Performance indicator

A performance indicator or key performance indicator (KPI) is a

measure of performance. Such measures are commonly used to help
an organization define and evaluate how successful it is, typically in
terms of making progress towards its long-term organizational goals.
KPIs can be specified by answering the question, "What is really
important to different stakeholders?". KPIs may be monitored using
Business Intelligence techniques to assess the present state of the
business and to assist in prescribing a course of action. The act of
monitoring KPIs in real-time is known as business activity monitoring
(BAM). KPIs are frequently used to "value" difficult to measure
activities such as the benefits of leadership development,
engagement, service, and satisfaction. KPIs are typically tied to an
organization's strategy using concepts or techniques such as the
Balanced Scorecard.

The KPIs differ depending on the nature of the organization and the
organization's strategy. They help to evaluate the progress of an
organization towards its vision and long-term goals, especially toward
difficult to quantify knowledge-based goals.

A KPI is a key part of a measurable objective, which is made up of a

direction, KPI, benchmark, target, and time frame. For example:
"Increase Average Revenue per Customer from £10 to £15 by EOY
2008". In this case, 'Average Revenue per Customer' is the KPI.

KPIs should not be confused with a Critical Success Factor. For the
example above, a critical success factor would be something that
needs to be in place to achieve that objective; for example, an
attractive new product.

Key Performance Indicators, also known as KPI or Key Success

Indicators (KSI), help an organization define and measure progress
toward organizational goals.

Once an organization has analyzed its mission, identified all its

stakeholders, and defined its goals, it needs a way to measure
progress toward those goals. Key Performance Indicators are those
measurements.

What Are Key Performance Indicators (KPI)

Key Performance Indicators are quantifiable measurements, agreed to

beforehand, that reflect the critical success factors of an organization.
They will differ depending on the organization. A business may have as
one of its Key Performance Indicators the percentage of its income that
comes from return customers. A school may focus its Key Performance
Indicators on graduation rates of its students. A Customer Service
Department may have as one of its Key Performance Indicators, in line
with overall company KPIs, percentage of customer calls answered in
the first minute. A Key Performance Indicator for a social service
organization might be number of clients assisted during the year.

Whatever Key Performance Indicators are selected, they must reflect

the organization's goals, they must be key to its success, and they
must be quantifiable (measurable). Key Performance Indicators usually
are long-term considerations. The definition of what they are and how
they are measured do not change often. The goals for a particular Key
Performance Indicator may change as the organization's goals change,
or as it gets closer to achieving a goal.

Key Performance Indicators Reflect the Organizational Goals

An organization that has as one of its goals "to be the most profitable
company in our industry" will have Key Performance Indicators that
measure profit and related fiscal measures. "Pre-tax Profit" and
"Shareholder Equity" will be among them. However, "Percent of Profit
Contributed to Community Causes" probably will not be one of its Key
Performance Indicators. On the other hand, a school is not concerned
with making a profit, so its Key Performance Indicators will be different.
KPIs like "Graduation Rate" and "Success in Finding Employment after
Graduation", though different, accurately reflect the schools mission
and goals.

Key Performance Indicators Must Be Quantifiable

If a Key Performance Indicator is going to be of any value, there must

be a way to accurately define and measure it. "Generate More Repeat
Customers" is useless as a KPI without some way to distinguish
between new and repeat customers. "Be The Most Popular Company"
won't work as a KPI because there is no way to measure the company's
popularity or compare it to others.

It is also important to define the Key Performance Indicators and stay

with the same definition from year to year. For a KPI of "Increase
Sales", you need to address considerations like whether to measure by
units sold or by dollar value of sales. Will returns be deducted from
sales in the month of the sale or the month of the return? Will sales be
recorded for the KPI at list price or at the actual sales price?

You also need to set targets for each Key Performance Indicator. A
company goal to be the employer of choice might include a KPI of
"Turnover Rate". After the Key Performance Indicator has been defined
as "the number of voluntary resignations and terminations for
performance, divided by the total number of employees at the
beginning of the period" and a way to measure it has been set up by
collecting the information in an HRIS, the target has to be established.
"Reduce turnover by five percent per year" is a clear target that
everyone will understand and be able to take specific action to
accomplish.

