Key Performance Indicators 

(KPI)
How an organization defines and measures progress toward its goals

By F. John Reh, About.com Guide

Key Performance Indicators, also known as KPI or Key Success Indicators (KSI), help an organization
define and measure progress toward organizational goals.

Once an organization has analyzed its mission, identified all its stakeholders, and defined its goals, it
needs a way to measure progress toward those goals. Key Performance Indicators are those
measurements.

What Are Key Performance Indicators (KPI)

Key Performance Indicators are quantifiable measurements, agreed to beforehand, that reflect the
critical success factors of an organization. They will differ depending on the organization. A business
may have as one of its Key Performance Indicators the percentage of its income that comes from
return customers. A school may focus its Key Performance Indicators on graduation rates of its
students. A Customer Service Department may have as one of its Key Performance Indicators, in line
with overall company KPIs, percentage of customer calls answered in the first minute. A Key
Performance Indicator for a social service organization might be number of clients assisted during the
year.

Whatever Key Performance Indicators are selected, they must reflect the organization's goals, they
must be key to its success,and they must be quantifiable (measurable). Key Performance Indicators
usually are long-term considerations. The definition of what they are and how they are measured do
not change often. The goals for a particular Key Performance Indicator may change as the
organization's goals change, or as it gets closer to achieving a goal.

Key Performance Indicators Reflect The Organizational Goals

An organization that has as one of its goals "to be the most profitable company in our industry" will
have Key Performance Indicators that measure profit and related fiscal measures. "Pre-tax Profit" and
"Shareholder Equity" will be among them. However, "Percent of Profit Contributed to Community
Causes" probably will not be one of its Key Performance Indicators. On the other hand, a school is not
concerned with making a profit, so its Key Performance Indicators will be different. KPIs like
"Graduation Rate" and "Success In Finding Employment After Graduation", though different,
accurately reflect the schools mission and goals.

Key Performance Indicators Must Be Quantifiable

If a Key Performance Indicator is going to be of any value, there must be a way to accurately define
and measure it. "Generate More Repeat Customers" is useless as a KPI without some way to
distinguish between new and repeat customers. "Be The Most Popular Company" won't work as a KPI
because there is no way to measure the company's popularity or compare it to others.

It is also important to define the Key Performance Indicators and stay with the same definition from
year to year. For a KPI of "Increase Sales", you need to address considerations like whether to
measure by units sold or by dollar value of sales. Will returns be deducted from sales in the month of
 the sale or the month of the return? Will sales be recorded for the KPI at list price or at the actual
sales price?

You also need to set targets for each Key Performance Indicator. A company goal to be the employer
of choice might include a KPI of "Turnover Rate". After the Key Performance Indicator has been
defined as "the number of voluntary resignations and terminations for performance, divided by the
total number of employees at the beginning of the period" and a way to measure it has been set up by
collecting the information in an HRIS, the target has to be established. "Reduce turnover by five
percent per year" is a clear target that everyone will understand and be able to take specific action to
accomplish.

Key Performance Indicators Must be Key To Organizational Success

Many things are measurable. That does not make them key to the organization's success. In selecting
Key Performance Indicators, it is critical to limit them to those factors that are essential to the
organization reaching its goals. It is also important to keep the number of Key Performance Indicators
small just to keep everyone's attention focused on achieving the same KPIs.

That is not to say, for instance, that a company will have only three or four total KPIs in total. Rather
there will be three or four Key Performance Indicators for the company and all the units within it will
have three, four, or five KPIs that support the overall company goals and can be "rolled up" into them.

If a company Key Performance Indicator is "Increased Customer Satisfaction", that KPI will be focused
differently in different departments. The Manufacturing Department may have a KPI of "Number of
Units Rejected by Quality Inspection", while the Sales Department has a KPI of "Minutes A Customer
Is On Hold Before A Sales Rep Answers". Success by the Sales and Manufacturing Departments in
meeting their respective departmental Key Performance Indicators will help the company meet its
overall KPI.

Good Key Performance Indicators vs. Bad

Bad:

 Title of KPI: Increase Sales

 Defined: Change in Sales volume from month to month
 Measured: Total of Sales By Region for all region
 Target: Increase each month

What's missing? Does this measure increases in sales volume by dollars or units? If by dollars, does it
measure list price or sales price? Are returns considered and if so do the appear as an adjustment to
the KPI for the month of the sale or are they counted in the month the return happens? How do we
make sure each sales office's volume numbers are counted in one region, i.e. that none are skipped or
double counted? How much, by percentage or dollars or units, do we want to increase sales volumes
each month?(Note: Some of these questions may be answered by standard company procedures.)

Good:

 Title of KPI: Employee Turnover

 Defined: The total of the number of employees who resign for whatever reason, plus the
number of employees terminated for performance reasons, and that total divided by the number of
 employees at the beginning of the year. Employees lost due to Reductions in Force (RIF) will not be
included in this calculation.
 Measured: The HRIS contains records of each employee. The separation section lists reason
and date of separation for each employee. Monthly, or when requested by the SVP, the HRIS group
will query the database and provide Department Heads with Turnover Reports. HRIS will post
graphs of each report on the Intranet.
 Target: Reduce Employee Turnover by 5% per year.

What Do I Do With Key Performance Indicators?

Once you have good Key Performance Indicators defined, ones that reflect your organization's goals,
one that you can measure, what do you do with them? You use Key Performance Indicators as a
performance management tool, but also as a carrot. KPIs give everyone in the organization a clear
picture of what is important, of what they need to make happen. You use that to manage
performance. You make sure that everything the people in your organization do is focused on meeting
or exceeding those Key Performance Indicators. You also use the KPIs as a carrot. Post the KPIs
everywhere: in the lunch room, on the walls of every conference room, on the company intranet, even
on the company web site for some of them. Show what the target for each KPI is and show the
progress toward that target for each of them. People will be motivated to reach those KPI targets.

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