Key performance indicator (KPI)

From CEOpedia | Management online

A key performance indicator (KPI) is a quantifiable performance measure that shows how effectively a company is achieving key business objectives. From finance and human resources to marketing and sales, KPIs help every area of the business move forward at a strategic level. A good performance indicator should not only be pragmatic, clear and easy to measure but also aligned with the overall business strategy and issues. Furthermore it's crucial that the KPI chosen is feasible: once established, the steps required to achieve it must be outlined.

KPIs come in many forms. While some measure monthly progress toward goals, others focus on the long term. Despite that, all KPIs have in common that they are linked to strategic objectives. One of the most common types of KPIs is the strategic one, which monitors overall business goals. More specific is the operational, which typically measures performance over a shorter period of time and focus on organizational processes and efficiencies. This type of KPI measure a company's monthly (or even daily) performance by analyzing different processes, market segments or geographies. Other KPIs are more tied to specific functions, such as finance or IT, and this is the case with functional KPIs. The last type is the Lagging one, which describes the nature of the data being analyzed.

Advantages and Disadvantages of KPIs

KPIs are an important way to ensure that the teams are achieving the goals of the organization (Badawy, El-Aziz, Idress 2016, p. 48). The benefits provided by KPIs are multiple, here are listed some of them:

  • KPIs align the team and guide everyone in the same direction, making everyone a happy contributor to the company's success
  • Provides a true view of organizational health from risk factors to financial metrics
  • Helps see successes and failures clearly so the team can do more of what works and less of what doesn't
  • Help employees track their progress and help managers move things forward; thanks to KPIs employees measure their impact and how their daily activities impact into the success of larger organizational goals
  • Because KPI is a helpful mechanism to measure performance, which has a direct tie to employee engagement, can solve the problem of disengaged employees

There are also some downsides to consider when working with KPIs, for example:

  • Require ongoing monitoring for accuracy and reasonableness in data
  • Encourage managers to focus on only KPIs instead of a broader strategy
  • May discourage employees if KPI targets are unreasonable

Example of KPI

Every business unit has unique key performance indicators that help them track progress. Listed below there are some of them divided by department:

  1. Financial KPIs: Historically, financial metrics have been the best indicators for evaluating company performance, such as the physical values of sales and profits or percentage return on equity and assets. The financial sector needs to track, monitor, and analyze company performance on a regular basis to stay healthy and avoid shortfalls of cash. From expenses and income to profit and cash management, financial managers have many options for tracking financial progress. The most used are net profit margin, working capital ratio, and operating profit margin (Bhatti, Awan, Razaq 2014, p. 3131).
  2. Employees satisfaction KPIs: Employee satisfaction is the key to the success of any business. When employees are happy, there are happy customers, and the overall performance of the organization increases. Employee satisfaction is also critical for teams to work efficiently and happily. So, finding out how the team is feeling (through various surveys, interviews, one-on-ones, etc.) can help form a clearer idea of the areas that can be improved, and how to make the workplace more harmonious and effective. Some of the KPIs regarding this field are the percentage of staff working flexible hours, turnover rate, employee satisfaction per survey.
  3. Sales KPIs: Sales-related KPIs ensure teams are meeting sales goals by tracking and regularly reviewing key sales KPIs, including KPIs for leads, opportunities, sales closed, and volume. So they are performance measures used by sales teams and top management to track the effectiveness of related sales activities within a company. These actions help optimize sales performance, sales pipeline, and sales cycle length. Here are some examples of KPIs for sales teams: Customer Lifetime Value, Sales Growth, Average Sales Cycle Length, Sales by Country

Final consideration about KPIs' importance

KPIs are financial and non-financial metrics that help organizations demonstrate how successful they are in their business. One of the necessary prerequisites for developing an effective and efficient system of performance measurement is the previously established process organization at different organizational levels. In this regard, companies can use KPIs on three broad levels (Velimirović, Velimirović, Stankovića 2011, p. 63). First, company-wide KPI that focus on overall business health and performance. Second, department-level KPI, and finally project-level KPI, the most specific and often requested.

In the end, we can conclude that KPIs provide an effective way to measure and track company performance using a variety of different metrics. By understanding exactly what KPIs are and how to properly implement them, managers can better optimize their business for long-term success.

Author: Laura Valenti


Key performance indicator (KPI) — recommended articles
Types of objectives — Goal intensity matrix — Measurement of performance — Objectives of the organization — Critical success factors — Business results — Success criteria examples — Balanced scorecard perspectives — Measure of organizational performance

References

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