Key Performance Indicators, also known as KPI or Key Success

Indicators (KSI), help an organization define and measure progress
toward organizational goals.

Once an organization has analyzed its mission, identified all its

stakeholders, and defined its goals, it needs a way to measure
progress toward those goals. Key Performance Indicators are those
measurements.

Background

The term KPI has become one of the most over-used and little
understood terms in business development and management. In
theory it provides a series of measures against which internal
managers and external investors can judge the business and how it is
likely to perform over the medium and long term. Regrettably it has
become confused with metrics – if we can measure it, it is a KPI.
Against the growing background of noise created by a welter of such
KPI concepts, the true value of the core KPI becomes lost.

The KPI when properly developed should be provided all staff with clear
goals and objectives, coupled with an understanding of how they relate
to the overall success of the organization. Published internally and
continually referred to, they will also strengthen shared values and
create common goals.

What are the key components of a KPI? The KPI should be seen
as:

Only Key when it is of fundamental importance in gaining competitive

advantage and is a make or break component in the success or failure
 of the enterprise. For example, the level of labour turnover is an
important operating ratio, but rarely one that is a make or break
element in the success and failure of the organization. Many are able
to operate on well below benchmark levels and still return satisfactory
or above satisfactory results.

Only relating to Performance when it can be clearly measured,

quantified and easily influenced by the organization. For example,
weather influences many tourist related operations – but the
organization cannot influence the weather. Sales growth may be an
important performance criterion – but targets must be set that can be
measured.

Only an Indicator if it provides leading information on future

performance. A considerable amount of data within the organization
only has value for historical purposes – for example debtor and creditor
length. By contrast rates of new product development provide
excellent leading edge information.

Obviously KPI's cannot operate in a vacuum. One cannot establish a

KPI without a clear understanding of what is possible – so we have to
be able to set upper and lower limits of the KPI in reference to the
market and how the competition is performing (or in the absence of
competition, a comparable measurement from a number of similar
organizations). This means that an understanding of benchmarks is
essential to make KPI's useful (and specific to the organization), as
they put the level of current performance in context – both for start
ups and established enterprises – though they are more important for
the latter. Benchmarks also help in checking what other successful
organizations see as crucial in building and maintaining competitive
advantage.

Start with what you need to measure and monitor

Different organizations need to monitor different aspects of their

environment. For example, the airline industry has a complex set of
issues many of which (but not all) are different from the dairy farmer.
Ibis has created a number of separate business monitoring modules for
medium sized companies which we believe cover the majority of
requirements for the development and maintenance of their
organization, that are part of a bottom up planning system based
around knowledge centres.

