Key Performance Indicators KPIs

Subject: Industry
Pages: 8
Words: 2163
Reading time:
9 min
Study level: PhD

Definition of KPI

Key performance indicators are tools that firms use to determine the level of progress towards achieving a given goal over a specified period. Samsonova (41) defines key performance indicators as “Metrics used to help a business define and measure progress towards achieving its objectives or critical success factors.” When setting goals and objectives, it is always important for a firm to monitor the progress that it is making to know whether it is on the right track. In the current competitive business environment, firms are finding it necessary to use key performance indicators to determine how effectively different departments are implementing various policies meant to enhance the competitiveness of their firm. In this paper, the researcher seeks to determine how a firm can apply key performance indicators in various departments to determine their progress towards set objectives.

How to Differentiate KPIs from Other Non-KPI

According to Baroudi, key performance indicators are unique ways of measuring the progress towards a specific goal or objectives (38). It has fundamental differences from other non-key performance indicators that have been used in the past. One factor that makes key performance indicators unique is that it uses specific metrics when determining the progress. This means that it may not be enough to state that the progress is good or bad when using key performance indicators as indicators. That will be considered a general term that is almost meaningless. This tool demands that one must use a specific metric. For instance, one can state that a department has achieved 95% of the set objectives within three months. It is important to note that in such an explanation, the level of performance has been given in a specific quantity over a given period. This will enable the relevant stakeholders to determine whether the department can meet the set objectives by the end of a specified period.

Griffin says that key performance indicators may use a baseline, something that is not common with other non-key performance indicators (72). For instance, the sales department may set an objective of selling goods worth $ 500,000 in two months. Using key performance indicators, the department can measure the performance after one month to determine the progress. If the target was $ 500,000 in two months, then the sales will be expected to be about $ 250,000 in the first half of the period. If this has been achieved or exceeded, then it will be an indication that the department is performing as per the expectations. If this is not met, then it will be a sign that something needs to be corrected to achieve the set objectives. Baroudi warns that it is important to be very specific when using key performance indicators because it is unique (42). For instance, sales managers posit a higher number of people within their stores as a key performance indicator. However, this may be misleading because some of the people may come for window-shopping. Unlike other indicators, key performance indicators require that there must be a direct relationship between the indicator used and the actual performance of a firm or a department.

How to Create and Write KPI

Key performance indicators may be created by the managers or employees at different levels based on the intended function. According to Sihler, this tool can be used at an individual, group, departmental, or organizational level (87). The level of its application always defines who and how this tool is created. The following are specific steps that should be followed when creating key performance indicators within a department.

Step 1: Identifying a problem

Managers or employees should engage in identifying a problem, which can be a situation or an objective that requires attention (Baroudi 38). This step aims to find a problem that should be addressed or a goal that should be achieved within a given period.

Step 2: Developing a viewpoint

In this stage, managers and the involved workers engage in developing a view on how the implementation teams or the department would want the ultimate results to look. The metrics should be stated in clear terms.

Step 3: Developing a KPIs process

According to Baroudi (38), the third stage involves a KPIs plan on how to achieve the specified targets presented in a situation or objective. For instance, a strategy may be developed to increase the number of customers visiting the retail stores.

Step 4: Developing effective KPIs

In this stage, managers and employees will design KPIs that are effective, before creating efficient KPIs. This process acts as a benchmark to the desired plans (Velimirovic et al. 69).

Step 5: The Stakeholder and the financial KPIs

The process in the fifth step involves developing the stakeholder and the financial KPIs while sorting out available options to help create strategic objectives. Sorting out KPIs in a categorical manner often helps to create the logical systems for the KPIs (Baroudi 39).

Step 6: Determining output

The sixth step of creating the KPIs entails determining the output KPIs before estimating the input KPIs. This is because the managers and concerned workers must first determine the output that would define the needed input.

Step 7: Selecting suitable KIP

According to Baroudi (39), the last step of creating the KPIs involves making the ultimate decisions by selecting the most suitable KPIs, sharing data, approving, and then writing the KPIs.

Basis of Choosing the KPI

It is important to define the basis of choosing KPIs. Sawang notes that an organization or a department should have a clear basis for choosing a given key performance indicator to justify the approach (24). The following are clear steps of how the KPI should be chosen in an organization or within a given department.

Step 1: Defining what should be achieved

The first step when choosing the most appropriate KPI is to define what should be achieved. For instance, the sales department may way to increase sales volume by 40% in one year. This will define the indicator that will be used.

Step 2: Stakeholders involved

It is also necessary to define stakeholders involved in achieving a given objective. Their opinion should be taken into consideration when choosing an appropriate indicator.

Step 3: Ability to achieve results within the set period

The manager and relevant employees must determine whether the chosen indicator may help achieve results within the desired timeline.

Step 4: Availability of relevant tools

When choosing KPI, Iveta says that it is important to ensure that there are relevant tools that can be used in measurements and that the relevant stakeholders can use these tools without any complications (121).

How to Measure KPIs

According to Baker, the approach that a firm uses to measure key performance indicators may vary from one firm to another based on factors such as industry, tools available within a firm, and the level of knowledge of the stakeholders (112). The following are conventional steps on how to measure KPIs.

Step 1: Choosing the target

In the first step, a manager and his stakeholders will need to choose the target. This involves defining the objectives to be measured and how they should be achieved.

Step 2: Set timeline for measuring KPI

When the objective has been defined, the next step is to set the time within which the objective should be achieved. This can be one week, one month, or a whole financial year.

