Running any organization is a complex undertaking. Success depends on recognizing and then measuring the simpler tasks that make up the whole. Key performance indicators provide the mechanism by which to measure performance at this level, and are assigned to all departments in the organization, from the sales staff to the controller’s office. They help to identify problems early, and involve all employees in goal achievement.
Key performance indicators measure specific management objectives established to meet a company's overall goal. They indicate whether the organization is on the right track. While KPIs are different for each organization, they must be measurable. They support key success factors. For instance, an airline's key success factor may be to increase revenue from overseas customers. A KPI measures smaller mini-goals that support this objective. A KPI might measure sales calls to overseas corporations or the number of contracts signed by foreign-based tour operators. KPIs can measure deviance from a standard or quantify advancement to a cumulative goal.
The Best KPIs
Once organizations establish overall goals, such as growth, market share or new product introductions, managers analyze several business categories to determine the best KPIs. These include customer, financial and process-oriented measurements. While all KPIs are important, indicators at the front end are very important because they serve as early warning signs that plans are not on track and that goal achievement may be in jeopardy. An example would be quality control deviations for a basic part in the manufacturing process. If the part fails the quality standard more than a certain percentage, or trends downward, early corrective action can occur. An example of a late KPI may be customer complaints.
Financial KPIs include measurements that track receivables and payables, travel and entertainment expenses, and profit trends. Payroll management and asset management also fall under this category, and include such measures as total employees, overtime costs and benefit costs. Customer KPIs may measure the number of website views, press stories and advertising cost. Companies also may track repeat orders, sales call volume, call center activity, and customer complaints and compliments. Process KPIs involve production. Quality control measurements ensure a good product while purchasing KPIs measure cost and availability of raw materials. Machine maintenance and downtime also are good KPIs.
According to the Advanced Performance Institute, an organizational performance research company, KPIs provide three benefits. They help a company learn and improve, demonstrate external compliance, and control and monitor people. KPIs provide managers with information at every stage in the production and marketing process. They may lead managers to alter strategies or pinpoint a deficiency. KPIs help financial managers compile annual reports, and they provide detail regarding reasons for company performance. They also engage employees, from lower level production staff to senior management. KPIs focus employees on their particular roles, providing a “line of sight” from what they do to the end customer. Companies often post KPIs in work areas so employees can relate their work to the customer and company goals.