Knowledge centre Focus of activity Possible KPI

Administration Planning and monitoring, PEST elements, high
balanced scorecard, budgeting, impact/ high probability
portfolio theory, golden circle, assumptions and
decision making, creativity, boundary conditions
SCORE, corporate governance, (strategic risk
territorial imperative, impact assessment),CGAL,
analysis, standard operating contractual, portfolio
procedures, mosaic management, risk levels, % hurdle
prioritization, trade offs, MBO, rate, insurance
succession planning, quality costs/sales, BEV,
circles, technology audit, vision capital spread ratio,
statement, SBU decisions, cost per sqm or cost
barriers to entry, critical success per employee for
factors, business model, legacy facilities total space, %
issues, successes failures/ lessons meeting time, utility
learnt, authority/ responsibility, cost, noise, accidents,
recruitment appraisal, premises % outsourcing,
review, stakeholder relationships, complaint resolution
trade associations, recruitment speed, complaint
appraisal, risk management, resolution cost,
planning effectiveness, legal, average meetings/
health and safety, SBS, utilities, month, utility cost/
insurance, security, design for market cost ratio,
operating efficiency, time study, premises cost/ market
complaints, pensions, share cost ratio, space
options, employee share savings utilization, whistle
schemes, fringe benefits, bonus blowing, temperature,
systems, secrecy, meeting noise, health and
management, time management, safety breaches,
cost cutting, facilities security breaches,
management, stress, forecast document loss, pension
grid, trade offs, communication, cost, theft, AER, budget
investment appraisal, health and ratio, KFR, project
safety, environmental audit, ISO success, certification,
9000, ISO 14000, operating wages ratio, litigation,
financial review (OFR), working internal service
conditions, employee suggestion, satisfaction levels
team building, training, internal
service satisfaction
Finance Planning and monitoring, Financial ratios, %
balanced scorecard, budgeting, outsourcing, FER,
cash flow, profit and loss, balance budget ratio, cost of
sheet, successes failures/ lessons finance, capital
learnt, trade offs, MBO, mosaic allocation ratio, capex,
management, prioritization, IFRS, EFT%, CER, tax charge,
 GAAP, succession planning, SPT %, gross yield,
accounting assumptions, P/E,PEG, EPS, project
technology audit, SCORE, success, DER%, BDR,
decision making, creativity, FCF, overdue accounts,
quality circles, asset register, market dynamics
invoicing, profitability, activity, capital allocation,
and liquidity ratios, revaluation EBITDA currency/ debt
accounting, fraud, capital currency ratio, sales
allocation profile, James' rule, tax rate %, cash
contingent liabilities, deferred interest rate%,
consideration, cost capitalization, depreciation %,
brand accounting, cost cutting, internal service
payment systems, trade offs, satisfaction levels
documentary credits, dividend
policy, cash management,
currency management, sales tax,
depreciation, recruitment
appraisal, funding options,
financial reporting, audit,
recruitment appraisal, source and
application of funds, sensitivity
analysis, investment appraisal,
convertibles, tax management,
credit management, hedging,
team building, time management,
training, internal service
satisfaction
Marketing/ sales Planning and monitoring, CLV, market share by
balanced scorecard , budgeting, segment, competitive
portfolio analysis, trade offs, score, sales by
MBO, successes failures/ lessons channel, % repeat
learnt, succession planning, purchase, average
recruitment appraisal, mosaic sales value, sales
management, prioritization, productivity, market
technology audit, SCORE, share, advertising
decision making, creativity, productivity by
market drivers, marketing mix, channel, cost per lead,
branding, Single Block Theory, cost per converted
entrants, substitutes, market lead, bid success rates,
research, customer panel, sales range sale%, average
channels, distribution channels, discount, service call
sales management, investment out times, enquiry
appraisal, call centres, marginal response time,
profitability, quality circles, seasonality ratio,
customer loss, products/services customer satisfaction,
 (width/depth), cross selling, % branding %,
expectation fulfillment gap, customer investment
market size, customer transition, review, customer
seasonality, networking, price transition rate, value
elasticity, pricing terms and chain, % outsourcing,
conditions, quantitative analysis, MER, budget ratio,
customer satisfaction, reference EGMG ratio, customer
sale, cost cutting, market spread, investment return,
customer investment review customer churn,
(CIR), product age spread, complaints, warranty
organizational buyer behaviour, claims, project success,
reference sale, customer spread, channel members,
product age, competitive product positioning
advantage, competitive bidding, variance, SER, AER,
trade offs, negotiation, pricing, country spread,
recruitment appraisal, game seasonality ratio,
theory, channel management, customer spread,
customer care, complaints, product spread,
warranties, mystery shopper, product age spread
time management, branding, ratios, segmental
team building, training, internal leadership, TDA's,
