Key Performance Indicators (KPIs) are quantitative and qualitative measures used to measure an organisation’s performance. These are established as targets in a hierarchy, e.g. by departments and individuals. The achievement of these targets is reviewed regularly.
KPIs are used to monitor the performance of a company, department, process or even an individual machine or business process. They also help to establish and shape the culture of the organisation, i.e. KPIs aid in modifying individual and organisational behaviour.
KPIs need to adapt to the changing goals of the organisation, i.e. the KPIs need to be established in the context of the organisation’s goals. Goals change as the organisation changes in reaction to external factors or as it improves or worsens in relation to achievement of its goals.
KPIs are cascaded down from the organisation’s goals to departmental KPIs and down to individual KPIs, and need to reflect the organisation’s culture and values, by indicating the behaviours
and performances that the organisation will recognise as ‘successful’ and reward employees for.
KPIs need to be measurable and reflect a balance between operational and people-orientated measures.
KPIs are a fundamental component of sustaining a change process and maintaining a performance management culture. KPIs should be aligned with the organisation’s vision and direction and this is achieved by cascading the KPI sets down from the organisation’s goals.
When performance is measured, and the results are made visible, organisations can act to improve.
S.M.A.R.T. KPIs
The acronym S.M.A.R.T. is often used to describe well-formed KPIs. The elements of S.M.A.R.T. KPIs are Specific, Measurable, Achievable, Relevant and Timely.
specific
KPIs need to be specific to the individual job and if possible expressed as statements of actual on-the-job behaviours.
For example, a KPI should:
- explain clearly to the employee how to perform to be successful
- have an impact on successful job performance, i.e. distinguish between effective and ineffective performance
- focus on the behaviour itself, rather than personality attributes such as ‘attitude to customers’.
Terms such as ‘work quality’, and ‘job knowledge’ are too vague to be of much use in and of themselves; KPIs should establish specific, quantifiable and measurable targets for ‘work quality’ and ‘job knowledge’.
measurable
KPIs must be measurable, that is based on behaviour that can be observed and documented, and which is job-related. They should also provide employees with continuous feedback on their standard of performance.
achievable
Performance management needs to be an open, two-way communication process. KPIs must be seen as achievable by all parties to the KPI. The KPI must be realistically achievable. If it is set too high for the circumstances (such as an ambitious production target) it will ensure failure.
relevant
It is essential that employees clearly understand the KPIs, and that they have the same meaning to both parties. Joint development of KPIs is more likely to result in relevant and valid standards than top-down edicts.
timely
KPIs should measure performance against an agreed time frame.
It should be possible to collect the relevant information either immediately or shortly thereafter and disseminate iit quickly, otherwise it will lose its relevance.
HR-related functions, including training and development, recruitment and selection, rewards and recognition, career planning etc. must be aligned with the KPIs and must act in a manner supportive of the KPIs. Thus the tangible reward system should directly reward KPI-based performance.
business aspects that require KPIs
KPIs should cover all aspects of the business. The selected KPI sets should cover a balanced-scorecard of KPIs. Examples are:
- customer satisfaction
- employee satisfaction
- staff turnover
- absenteeism
- departmental & divisional specific measures
- triple bottom line: financial, environmental and social responsibility
- finance including revenue and costs
- OHS reporting including incidents and related costs
- equipment usage and OEE
- maintenance costs and effectiveness
- new product development & innovation
- lead times and down times
- quality.
KPI components
KPIs should identify the required outcomes, for example:
- the minimum acceptable performance e.g. daily break-even point
- target performance e.g. desired daily output.
KPIs should be communicated to all staff so that they are aware of how they are to be measured and how their KPIs impact on the organisation as a whole. KPIs should also be aligned with the vision and direction of the organisation and have relevant reward and recognition criteria linked to each KPI.
When implementing new KPIs, having baseline data to measure improvements is very important. Progress on KPIs should be communicated at regular times to highlight emerging trends. As these trends emerge, corrective action can be implemented in a timely fashion. KPIs need to be communicated via multiple media.
The measures that are selected must be carefully specified to ensure they do not cause unintended behaviours. There needs to be a a balance of qualitative and quantitative factors to encourage the correct behaviours.
Listed below are some examples of the behaviours and outcomes that ill-considered KPIs can cause.
| Measurement area |
Behaviour |
Outcome |
| Production output |
Make more |
Overproduction |
| Machine efficiency |
Run machine longer
Run in most efficient sequence for machine |
Unnecessary stock
Customer orders late |
| Maintenance costs |
Reduction in maintenance activities to reduce costs |
Machine breakdowns |
| Cash flow performance |
Pay suppliers as late as possible |
Supplier deliveries unreliable |
creating KPIs
This section addresses the practical matter of how to generate candidate KPIs; in other words, given a set of business processes, how can we go about generating a good set of candidate KPIs for those processes. We will examine several useful aids for generating KPIs and then describe the “in practice” process of generation.
cascading corporate goals down
Many ways of generating KPIs for a department or sector of an organisation can be used, but since at some point in the process the KPIs will need to be assessed for their contribution to corporate goals, one approach which can shortcut some work is to determine the department’s goals by cascading the corporate goals down to the department level.
A department’s goals should contribute to the corporate goals in the appropriate manner for the department’s nature. For example, given a corporate goal of “Differentiate top-tier products by market-leading quality”, the Purchasing Department’s goals might include “Seek alternate suppliers with higher quality components at competitive rates and supply conditions”, i.e. the departmental role contributes to the corporate role within the limitations of the department’s raison d’etre.
Once the department’s goals are known and agreed, there is a basis for designing metrics. KPIs can be chosen which not only satisfy the fundamental properties of KPIs (key indicators of process performance) but which also can be directly understood in light of the department’s goals. This approach significantly facilitates generating KPIs.
KPI examples
We provide over 500 common KPIs for your consideration at:
modulus KPIs.
This note has been a high-level summary of the question of what is a KPI. For a much more detailed analysis of KPIs, and especially of choosing KPI sets, consider our e-book Generating and Selecting KPI Sets”
