What is the Key Performance Indicator (KPI)?

Published by Thomas Herold in Economics, Investments

'Key Performance Indicator (KPI)' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Key Performance Indicators are measurements that aid companies and other organizations in assessing the progress they are making towards their key goals. It is important for any organization to start out by deciding on its mission and determining its goals. Once they have done this effectively, they can decide on the best means of measuring their incremental progress to reaching the goals.

A characteristic of Key Performance Indicators is that they are measurements that are quantifiable. They must also be relevant to the organization’s particular benchmarks of success. These will be different for various organizations. A business and a community service organization will not have the same KPIs.

Businesses could have KPIs that relate to their total profits or amount of income that they derive from repeat customers. Customer service departments could use KPIs that measure the number of calls they answer in under a minute. Schools’ Key Performance Indicators could center on the percentages of students who graduate. Community service organizations might look at a KPI that revolves around the number of individuals they are able to assist in a given year.

There is no one right or wrong Key Performance Indicator. KPIs only need to be measurable, relevant to the goals of the organization, and a core part of the group’s success. As an outfit’s goals evolve or are met, the KPI goals may shift as well.

Key Performance Indicators have to be definable and measurable to be useful. It is no good setting a KPI that is subjective or a matter of opinion. Their definitions also should be consistent year in and year out. This is the only way that the targets set for each KPI will be meaningful.

If a company sets a goal to be the best employer, then they might use their company Turnover Rate each year as a Key Performance Indicator. This will work so long as they are using the same turnover rate definition and measurement each year. Reducing turnover by a certain percent annually is an understandable goal that different departments can act on and address.

Another important attribute of these Key Performance Indicators is that they have to be relevant to the organization and its goals. A business whose goal is to become the most profitable company in the sector will need to use KPIs that address profits and relevant finances. They might choose profits before taxes. Schools that are not interested in turning profits would not utilize such KPIs.

For Key Performance Indicators to be helpful they also need to be a core part of an organization’s success. KPIs are only practical so long as they relate to the elements that the organization needs to work on so that they can attain the goals. Another important facet of these KPIs is that there should not be too many of them.

The idea is for the members of the organization to be able to focus on the identical Key Performance Indicators. It is possible for the organization as a whole to have three to five KPIs while departments have several others that help to support the overall goals. So long as these goals can be neatly categorized under the company’s larger ones, this is acceptable.

Key Performance Indicators make a good tool for performance management. When everyone in the organization is aware of the goals, then they can take appropriate steps to help reach them. KPIs can be posted on company websites, in employee break rooms, and in company conference rooms. All of the activities of the members of the organization should be focused towards meeting or even surpassing those KPI goals.

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The term 'Key Performance Indicator (KPI)' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.