service satisfaction project success, CIR%,
competitive bidding
success %, internal
service satisfaction
levels
Production/logistics/ Planning and monitoring, Cost variances, order
service delivery balanced scorecard, budgeting, processing cycle,
successes failures/ lessons learnt, production cycle times,
standard costing, activity based downtime, %
costing, trade offs, MBO, outsourcing, PLER,
succession planning, mosaic budget ratio, STR,
management, prioritization, capacity utilization,
investment appraisal, design for logistics cost, SPC, load
operating efficiency, JIT, utilization, failure rates,
FMS,technology audit, SCORE return on plant, space
including cost cutting, decision utilization, set up time,
making, creativity, production waste rates, pollution
efficiencies, PLM, aggregate levels, emergency
demand policy, management delivery, out of stock
accounting, OR, suppliers, supply %, recycling%, energy
chain management, MRP, efficiency ratio, peak
inventory levels, production capacity %, supplier
equipment age, quantitative ratio, partnering,
analysis, design, sophistication, obsolescent stock,
 capacity, TQM, TPM, waste EOQ, number of
management, condition suppliers, supplier
monitoring, recycling, complaints, spread ratio, number of
technical support, recruitment components,
appraisal, distant data capture, emergency call out,
distribution structure delivery failures, E-
(warehousing, outlet location) enablement, vendor
and physical distribution rating, project success,
management, time based internal service
competition, time management, satisfaction levels
quality circles, order processing,
trade offs, scheduling,
purchasing, recruitment
appraisal, vendor ranking,
networking, postponement,
standardization, product/ service
design, team building, training,
internal service satisfaction
Personnel Planning and monitoring, Productivity, turnover,
balanced scorecard, budgeting, absenteeism, %
successes failures/ lessons learnt, outsourcing (temporary
trade offs, MBO, succession staff ratio), PER,
planning, mosaic management, budget ratio, labor cost
prioritization, quality circles, Noah %, wages ratio, CNCER,
principle, decision making, employee satisfaction
creativity, technology audit, levels, CH/WH ratio,
SCORE, eight "S", absenteeism, overtime%, skills,
timekeeping, trade offs, overtime, training, discipline,
industrial relations, stress, bonus disputes, appeals,
systems, training needs analysis, timekeeping ratio,
recruitment appraisal, time apprenticeship,
management, team building, cost recruitment costs,
cutting, wages, employee record training days, whistle
keeping, vacation planning, blowing, span of
training, internal service control, appraisals,
satisfaction wages ratio, diversity
index, PDP, project
success, internal
service satisfaction
levels
IT Planning and monitoring, Management
balanced scorecard , budgeting, information system
successes failures/ lessons learnt, functionality,
trade offs, MBO, investment productivity, stability,
appraisal, succession planning, web hits, access speed,
 mosaic management, site downtime, site
prioritization, data mining, click through, Intranet,
technology audit, SCORE, Extranet, %
decision making, creativity, outsourcing, ITER,
Intranet, Extranet, trade offs, budget ratio, security
telecommunications and IT breaches, data storage,
platform, management EDI, web position,
information systems (MIS), web quality of data,
design and management, cloud information overload,
computing, systems, time project success,
management, recruitment internal service
appraisal, SEO, information flow satisfaction levels
map, security, mystery shopper,
teleworking, quantitative
analysis, cost cutting, systems
analysis, team building, training,
artificial intelligence, quantitative
analysis, modeling, encryption,
recruitment appraisal, internal
service satisfaction
Product/ service Planning and monitoring, Product age spread,
development budgeting, innovation matrix, R&D%, ideas, strategic
balanced scorecard, mosaic fit, protocol score, total
management, prioritization, cycle time, project
successes failures/ lessons learnt, review, team creation,
trade offs, MBO, succession testing, % outsourcing,
planning, investment appraisal, NPDER, budget ratio,
TBC, technology audit, SCORE, license fees, IPR%, IPR
quality circles, decision making, infringements, IPR
recruitment appraisal, creativity, maintenance costs,
product age profile, period of royalty rate %, time,
grace, trade offs, halo effect, budget, specification,
identification of new product/ project success,
service concepts, synergy, internal service
cannibalization, protocol, IPLC, satisfaction levels
certification, technology transfer,
first mover advantage, time
management, recruitment
appraisal, IPR, successful
development/ commercialization,
team building, training, internal
service satisfaction
Contingency Authority and responsibility, Response times, KFR,
planning planning and monitoring, % outsourcing, % SOP,
budgeting, successes failures/ % training, %
 lessons learnt, SCORE, above/below barrier
investment appraisal, conditions, success
assumptions, high risk/high rates, % budget
probability, Black Swan theory,
failure points, reducing potential
for failure, setting trigger points,
action plan, stage gate, team
building, communication, training,
TEWT, simulations, role play,
impact analysis

