Advances in information technology have led to a dramatic increase in the number of metrics being tracked by organizations. Managers face the challenge of distinguishing between those metrics that simply track data versus those metrics that provide information on how well a company is doing. Key Performance Indicators (KPIs) are metrics that measure performance in relation to desired outcomes. All KPIs are metrics, but not all metrics are KPIs. Managers can identify a metric as a KPI if it is directly linked to a strategic objective, if it is actionable and if it is part of a multi-dimensional assessment of organizational performance.
Many things can be measured but KPIs are linked to strategic objectives. They are based on desired outcomes as opposed to outputs and activities. KPIs facilitate the execution of strategic plans by translating desired outcomes into quantifiable targets. For example, a company might track unit production. As a KPI, management will look at production in relation to a target. If the target is 1000 units per year, then the KPI is expressed as a percentage of this target. A KPI is linked directly to a strategic objective. KPIs measure the success of an organization rather than just tracking activities that have happened in the past.
KPIs are designed to help organizations achieve targets, so they must be actionable. Even if a metric is linked to a strategic objective, if an organization cannot change the metric, then it cannot help achieve performance targets. Therefore, the metrics that are not actionable are not identified as KPIs.
Once a company has established performance targets, it can conduct a gap analysis by measuring where the metric is today relative to these targets. Management needs to take steps to close these gaps. For KPIs to be actionable, they need to be easily understood and consistent over time.
KPIs are strategic, therefore they measure multiple facets of performance, including financial, non-financial, historical and directional. Historical data tends to be transaction-based. It is valuable for assessing where an organization has come from and is necessary for taking a snapshot of where a company is in the present. This information also tends to be readily available through existing information systems. However, KPIs encompass more than hard numbers. Directional KPIs track ongoing improvements. For instance, a survey designed to measure customer satisfaction provides more indepth information than simply tracking customer service calls. Companies can conduct these surveys at regular intervals to gauge progress over time. Although this information is subjective in nature, organizations can quantify the data for the purpose of tracking and analysis.