Step 3: Assigning of numerical values

The next step will be to assign numerical values to different levels of performance. A common way of doing this is to develop a scale of 1 to 5, where 1 is extremely poor while 5 is excellent performance.

How to Manage KPIs

Managing key performance indicators is very important, especially when a firm or a department has very strict objectives that should be achieved within a given timeline. The figure below shows factors that should be considered when managing a winning KPI.

Managing a wining KPI
Figure 1: Managing a wining KPI

Step 1: Make it informative

Key performance indicators should be made as informative as possible for to stakeholders understand what is expected of them. According to Iveta, when stakeholders know what is expected of them, it becomes easy for them to make a concerted effort towards achieving the set goals and objectives (119).

Step 2: Make it measurable

To manage KPIs, they should be defined in measurable terms. For instance, the production department will need to specify that it needs to increase its output by 35% within one year. This way, the firm will be able to quantitatively monitor and manage the progress of the department towards achieving this goal.

Step 3: Make it simple

Finally, Griffin says that KPIs should be simple and clear (73). All the stakeholders must understand what they should achieve and how this performance will affect the current position of their firm in the market.

How to Monitor and Continuously Improve KPI

Monitoring and improvement of KPI is a continuous process that needs to be given proper attention. The diagram below shows specific steps that should be followed in monitoring and continuous improvement of KPI.

Monitoring and improvement of KPI
Figure 2: Monitoring and improvement of KPI

Step 1: KPI identification and selection

As shown in the figure above, the first step is to identify and select the most appropriate key performance indicator using some of the strategies suggested in the previous sections of this paper.

Step 2: KPI documentation and alignment

Once KPI has been identified, the next step is to document this information in preparation for the implementation process. The manager will also need to align the objectives with the skills and knowledge of employees. This means that employees will be assigned tasks that they can handle.

Step 3: KPI interpretation

Once the documentation has been done, the team will then interpret the principles defined in KPI. Every stakeholder will be assigned their roles and informed about the target they have to meet within a given period.

Step 4: KPI reporting and visualization

The fourth step is reporting and visualization. After a regular interval, the teams will report their performance to their team leaders. The team leader will visualize the performance against the set targets to determine the current position of his team. The team leader will then write a report to the superiors informing them of the current position of his team in fulfilling a given objective.

Step 5: KPI feedback and re-alignment

After visualization, the final step is feedback and realignment. The superiors will give feedback to the team leader about their view towards the performance of the team. The feedback may include the identification of some weaknesses or some recommendations on how the performance can be improved. The leader will be expected to use the information to make re-alignment within the team for better performance.

How to Measure Effectiveness of KPI

Measuring the effectiveness of KPI is critical, especially for a firm that is trying to gain a competitive edge over its market rivals. The figure below shows four areas of measuring the effectiveness of KPI

Measuring effectiveness of KPI
Figure 3: Measuring effectiveness of KPI

Step 1: Determine the cost

According to Cronin, the first step in determining the effectiveness of KPI is to find the cost of the project (30). The indicator can only be considered effective if the project cost is within the set allocations.

Step 2: Completeness

The project should be complete as per the defined aims and objectives for it to be considered effective. The team leader should, therefore, determine the completeness of the project.

Step 3: Speed

To determine the effectiveness of KPI, one should find out whether the project was completed within a specified duration.

Step 4: Accuracy

The final step is to determine the accuracy with which the set objectives were achieved. This can be done using a scale of 1 to 5 as was stated in the section above.

Actual Process Example of How to Choose KPIs

In this section, the researcher will give an actual process example of how the Sales Department can choose KPI.

Step 1: Defining what should be achieved

The sales department would want to increase the sales volume of personal computers. This should be done in the current market.

Step 2: Stakeholders involved

The stakeholders involved include the sales manager and all the employees working in the sales department.

Step 3: Ability to achieve results within the set period

With the current financial resources within the firm and the ability of the employees working within the department, we can achieve a 40% increase in sales volume. This means that the set objective is realistic.

Step 4: Availability of relevant tools

We have the relevant retailing equipment that will help in the realization of the set objectives. We intend to use social media to boost our sales.

Step 5: Choose the metrics

Based on the above factors, we believe that we can increase the sales volume of personal computers in the current market by 40% within one year.

Works Cited

Baker, Trischa. Key Performance Indicators Manual: A Practical Guide for the Best Practice Development, Implementation and Use of Kpis. Crows Nest: Allen & Unwin, 2002. Print.

Baroudi, Rachad. “Key performance indicators Winning tips and common challenges.” Performance Journal 6.2 (2014): 36-42. Print.

Cronin, Graham. “Measuring strategic progress: Choosing and using KPIs.” Accountancy Ireland 39.4 (2007): 30-31. Print.

Griffin, John. “Developing strategic KPIs for your BPM system.” Data Mining Review 14.10 (2004): 70-73. Print.

Iveta, Gabčanová. “Human Resources Key Performance Indicators.” Journal of Competitiveness 4.1 (2012): 117-128. Print.

Marr, Bernard. Key Performance Indicators: The 75 Measures Every Manager Needs to Know. Harlow: Pearson Education, 2012. Print.

Samsonowa, Tatjana. Industrial Research Performance Management: Key Performance Indicators in the Ict Industry. Heidelberg: Physica-Verlag, 2011. Print.

Sawang, Sukanlaya. “Key Performance Indicators for Innovation Implementation: Perception vs. Actual Usage.” Asia Pacific Management Review 16.1 (2011): 23-29. Print.

Sihler, Patrick. Key Performance Indicators Aus Controlling-Sicht. München: GRIN Verlag GmbH, 2009. Print.