Definition of Key Performance Indicators
Key performance indicators are quantifiable measurements that are critical to the success of a company. These indicators vary between organizations and industries but should always, if implemented and monitored correctly, help a business define and measure progress toward both short-term and long-term organizational goals.
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Function
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A company must identify all stakeholders' interests and define organizational goals based on the company's mission statement before measuring the progress through the success of the key performance indicators.
Significance
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When key performance indicators are properly developed and implemented, they should provide employees specific roles and responsibilities, clear goals and objectives, and outline how they contribute to the overall success of the company. Key performance indicators can strengthen the organizational culture of a business through common goals and shared values.
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Requirements
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All key performance indicators need to be quantifiable to have any value to the company; these measurements must also have set targets for each specific indicator. For example, a performance indicator cannot be just to increase business. It must be something like increasing profits or increasing units sold with an agreed upon set target such as to raise profits by 15%.
An indicator is only useful if it provides insightful information regarding future performance of a company. Understanding the past, present, and future market is crucial when establishing goals and targets; benchmarking against other successful companies in the same industry allows an organization to measure and compare current performance while setting realistic goals and targets for the future.
Implementation
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For the implementation of key indicators to be successful they must have a fundamental importance in creating and maintaining a competitive advantage; they must be the difference between success and failure of a company. Although something like employee turnover or employee morale may be important to a company, those indicators will usually not create a sustainable competitive advantage over other organizations. Once implemented, key performance indicators are used as a performance management tool; meeting and exceeding these indicators should be used to motivate all employees.
Considerations
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There are popular and common indicators specific to certain industries. For example, schools are more concerned with graduation rate, fire departments typically use response time as an success indicator, while most other business are focused on sales, profits, cycle time or customer service. Key performance indicators are sometimes called key success indicators.
Warning
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Implementing and monitoring key performance indicators can be difficult and expensive for businesses. Benchmarking research can be extensive and leave the organization with more of a broad estimate rather than an exact benchmark. Key performance indicators are focused on internal organizational activities so finding comparisons and benchmarks may be difficult due to competition.
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