Key Performance Indicators help organisations evaluate their performance over time. Most importantly, they are objectives that are linked to core functions/strategic goals of the organisation. As this is the case, if they are being met, it is likely the organisation is performing well overall. For example, an overall aim of an organisation may be to have a respected brand image and a KPI of customer satisfaction may be used to measure this.
KPIs have three key aims. Firstly, they aim to assess performance. This may be in terms of quality, finance or customer reach. A KPI will be chosen that reflects how the organisation is performing in this sense. Secondly, KPIs can be used to highlight potential areas of improvement. If performance is low the KPI may demonstrate exactly where the organisation can improve. Finally, the existence of KPIs within an organisation can drive a performance culture. This means all employees expect their performance to be evaluated and hence can act as a motivation tool. They can also be used as a tool to impress stakeholders, show current trends, increase transparency and act as a comparison internally and externally.
Despite KPIs’ importance and prevalence, they are often introduced to inappropriate situations, monitored by uninformed managers or introduced with the wrong parameters. For this reason, it is important to be diligent when developing them. We have set out some tips to remember during this process.
Financial and Non-financial – Financial figures are important for assessing performance, yet relying on them too heavily can often mask serious problems.For example, your brand may be deteriorating but sales remain high. Suddenly your sales fall dramatically and you were not aware this was likely to happen.
Use External Benchmarking – Simply setting internal performance markers runs the risk of being unaware of how your competitors are performing. Increasing sales by 10% is less impressive if your competitors are already performing far better or growing faster.
Clarity – KPIs should be simple and clear. This ensures everyone understands why they have been introduced and how they can be achieved.
Not too many/too few – Too many can lead to a lack of direction and confusion, whereas too few may not show enough of the picture. PWC (2006) found that between 4 and 10 was the most effective number of KPIs, although this will be organisation specific.
Make resources available – Planning which KPIs are relevant, training managers how to monitor them and rolling them out all cost large amounts. Therefore, resources must be made available to ensure all these processes happen effectively.
Communicate Information – The details of the KPIs, how they can be achieved and how well individuals/teams are performing need to be communicated throughout the organisation. A number of tools can be used here (see Creating a Balanced Scorecard and 180° and 360° Feedback).
SMART KPIs – Using the SMART acronym can ensure KPIs are introduced effectively.
Avoid Misleading KPIs – Some KPIs can hide important information or have unintended consequences. For instance, targets that only measure quantity, exclude quality measures and can lead to an incentive to decrease quality.
The main aim of KPIs is to improve individual behaviours, which in turn influence the overall organisational objectives. For this reason, it is essential they are closely aligned to the organisation’s overall strategy.
Parmenter, David. (2007). Key Performance Indicators. Hoboken, N.J.: John Wiley & Sons, 2007. Print.
PriceWaterhouseCoopers. (2006). A Guide to Key Performance Indicators: Communicating the Measures That Matter. (June 2006). Available at: http://www.pwc.com/gx/en/corporate-reporting/assets/pdfs/uk_kpi_guide.pdf