Key Performance Indicator
Introduction
A Key Performance Indicator (KPI) is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs at multiple levels to evaluate their success at reaching targets. High-level KPIs may focus on the overall performance of the enterprise, while low-level KPIs might focus on processes in departments such as sales, marketing, HR, support and others.
Understanding Key Performance Indicators
KPIs are a type of performance measurement that helps organizations understand how well they are performing in relation to their strategic and operational goals. KPIs can be used by individuals, businesses, and governments to evaluate the effectiveness of various functions and processes. KPIs can be financial, including net profit (or the bottom line, gross profit margin), revenues minus costs, return on investment (ROI), or they can be non-financial, such as loyalty and retention rates, the number of complaints, and product quality.
Types of Key Performance Indicators
There are several types of KPIs: quantitative indicators which can be presented with a number, qualitative indicators which can't be presented as a number, leading indicators which can predict the outcome of a process, and lagging indicators which present the success or failure post the event.
Quantitative Indicators
Quantitative indicators are the most straight-forward type of KPI as they can be measured directly and are represented by a number. Examples of quantitative KPIs include net profit margin, return on investment, and revenue growth rate.
Qualitative Indicators
Qualitative indicators are not represented by a number. Instead, they represent an approximate or relative value, such as levels of customer satisfaction, product quality, or brand recognition.
Leading Indicators
Leading indicators are used to predict changes and trends in a company's performance and can be used as an early warning system for potential problems. Examples of leading indicators include the size of a company's sales pipeline, the number of new customers acquired, and the amount of expenditure on research and development.
Lagging Indicators
Lagging indicators show the outcome of certain business activities or processes and are typically used to assess the success or failure of a project. Examples of lagging indicators include total sales for a specific period, the number of customers at the end of a period, and the percentage of market share.
Importance of Key Performance Indicators
KPIs provide a framework for strategic performance measurement, and help to create an analytical basis for decision making. By using KPIs, organizations can measure their progress towards their strategic goals, identify areas where performance is lagging, and implement corrective measures.
How to Select Key Performance Indicators
When selecting KPIs, it is important to identify what is important to the organization and what can be measured. The selected KPIs should be aligned with the organization's strategic objectives, and they should be key to its success. KPIs should be well-defined, quantifiable, and a direct result of strategic objectives.