KEY PERFORMANCE INDICATORS

I. What is a Key Performance Indicator (KPI)?

A Key Performance Indicator is a financial or non-financial measurement used to quantify progress towards strategic objectives set as part of a Strategic Business Plan using techniques such as the Balanced Scorecard. They will differ depending upon the nature of the business and its strategic objectives, especially those involving difficult to quantify activities.

II. How are Key Performance Indicators used?

Monitoring business activity and performance in real time uses KPIs as part of a measurable strategic objective, which is in turn made up of a direction, the KPI, a benchmark, a target, and a timeframe. For example, a strategic objective such as: "Increase Gross Margin to 30% by the Year End 2009". In this case "Gross Margin" is the Key Performance Indicator. Between 11 and 15 KPIs are sufficient for this monitoring purpose.

III. Identifying Key Performance Indicators

When looking at overall business activity the "Gross Margin" KPI above is easy to identify. Making a Strategic Business Plan using the Balanced Scorecard technique it is necessary for the business to identify KPIs which may be non-financial as well. The key points for identifying suitable ones are:

a. They must represent a defined business process
b. The process must have clear goals or performance requirements
c. There must be a quantitative/qualitative measurement of the results, and comparison with the goals or performance requirements
d. There must be a procedure for investigating variances and changing processes to achieve the goals

IV. Examples of Key Performance Indicators

Using the four perspectives of the Balanced Scorecard, examples of KPIs are:

a. Financial Perspective - Gross Margin, Overheads, New Business, Debtors
b. Customer Perspective – On time contracted delivery, complaints, Customer Survey index, New customers acquired
c. Internal Processes Perspective – Rework, Labour utilization, Lost time injuries, Overtime
d. Learning and Growth Perspective – Employee satisfaction index, Number of trained deputies, Closing of skills gap, Number of cross functional teams

These are just a few of the possibilities, but by carefully selecting the KPIs, and concentrating management effort on the objectives they measure, the progress and health of a business can be easily established.