The key to success of a business is dependant on good management information. Thus while monitoring profitability and cash flows, a business also need to keep its Key Performance Indicators (KPI) under a tight check.
|Examples of key performance indicators on a balanced scorecard|
Key Performance Indicators are quantifiable measurements that reflect the critical success factors of an organization. Based on beforehand agreed measures, they reveal a high-level snapshot of the organization. They vary depending on the kind of organization they characterize; for instance a business may have a KPI as the annual sales volume, while KPIs of a social service organization may have to do more with the number of people helped out. Moreover, colleges may have number of students graduating per year, as one of their KPIs.
Thus before any Key Performance Indicators are selected, it is vital to identify what the organization’s goal is, which are in turn dependent upon the its mission and its stakeholders. Consequently, KPIs act as a measure of progress towards these goals. Whatever they may be, they must be critical to the success of the organization.
The application of Key Performance Indicators provides business executives with a high-level, real-time view of the progress of a company. They may consist of any combination of reports, spreadsheets and charts. They may be sales figures (global or regional), trends over time, supply chain information or any other long-term consideration which may be essential in gauging the health of the organization. However, it should be noted that Key Performance Indicators should not only reflect the organizational goals but should also be quantifiable.
For a Key Performance Indicator to be of any value there must be a way to accurately define and measure it. This is so because a KPI may meet the criteria of reflecting the organizational goal, which may for instance pertain to being the most popular company. However, since a company’s popularity can not be measured or compared to others, therefore the KPI would be useless.
Considerations regarding how a Key Performance Indicator is to be measured should also be established in advance. Definitions as to exactly how the indicator is to be calculated and whether it is to be measured in dollar amounts or units should also be specified. Moreover, it is imperative that the organization then sticks to these definitions from year to year in order to allow for annual comparisons.
After the Key Performance Indicator has been defined and a way to measure it has also been determined, a clear target has to be demarcated which should be understandable by everyone. The target should also be specific so that every individual can take actions towards accomplishing it.
Here it is needless to say that to achieve a particular target level of Key Performance Indicator for a company, every department has to work in synergy towards it. For this purpose, all the units of an organization need to define their respective KPIs which should in turn work towards accomplishing the overall KPIs of the organization.
It is important that after Key Performance Indicators and their relative components have been identified, they should be used as a performance management tool. Best ways to represent variance (from the target levels) should be defined, eventually making sure that everyone in the organization is focused towards meeting target levels of the Key Performance Indicators.