A lot has been said and written on KPIs but what does it actually means, why an organisation need to have KPIs, How KPIs are developed? Who determines KPIs? Which KPIs should an organisation use? When should it be used? How do KPIs needs to be reported? These are some of the questions, which each and every oneof us are trying to explore and understand.
It is rightfully said by Peter Drucker – “If it cannot be measured, it cannot be managed”. KPI is a performance measure which shows how effectively an organisation is performing towards the achievement of its key objectives. In other word, KPI tells us how good something and someone is performing. For example, Return on Investment (ROI), one of the financial KPI, can provide indication whether investment made is good or bad, if the actual returned profit on invested project is 52% compared to target ROI of 50% (good) or 70% (bad).
KPIS are extremely useful tools but only when they are aligned with the organisation goals and objectives. At the same time, KPIs also need to be relevant to the industry, organisation, and department. There are certain keys points which an organisation needs to be aware of, when it comes to KPIs:
- KPIs should always be simple to understand and manage;
- Relevant to the objectives, which needs to be achieved;
- KPIs needs to be communicated to concerned staff members;
- Should have a context i.e. measure against thresholds and targets;
- Leads to improvement;
- Not too ambitious set but are very realistic to be achievable.
- What are the good KPIs attributes?
The November 1981 issue of “Management Review” contained a paper by George T. Doran called “there’s an S.M.A.R.T. way to write management’s goals and objectives” which discussed the importance of objectives and the difficulty of setting them (Wikipedia).Using the same S.M.A.R.T approach, KPIs should be defined:
- Specific – target a specific area for improvement.
- Measurable – quantify or at least suggest an indicator of progress.
- Assignable – specify who will do it.
- Realistic – state what results can realistically be achieved, given available resources.
- Time-related – specify when the result(s) can be achieved.
Type of KPIs:
Typically, there are five major types of KPIs:
- Input KPIs – measure resources used during a business process. Some examples of input indicators include staff time, cash on hand, or equipment.
- Process KPIs – measure the efficiency or productivity of a business process i.e.average response time to the customer calls.
- Output KPIs – measure financial and non-financial results of business activities i.e. revenues, profits, or new customers acquired.
- Leading KPIs – used in predicting or influencingthe future performancei.e. % growth in Sales Pipeline, user guide usage.
- Lagging KPIs – used to measure results at the end of a time period to reflect upon the success or failure of an initiativei.e. customer satisfaction, number of deaths.
How to create KPIs:
There is no one-size-fits-all KPIs. Every organisation if different and therefore uses different set of KPIs to measure their success. Creating meaningful KPIs requires meticulous planning as each KPIs looks after different objectives and has to be aligned properly. The step generally taken to create KPIs can be as follows:
- Establishment of clear objective –what is the goal of the department? Is to reduce the re-work cost or high product turnover?
- Defining the context – what is the acceptable fault rate or what should be the minimum product turn over per hour/
- Data gathering – looking and evaluating the data source. Exploring the options of data extraction, accumulation, sanitization etc.
- Formulating KPIs – Building formula using both financial and non-financial metric i.e. gross margin divided by number of shops.
- KPI presentation – building dash boards, graphs, charts etc. to present information in visual form for better communication and understanding of KPIs.
KPIs can be numerous but most important thing to remember is the word “KEY” which means it has to be crucial to the performance measurement. Following are some typical KPIs which are generally used by the various organisations:
- Monthly sales growth
- Win ratio
- Returns and refunds
Human resources KPIs:
- Staff satisfaction
- Average salary
- Average length of service
- Employee / sales ratio
- Retention rate
Product management KPIs:
- Monthly recurring revenue
- Product engagement rate
- Retention rate
- Customer complaints
Customer success KPIs:
- Customer satisfaction (CSAT) score
- Customer retention rate
- Customer churn
- Net promoter score
- Customer support KPIs:
- Average response time
- Average resolution time
- Incident rate
Customer retention KPIs:
- Customer satisfaction
- Net promoter score
- Gross profit
- Return on assets
- Working capital ratio
- P/E ratio
- Operating cash flow
- Labour utilization
- Machine time availability
- Rework (work that had to be done again)
Measuring KPIs is vital to assess the strength and success of the organisation. It helps organisation to understand where they stand and what needs to be done to achieve organisational goals and objectives. KPIs are very powerful communication tools, which enables both executives and employees to focus their attention in right direction to deliver the most value to the organization as a whole.
Mohammad Usman Ali – Author is the Director of Financial Shared Services in Australian subsidiary of a US multinational company, based in Melbourne. He is a member of various prestigious professional organisation including CPA Australia, ACCA UK and ICAP Pakistan. He is also a panel member of ACCA Australia & New Zealand chapter.
Disclaimer: The content of this article is for information only and is not offered as an advice. Readers are encouraged to consult a suitably qualified professional adviser to obtain advice tailored to their specific requirement.