Establish current performance, benchmark and target levels

For each monitoring module, one can then establish what the current
level of performance is in a measurable and understandable way. This
is the current performance. From industry sources, the benchmark
level can normally be introduced (getting to benchmarks is often a
difficult process and one requiring a mixture of low cunning and/or
sophisticated analysis). Then a target level of achievement can be
entered. Let us take an example of a financial management module for
an established manufacturing company and what it will tell us.

Financial knowledge centre monitoring components

Factor Current Benchmark Target

Gross profit % 68 52 72
ROCE % 13 10 20
FCF 12 n/a 10
Gearing (DER) 15 38 15
Interest cover X 8.3 3.7 10
AER % 8 12 6
SER % 10 12 6
Debtor length (days) 102 95 60
Creditor length (days) 60 63 60
Stock turn/year 5 4 8
Current ratio 4 3 4
Budget ratio 95 n/a n/a
Capex ratio 8 4 7
WCR 1.7 3.2 1.7
Z score 3 7 3
Tax charge % 12 19 10
Depreciation % 15 12 n/a
Cost of finance % 3 8 3
EFT 82 n/a 88
Overdue accounts % 2 n/a 1
STP% 92 n/a 95
FER% 3 n/a 2.6
Project success ratio 90 n/a 90
Internal satisfaction level
% 67 n/a 90

We can gain an enormous amount of information and control from such

a chart, but obviously not all components will meet the criteria of being
a KPI – otherwise we are back into the problem of measuring
everything and not concentrating on a limited number of core criteria.

Add KPI project control elements

This ratio based analysis is combined with a review of individual

projects – normally based around the three key performance criteria,
whether the project is on time, on budget and on specification. For
projects involving significant expenditure the measurement of stage
gate components will also significantly add to the level of control at a
knowledge center level.

An example from the same knowledge centre would look like this:

Project Due date On time On budget On spec Stage gate

Debt August Yes Yes Yes None
refinancing
Tax review September Yes Yes Yes None
Sales August Yes Yes Yes None
insurance

How do I use such a format to develop and understanding of

what is a KPI?

As different individuals and organizations will put a different emphasis

on each item of information a definitive list of what is and what is not a
KPI will depend on individual decisions, and will vary considerably
according to the stage of company development. Start up enterprises
need to place their emphasis on structural factors; established
companies on operational performance.

However, one can set some guidelines. The most rapid way to
establish the KPI within any set of monitoring information is to work
through the three criteria in sequence.

Which measures in the above chart are key?

Gross profit is one key measure to the success of the organization.

Research shows that survival rates are linked to levels of gross profit;
gross profit margins above that of the competition provide clear
evidence of competitive advantage.

Return on capital employed is another key measure of the success of

the organization. The ability to use investment effectively is central to
effective long term development.

Z score is a measure of the liquidity of the enterprise and clearly

defines positive or negative trends.

It would be the Ibis argument that the other components of the chart
are not key – they are valuable items of information but are not make
or break aspects of company management (unless they are
grotesquely different from benchmark values).

Are these performance measures – can we quantify them and influence

them?

Yes

Do these provide leading edge indications of future performance?

Yes

The conclusion from this analysis is that in financial reporting the

company should concentrate on gross profit, return on capital
employed and Z scores as their key performance indicators. Both gross
profit and return on capital employed are part of the “model” balanced
scorecard for overall objectives that Ibis propose for the majority of
enterprises as part of their planning platform.

Other components within the financial reporting module that might be

considered as KPI's are factors such as the levels of gearing (debt/
equity ratio – DER), project success rates, bad debt rates, and free
cash flow (FCF). Including time, budget and specification to project
reporting would also be a natural addition.

The balanced scorecard and KPI's

In addition to the creation of the enterprise balanced scorecard, in

which gross profit, return on capital and Z scores are standard
elements, the identification of KPI's in each of the operational areas or
knowledge centres also assists the enterprise in plan development.
These KPI's will change over time, but their creation as part of the
initial creation of each knowledge centre will focus and direct their
operational activities.

Where else are KPI's valuable?

The KPI is central to a number of other elements in the planning

platform which provides the basis for answering the three crucial
planning questions:

In addition to the creation of knowledge centres and business

monitoring, KPI's have a vital role to play in:

Action planning and implementation with an emphasis on management

by objectives which will include a standardized rate of return and
detailed project control;

Training as part of a company wide approach to focusing staff and

management on essential operational requirements;

Central to business planning as a core part of the business plan

outline;

Identification of necessary actions in change management, exit

planning and survival and recovery planning;

They set priorities for investment appraisal, and the choice of

emphasis that should be given to the main strategies within the golden
circle, consolidation (including cost cutting), market penetration,
,market development and product development.

Training on key performance indicators, the creation of a business plan

and standard operating procedures is available from Ibis.

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.

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.