KPI is a business term standing for Key Performance Indicators. These indicators are quantifiable measurements with specific targets or goals that make the difference between success and failure of a company. Many KPIs are specific to certain industries or sectors, while some are specific to certain companies; regardless, all KPIs should measure progress toward both important short- and long-term business goals.
KPIs create common goals and shared values for a company’s work force. KPIs can improve efficiency and employee morale, as well as strengthen an organization’s culture. These KPIs spell out the roles and responsibilities of employees, the goals and objectives of the company, and how the KPIs combined with employees' efforts contribute to the success of the organization.
KPIs are the difference between success and failure of a company. Successful KPIs make a fundamental and measurable difference in either succeeding or failing to create and maintain a competitive advantage over the competition. After implementation, these indicators should be used as a performance management tool and method for motivating employees to meet and exceed the targets.
KPIs must aim to complete a company’s mission statement. The functions of successful KPIs are to identify and define all stakeholders’ interests while increasing shareholder value. All KPIs must provide insightful information about future performance. For example, "increasing sales" is not a KPI, but "increasing net profit by ten percent" is a common KPI. Benchmarking is commonly used during the planning and development stages; measuring and comparing current performance with similar businesses within the same industry allows a company to better understand the marketplace and establish realistic goals for the future.
Benchmarking is easier for more established companies in certain industries with specific characteristics, such as a high level of competition and less product differentiation. Certain industries share common indicators that reflect the difference between success and failure for all organizations in that sector. For example, production facilities are concerned with the efficient use of resources and cycle times; fire and police departments are more concerned with response time; while schools use graduation rate as an indicator.
Developing, implementing and monitoring KPIs is expensive, difficult and time consuming for companies. The extensive research needed for benchmarking comparisons can be costly, and in many cases only provide estimates.