Businesses typically use one or more of the following performance indicators to measure performance:
- Result Indicators (RIs): Shows how all the departments of a company are working together to get the best results; it shows what the company has done so far.
- Key Result Indicators (KRIs): It is a summary of the company’s overall performance, and is ideally for those not involved in day-to-day management, like the Board of Directors. It can show if a company is doing well or failing, but cannot reveal the reasons behind it, as it only tracks results.
- Performance Indicators (PIs): Unlike RIs, it is specific to one department, and shows what each team is delivering. Usually non-financial, it helps teams stay in line with the organization’s goals; it shows what the company needs to do to achieve goals.
- Key Performance Indicators (KPIs): A measurable value that demonstrates how effectively a company is achieving key business objectives, and is used by senior management like CEOs. Unlike KRIs, KPIs can reveal the reasons behind a company doing well or failing by tracking performance.
Performance management is used by companies to assess how well they are doing, and KPIs are used at multiple levels to evaluate their success at reaching targets, or to see how successful a project is.
It is vital that the KPIs chosen by an organization are well-defined and achievable. They must be communicated clearly throughout the company, and must be applicable to the business.
While deciding what sort of a KPI your business needs, it’s important to think of what business outcome or objective is. KPIs need to be customised based on your business. Thus, in order to find the right KPI, you need to:
1. Have clear objectives about your business and KPIs
2. Share these KPIs with everyone involved in the company
3. Regularly review the KPIs
4. Ensure the KPIs are actionable
5. Change and update KPIs to match the goals of the company, ensuring they are attainable
KPIs can be assigned to any department, including:
- Financial: Working capital, net profit margin, and operating cash flow
- Service: First response time, employee engagement level, and number of escalations
- Employee: Staff advocacy score, Human capital value added (HCVA), and absenteeism rate
- Process: Percentage of product defects, average time to complete task, and average process overdue time
- Customer: Net Promoter Score (NPS), resources spent on one paying and one non-paying client, and Customer Satisfaction Score (CSAT)
It isn’t necessary that every department within the company has the same KPIs; every operation needs its own set of KPIs. Thus, this results in a mix of metrics throughout the company, where some are directed towards performance and others towards operations.
In order to implement KPIs, businesses usually follow this procedure:
There are numerous benefits associated with using KPIs. First and foremost, KPIs are like business intelligence. Monitoring KPIs are a vital strategy of keeping a business ahead of its competition. They are measures that focus on aspects that are important for the success of the organisation. When done right, KPIs help with timely and accurate fact-based decision making processes. This helps increase productivity, keeping employees and stakeholders happy, and contributes to the growth of the company.
Pfizer is one of the many global companies that uses regularly audits, reviews, measure, and reports the performance of its business and its global environment, health and safety (EHS) programs.
The company uses KPIs to measure and report its global performance. Its metrics include Waste disposed (in million kgs.), hazardous waste disposed and recycled (in million kgs.), and energy use (in million gigajoules).
To this end, Pfizer’s scope for data collection is driven by its EHS standards.
Based on a survey, about 80% companies use KPIs. But, in order to gain benefits from the use of KPIs, it is important to choose the right metrics.
The wrong KPIs bring the danger of pointing people into the wrong direction and even encouraging them to deliver the wrong things. Always remember, the reason why KPIs are so powerful is that ‘you get what you measure’.
A large list of KPIs that do not have any discernible connection to the actual business objectives and goals are bound to create more problems than help the business, as is not understanding the indicators completely leads to a failure in monitoring the same. Creating KPIs that lack any form of accountability or those that are not achievable will not only hurt the business but also bring down employee morale.
KPIs are an important tool that can improve business processes in an efficient way. The numerous benefits it offers can only be obtained provided one identifies and follows the right KPIs. In order to find the right KPIs for one’s business, one needs to figure out what the goals of the company are. Some companies might measure success by how happy their customers are, and so can use customer satisfaction as a KPI, whereas some companies may be more inclined to measure success through a monetary point of view, thus using net profit margin as a KPI.
Without KPIs, it would be difficult for a company’s leaders to evaluate how well the business is doing, and decide what operational changes need to be made in order to address the problems.
By ensuring that their business continuously improves and alters its KPIs to match its short term and long term goals, companies will find it easier to create a working process that helps them continuously achieve said goals.