage KPIs can also be used to determine the efficiency of the storage space and the carrying cost of the inventory.[11]

Government

The provincial government of Ontario, Canada has been using KPIs since 1998 to measure the performance of higher education institutions in the province. All post-secondary schools collect and report performance data in five areas – graduate satisfaction, student satisfaction, employer satisfaction, employment rate, and graduation rate.[12] In England, Public Health England uses KPIs to provide a consistent measure of the performance of NHS population screening activities,[13] and publication of up to four main KPIs for the most important contracts outsourced by each UK government department is seen as a measure helping to increase transparency in the delivery of public services.[14]

Other performance indicators

Human Resource Management

Problems

In practice, overseeing key performance indicators can prove expensive or difficult for organizations. Some indicators such as staff morale may be impossible to quantify. As such, dubious KPIs can be adopted that can be used as a rough guide rather than a precise benchmark.[16]

Key performance indicators can also lead to perverse incentives and unintended consequences as a result of employees working to the specific measurements at the expense of the actual quality or value of their work.[17][18]

Sometimes, collecting statistics can become a substitute for a better understanding of the problems, so the use of dubious KPIs can result in progress in aims and measured effectiveness becoming different. For example, during the Vietnam War, US soldiers were shown to be effective in kill ratios and high body counts, but this was misleading when used to measure aims as it did not show the lack of progress towards the US goal of increasing South Vietnamese government control of its territory.[16] Another example would be to measure the productivity of a software development team in terms of lines of source code written. This approach can easily add large amounts of dubious code, thereby inflating the line count but adding little value in terms of systemic improvement. A similar problem arises when a footballer kicks a ball uselessly to build up their statistics.

See also

References

  1. ^ Carol Fitz-Gibbon (1990), "Performance indicators", BERA Dialogues (2), ISBN 978-1-85359-092-4
  2. ^ Weilkiens, Tim; Weiss, Christian; Grass, Andrea; Duggen, Kim Nena (2016). "Frameworks". OCEB 2 Certification Guide. Elsevier. pp. 149–169. doi:10.1016/b978-0-12-805352-2.00007-8. ISBN 9780128053522. KPI is a business metric that measures the degree of fulfillment of a goal or a Critical Success Factor (CSF). The CSF is an organization-internal or organization-external property that is necessary to achieve a specific goal. A CSF can involve multiple KPIs.
  3. ^ "What is a Key Performance Indicator (KPI)". KPI.org. Retrieved 1 January 2022.
  4. ^ Key Performance Indicators – What Are Key Performance Indicators or KPI
  5. ^ a b c Key Performance Indicators: Establishing the Metrics that Guide Success (PDF), archived from the original (PDF) on 2017-12-01, retrieved 2016-04-23
  6. ^ "KPIs and the Logic of Decision Making". www.linkedin.com. Retrieved 2021-04-04.
  7. ^ Dolence, Michael G. (1994). "Using Key Performance Indicators to Drive Strategic Decision Making". New Directions for Institutional Research. 1994 (82): 63–80. doi:10.1002/ir.37019948207 – via academia.edu.
  8. ^ a b Eckerson, W., Ten Characteristics of a Good KPI, BPM Partners, published 17 July 2016, accessed 24 November 2022
  9. ^ Palffy, Georgina (2015-04-14). How Business Works (1st ed.). DK Publishing. p. 146. ISBN 978-1-46542-979-7.
  10. ^ El Sayed, H., Supply Chain Key Performance Indicators Analysis, International Journal of Application or Innovation in Engineering & Management (IJAIEM), Volume 2, Issue 1, January 2013, accessed 6 January 2022
  11. ^ "Key Performance Indicators for Warehousing Performance | SIPMM Publications". publication.sipmm.edu.sg. 6 October 2020. Retrieved 2022-07-27.
  12. ^ "Key Performance Indicators". Colleges Ontario. Retrieved 2019-09-25.
  13. ^ Public Health England, Population screening KPIs: purpose and data submission guidance, updated 17 August 2020, accessed 24 November 2022
  14. ^ Cabinet Office, Key Performance Indicators (KPIs) for government's most important contracts, last updated 25 November 2022, accessed 26 November 2022
  15. ^ Abeysiriwardana, Prabath Chaminda; Jayasinghe-Mudalige, Udith K. (2021). "Role of Peripheral Analysis Methods in Adoption of Successful KPIs for a Research Institute Working Towards Commercial Agriculture". International Journal of Global Business and Competitiveness. 16: 61–71. doi:10.1007/s42943-021-00021-z. S2CID 257161299.
  16. ^ a b Daddis, Gregory (June 1, 2011). No Sure Victory: Measuring U.S. Army Effectiveness and Progress in the Vietnam War. Oxford University Press, USA. ISBN 978-0-19974-687-3.
  17. ^ Austin, Robert D. (Robert Daniel), 1962– (1996). Measuring and managing performance in organizations. DeMarco, Tom., Lister, Timothy R. New York: Dorset House Publishing. ISBN 0932633366. OCLC 34798037.((cite book)): CS1 maint: multiple names: authors list (link) CS1 maint: numeric names: authors list (link)
  18. ^ Martin Fowler (2003-08-29). "CannotMeasureProductivity". Martinfowler.com. Retrieved 2013-05-25.

Further reading