A Key Performance Indicator (KPI) is a performance measure of an activity that is critical to the success of an organisation. KPIs function as a fundamental navigation instrument utilised by a company’s managers to track and understand if they are on course for success or taking a step backward.
Importance of Key Performance Indicators
Identification and consistent tracking of the right mix of KPIs shine light on a company’s performance over time and highlight areas that require attention in a timely manner. However, due to the conventionality of KPIs, we have to avoid taking KPIs only at its face value. Rather, managers need to investigate in greater detail to ascertain root causes of deteriorating trends. Similar to statistics, what KPIs reveal is suggestive, but what they conceal is vital. The key lies in the interpretation of these KPIs to generate insights for improvement.
Cautions in Developing Key Performance Indicators
There are a vast amount of KPIs available for managers to adopt in their companies. More often than not, managers collect and report many KPIs that are easy to measure although they may be repetitive and inaccurate. As a result, they end up drowning in data with a thirst for insights.
In order to circumvent this, managers must first define their strategy before aligning desired KPIs to their objectives. After all, navigation instruments are only useful if we know where we want to go. It is often overlooked that regular collection and monitoring of KPIs require labour and in some cases, monetary resources. Hence, the second step is to optimise efficiency by selecting only the essential KPIs and eliminate redundancy. Lastly, it is vital to understand the source of the information and data to ensure its accuracy. Managers and analysts, who will be evaluating these KPIs, need to be cognizant of the strengths and drawbacks of different methods of data collection to ensure precise conclusions are extracted from them.
Business Excellence Framework and Key Performance Indicators
The Business Excellence Framework provides guidance on the four important areas that may benefit from consistent tracking of KPIs. These four areas are Customer Results, Operational Results, Employee Results and Financial Results.
- Customer Results: A company’s product and service performance is best evaluated by customers, and business sustenance is built upon high customer satisfaction in the company’s product and service. Essential KPIs in this category may include a customer satisfaction index, a net promoter score, minimising complaint resolution time and general customer feedback.
- Operational Results: Managers need to ensure the optimization of the way their products or services are processed and delivered to customers. In other words, internal processes needs to be as efficient as possible without compromising on product and service quality. Operational KPIs have the greatest variations depending on the type of industry and company. Taking a manufacturing company as an example, essential KPIs in this category may include a suppliers and partners rating, rate of wastage, productivity per employee, product defect rate and capacity utilisation rate.
- Employee Results: Employees are regarded as the most important asset in any business. Companies usually do not do well if their employees are unhappy or unmotivated, hence the importance of developing insights regarding their sentiments of the company. Essential KPIs in this category include an employee satisfaction index, turnover rate and training expenditure per employee.
- Financial Results: Money matters as much to shareholders as it matters to employees in order to ensure profitability and business continuity. Essential KPIs in this category include profitability ratios, asset liquidity ratios, sustainability ratios and business activity ratios.
KPIs are one of the most powerful tools available to enable organisations to achieve performance excellence. As long as proper implementation is in place, managers will definitely benefit from the regular monitoring and assessment of KPIs.