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In business, what gets measured gets done. Key performance indicators (KPIs) help a team, department or organization focus on important success factors. Businesses monitor KPIs to monitor operations. KPIs give management actionable data it can use to improve services, align operations with organizational objectives and track progress toward goals. KPIs are included in balanced scorecards or strategic plans and report current performance, year-to-date and trend data for each KPI through management dashboards, reports, charts or spreadsheets.
Each KPI must be clearly defined if it is to be an effective management tool. The definition includes a description of what is being measured and why. The "why" component makes the business case for the KPI -- why it is important and how it is tied to the organization’s strategic goals. The business case defines the current situation and how it affects products or services. The definition also describes how making progress toward or achieving a goal will affect the customer, team, department or organization, along with any associated risks.
KPIs include a number of attributes that must be identified and documented, including the start and end dates, unit of measurement and formula and data sources for the KPI; how it is linked to strategic initiatives and goals; and how it relates to quality management. The attributes include the KPI sponsor, the position or person responsible for tracking it and those who will benefit from it.
KPIs are often categorized based on the main areas of business operations -- customer indicators, financial performance, internal processes and learning and growth. Customer indicators may include the number of customers per reporting period, number of new customers, number of complaints, call abandon rate or customer satisfaction scores. Financial KPIs may include profit per project, percent of accounts paid in full, market share, performance compared to budget, number of billing disputes and average production cost per item. Internal process KPIs may include new product/service time to market, research and development cost as a percent of revenue or average number of quality checks compared to the target number. Learning and growth KPIs may include average training hours per employee, training cost per employee or trainer-to-employee ratio.
Organizational KPIs are determined by senior management, while departments and teams develop their own, which are aligned with organizational KPIs. The KPI procedure begins by identifying the indicators linked to strategic goals and initiatives. Data elements and resources are identified, along with collection and reporting methods. A formula is developed that summarizes the KPI; for example, average call time equals the total length of all calls divided by the number of calls. A reporting or display method, such as a dashboard or chart, is developed for each KPI and the results are evaluated each month by the team, department or management to identify problems and opportunities for improvement.
Diane Chinn is a freelance writer with more than 15 years experience in many areas, including business and technical communications. She has a Bachelor of Arts in psychology from California State University and a Master of Arts in human resources and industrial relations from the University of Minnesota. She is a Six Sigma Green Belt .