Key Performance Indicators or KPI are metrics that you believe are critical for the success of your business. They will be different depending on your industry, your business and your mission and values. Yes, this is a part of strategic planning. KPIs when selected, measured and monitored correctly allow you to determine whether your business is a success.
A service oriented business may select as a KPI a metric dealing with how fast customers are served, if that is of strategic importance. A business developing its online market share may select a KPI that measures online sales. A NCAA football team may select number of wins as a KPI and also the graduation rate of its team members.
Attributes of KPIs are:
- Specific and Measurable – a KPI needs to be a specific metric that can be expressed as a number. General feelings about customer satisfaction for example may be difficult to quantify.
- Consistent – KPIs should be metrics that can be measured the same way over time.
- Relevance – KPIs must be relevant to the fulfillment of the mission and overall success of the business. They measure the big picture organizational objectives.
Notice that each of the KPIs measures progress to fulfilling the organization’s mission. However, the organization may not actually be able to control the KPI. For example, if a school uses its graduation rate as a KPI, there are factors that influence the KPI that are beyond the control of the school – because the KPI really is measuring student performance, not school performance.
The business or organization may only be able to influence the KPI through achieving objectives it can control. For example if the KPI is Sales, one could argue that only the customers control purchasing of the entity’s products. However, the entity can influence Sales by doing Sales activities, advertising, customer relations, customer development, maybe cold calls or other initiatives. But there are other factors that may impact sales as well – changing customer demographics, product life cycle, competitive pressures are but a few. So the analysis of the change in a KPI may indeed be a very complicated endeavor.
KPIs like Sales or Graduation Rates can be important to monitor, and they can be useful in measuring an organization’s effectiveness. But the cautionary tale is this: if a business selects a KPI that it cannot directly control, a great deal of effort may be needed to understand how to respond its change.
The optimal KPI would be one that the business can not only influence but control.