What is a KPI?
A KPI (Key Performance Indicator) is a statistical measure of how well a business is progressing towards specific goals and objectives. A KPI could, for example, measure a company’s financial performance or how well it is meeting customer requirements. However, in order to be effective, KPIs must be effectively and accurately applied.
KPIs can be applied to many elements deemed critical to the success of the overall business and its individual operations such as employee performance, process throughput efficiency, training effectiveness. When key indicators of performance are measured, regularly reviewed and evaluated, business owners and managers can identify problem areas and address them in real time, allowing problems to be immediately identified and addressed before an operation is derailed.
KPIs can also be used to improve performance efficiency and provide business owners with metrics necessary to benchmark their processes, thereby giving them a competitive edge. Additionally, utilizing them in measuring performance can give business owners peace of mind that their organization is heading towards potential growth and success.
The 3 Rules of KPIs:
- Should be quantifiable, unbiased, and realistic.
- Should be agreed to by management.
- Should be reflective of the factors deemed critical to the success of the operation or business.
Establishing quantifiable, unbiased, and realistic KPIs enables a keen measurement of performance such that feedback is value-added and accurately reflects intermediate and end results. A quantifiable KPI is one that can be measured empirically, without room for opinion or bias. If it cannot be measured then it cannot be adequately evaluated or managed. An unbiased KPI is one that is a true reflection of performance rather than a reflection of what you want the result to look like. In the application of KPIs, they should directly tie to the measure of aspects that are deemed critical to the success of the overall business and to its individual operations.
5 rules for the proper development and implementation of KPIs:
- In order to be effective, the development and application of KPIs should be performed in a vacuum. Business owners and managers should brainstorm with key personnel and identify the Key Performance Indicators needed to assure success of the operation.
- Establish at what when and where Key Performance Indicators should be used.
- The mechanism for data collection and method of measurement evaluation should be defined and reliable.
- The Key Performance Indicators must be effectively implemented and continuously measured.
- Any adjustments that are made must be unbiased.
The 3 Benefits of using KPIs to measure performance:
- Performance against goals and objective can be tracked and a real-time snapshot of performance can be obtained. For business owners, this can be beneficial in identifying and resolving issues before the operation hits a speed bump or roadblock.
- KPIs are adaptable, and can be applied to any situation.
- Organizational performance can be measured in an unbiased and concrete way.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information: