A performance indicator or key performance indicator (KPI) is a type of performance measurement. KPIs evaluate the

success Success is the state or condition of meeting a defined range of expectations. It may be viewed as the opposite of failure. The criteria for success depend on context, and may be relative to a particular observer or belief system. One person migh ...

of an organization or of a particular activity (such as projects, programs, products and other initiatives) in which it engages. KPIs provide a focus for strategic and operational improvement, create an analytical basis for decision making and help focus attention on what matters most. Often success is simply the repeated, periodic achievement of some levels of operational goal (e.g. zero defects, 10/10 customer satisfaction), and sometimes success is defined in terms of making progress toward strategic goals. Accordingly, choosing the right KPIs relies upon a good understanding of what is important to the organization. What is deemed important often depends on the department measuring the performance – e.g. the KPIs useful to finance will differ from the KPIs assigned to sales. Since there is a need to understand well what is important, various techniques to assess the present state of the business, and its key activities, are associated with the selection of performance indicators. These assessments often lead to the identification of potential improvements, so performance indicators are routinely associated with 'performance improvement' initiatives. A very common way to choose KPIs is to apply a management framework such as the balanced scorecard. The importance of such performance indicators is evident in the typical decision-making process (e.g. in management of organisations). When a decision-maker considers several options, they must be equipped to properly analyse the status quo to predict the consequences of future actions. Should they make their analysis on the basis of faulty or incomplete information, the predictions will not be reliable and consequently the decision made might yield an unexpected result. Therefore, the proper usage of performance indicators is vital to avoid such mistakes and minimise the risk.

Categorization of indicators

Key performance indicators define a set of values against which to measure. These raw sets of values, which can be fed to systems that aggregate the data, are called ''indicators''. There are two categories of measurements for KPIs. * ''

Quantitative Quantitative may refer to: * Quantitative research, scientific investigation of quantitative properties * Quantitative analysis (disambiguation) * Quantitative verse, a metrical system in poetry * Statistics, also known as quantitative analysis ...

'' facts presented with a specific objective numeric value measured against a standard. Usually they are not subject to distortion, personal feelings, prejudices, or interpretations. * '' Qualitative'' represents non-numeric conformance to a standard, or interpretation of personal feelings, tastes, opinions or experiences. An 'indicator' can only measure what 'has' happened, in the past tense, so the only type of measurement is descriptive or lagging. Any KPI that attempts to measure something in a future state as predictive, diagnostic or prescriptive is no longer an 'indicator', it is a 'prognosticator' – at this point, it is analytics (possibly based on a KPI) but leading KPIs are also used to indicate the amount of front end loading activities.

Points of measurement

''Performance'' focuses on measuring a particular ''element'' of an ''activity''. An activity can have four elements: input, output, control, and mechanism. At a minimum, activity is required to have at least an input and an output. Something goes into the activity as an ''input''; the activity transforms the input by changing its ''state'', and the activity produces an ''output''. An activity can also enable ''mechanisms'' that are typically separated into ''human'' and ''system'' mechanisms. It can also be constrained in some way by a ''control''. Lastly, its actions can have a temporal construct of ''time''. * ''Input'' indicates the inputs required of an activity to produce an output. * ''Output'' captures the outcome or results of an activity or group of activities. * ''Activity'' indicates the transformation produced by an activity (i.e., some form of work). * ''Mechanism'' enables an activity to work (a performer), either human or system. * ''Control'' is an object that controls the activity's production through compliance. * ''Time'' indicates a temporal element of the activity.

Identifying indicators

Performance indicators differ from business drivers and aims (or goals). A school might consider the failure rate of its students as a key performance indicator which might help the school understand its position in the educational community, whereas a business might consider the percentage of income from returning customers as a potential KPI. The key stages in identifying KPIs are: * Having a pre-defined business process (BP). * Having requirements for the BPs. * Having a quantitative/qualitative measurement of the results and comparison with set goals. * Investigating variances and tweaking processes or resources to achieve short-term goals. Key performance indicators (KPIs) are ways to periodically assess the performances of organizations, business units, and their division, departments and employees. Accordingly, KPIs are most commonly defined in a way that is understandable, meaningful, and measurable. They are rarely defined in such a way that their fulfillment would be hampered by factors seen as non-controllable by the organizations or individuals responsible. Such KPIs are usually ignored by organizations. KPIs should follow the SMART criteria. This means the measure has a Specific purpose for the business, it is Measurable to really get a value of the KPI, the defined norms have to be Achievable, the improvement of a KPI has to be Relevant to the success of the organization, and finally it must be Time phased, which means the value or outcomes are shown for a predefined and relevant period. KPIs should be set at a senior level within an organization and cascaded through all levels of management.Eckerson, W.
Ten Characteristics of a Good KPI
''BPM Partners'', published 17 July 2016, accessed 24 November 2022 In order to be evaluated, KPIs are linked to target values, so that the value of the measure can be assessed as meeting expectations or not. Key performance indicators are mostly the non-financial measures of a company's performance – they do not have a monetary value but in a business context they do contribute to the company's profitability.

Examples

Accounts

These are some of the examples: # Percentage of overdue invoices # Percentage of purchase orders raised in advance # Number of retrospectively raised purchase orders # Finance report error rate (measures the quality of the report) # Average cycle time of workflow # Number of duplicate payments

Marketing and sales

# New

customer In sales, commerce, and economics, a customer (sometimes known as a client, buyer, or purchaser) is the recipient of a good, service, product or an idea - obtained from a seller, vendor, or supplier via a financial transaction or exchan ...

acquisition # Customer acquisition cost (CAC) # Average deal size # Demographic analysis of individuals (potential customers) applying to become customers, and the levels of approval, rejections, and pending numbers # Status of existing customers #

Customer attrition Customer attrition, also known as customer churn, customer turnover, or customer defection, is the loss of clients or customers. Banks, telephone service companies, Internet service providers, pay TV companies, insurance firms, and alarm monitorin ...

# Turnover (i.e., revenue) generated by segments of the customer population # Outstanding balances held by segments of customers and terms of payment # Collection of

bad debt Bad debt, occasionally called uncollectible accounts expense, is a monetary amount owed to a creditor that is unlikely to be paid and for which the creditor is not willing to take action to collect for various reasons, often due to the debtor not ...

s within customer relationships # Profitability of customers by demographic segments and segmentation of customers by profitability Many of these customer KPIs are developed and managed with

customer relationship management Customer relationship management (CRM) is a process in which a business or other organization administers its interactions with customers, typically using data analysis to study large amounts of information. CRM systems compile data from a r ...

software. Faster availability of data is a competitive issue for most organizations. For example, businesses that have higher operational/credit risk (involving for example credit cards or wealth management) may want weekly or even daily availability of KPI analysis, facilitated by appropriate IT systems and tools.

Manufacturing

Overall equipment effectiveness (OEE) is a set of broadly accepted nonfinancial metrics that reflect manufacturing success. * OEE = availability x performance x quality * Availability = run time / total time; by definition this is the percentage of the actual amount of production time the machine is running to the production time the machine is available. *

Down time The term downtime is used to refer to periods when a system is unavailable. The unavailability is the proportion of a time-span that a system is unavailable or offline. This is usually a result of the system failure, failing to function because ...

= time the building/ location/ service/ machine is out of operation due to any reason (including planned down time such as maintenance or 'out of season'). * Performance = total count / target counter, by definition this is the percentage of total parts produced on the machine to the production rate of machine. * Quality = good count / total count, by definition, this is the percentage of good parts out of the total parts produced on the machine. * Cycle time ratio (CTR) = standard cycle time / real cycle time *

Capacity utilization Capacity utilization or capacity utilisation is the extent to which a firm or nation employs its installed productive capacity. It is the relationship between output that ''is'' produced with the installed equipment, and the potential output whic ...

* Rejection rate

Professional services

Most

professional services Professional services are occupations in the service sector requiring special training in the arts or sciences. Some professional services, such as architects, accountants, engineers, doctors, and lawyers require the practitioner to hold prof ...

firms (for example, management consultancies, systems integration firms, or digital marketing agencies) use three key performance indicators to track the health of their businesses. They typically use professional services automation (PSA) software to keep track of and manage these metrics. *

Utilization rate In business, the utilization rate is an important number for firms that charge their time to clients and for those that need to maximize the productive time of their employees. It can reflect the billing efficiency or the overall productive us ...

= the percentage of time employees spend generating revenue * Project profitability = the difference between the revenue generated by a project and the cost of delivering the work * Project success rate = the percentage of projects delivered on time and under budget

System operations

* Availability / uptime * Mean time between failure * Mean time to repair * Unplanned availability * Unplanned downtime * Average time to repair

Project execution

* Earned value * Cost variance * Schedule variance * Estimate to complete * Manpower spent / month * Money spent / month * Planned spend / month * Planned manpower / month * Average time to delivery * Tasks / staff * Project overhead / ROI * Planned delivery date vs actual delivery date

Supply chain management

Businesses can utilize KPIs to establish and monitor progress toward a variety of goals, including lean manufacturing objectives,

minority business enterprise Minority business enterprise (MBE) is an American designation for businesses which are at least 51% owned, operated and controlled on a daily basis by one or more (in combination) American citizens of the following ethnic minority and/or gender (e ...

and diversity spending, environmental "green" initiatives, cost avoidance programs and

low-cost country sourcing Low-cost country sourcing (LCCS) is procurement strategy in which a company sources materials from countries with lower labour and production costs in order to cut operating expenses. LCCS falls under a broad category of procurement efforts called ...

targets. In a warehouse, the manager will use KPIs that targets maximizing the facility, like the receiving and put away KPIs to measure the receiving efficiency and the putaway cost per line. Storage KPIs can also be used to determine the efficiency of the storage space and the carrying cost of the inventory. Any business, regardless of size, can better manage supplier performance with the help of KPIs robust capabilities, which include: * Automated entry and approval functions * On-demand, real-time scorecard measures * Rework on procured inventory * Single data repository to eliminate inefficiencies and maintain consistency * Advanced workflow approval process to ensure consistent procedures * Flexible data-input modes and real-time graphical performance displays * Customized cost savings documentation * Simplified setup procedures to eliminate dependence upon IT resources Main KPIs for

supply chain management In commerce, supply chain management (SCM) is the management of the flow of goods and services including all processes that transform raw materials into final products between businesses and locations. This can include the movement and st ...

will detail the following processes: * Sales forecasts * Inventory * Procurement and suppliers * Warehousing * Transportation *

Reverse logistics Reverse logistics encompasses all operations related to the upstream movement of products and materials. It is "the process of moving goods from their typical final destination for the purpose of capturing value, or proper disposal. Remanufacturin ...

Suppliers can implement KPIs to gain an advantage over the competition. Suppliers have instant access to a user-friendly portal for submitting standardized cost savings templates. Suppliers and their customers exchange vital supply chain performance data while gaining visibility to the exact status of cost improvement projects and cost savings documentation.

Government

The provincial government of

Ontario, Canada Ontario ( ; ) is one of the thirteen provinces and territories of Canada.Ontario is located in the geographic eastern half of Canada, but it has historically and politically been considered to be part of Central Canada. Located in Central Ca ...

has been using KPIs since 1998 to measure the performance of higher education institutions in the province. All post-secondary schools collect and report performance data in five areas – graduate satisfaction, student satisfaction, employer satisfaction, employment rate, and graduation rate. In England,

Public Health England Public Health England (PHE) was an executive agency of the Department of Health and Social Care in England which began operating on 1 April 2013 to protect and improve health and wellbeing and reduce health inequalities. Its formation came as ...

uses KPIs to provide a consistent measure of the performance of NHS population

screening Screening may refer to: * Screening cultures, a type a medical test that is done to find an infection * Screening (economics), a strategy of combating adverse selection (includes sorting resumes to select employees) * Screening (environmental), ...

activities, and publication of up to four main KPIs for the most important contracts outsourced by each UK government department is seen as a measure helping to increase transparency in the delivery of public services.

Further performance indicators

* Duration of a stockout situation :

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* Customer order waiting time Human Resource Management * Employee turnover * Ability to recruit to advertised roles * Employee performance indicators * Staff satisfaction/ results of staff surveys * Proportion of staff unplanned absence (due to short or long term sickness) * Cross-functional team analysis * Organization contribution to Sector performance improvement Ex: Research Institutes contribution to Commercial Agriculture Improvement

Problems

In practice, overseeing key performance indicators can prove expensive or difficult for organizations. Some indicators such as staff morale may be impossible to quantify. As such, dubious KPIs can be adopted that can be used as a rough guide rather than a precise benchmark. Key performance indicators can also lead to

perverse incentive A perverse incentive is an incentive that has an unintended and undesirable result that is contrary to the intentions of its designers. The cobra effect is the most direct kind of perverse incentive, typically because the incentive unintentional ...

s and unintended consequences as a result of employees working to the specific measurements at the expense of the actual quality or value of their work. Sometimes, collecting statistics can become a substitute for a better understanding of the problems, so the use of dubious KPIs can result in progress in aims and measured effectiveness becoming different. For example, during the

Vietnam War The Vietnam War (also known by #Names, other names) was a conflict in Vietnam, Laos, and Cambodia from 1 November 1955 to the fall of Saigon on 30 April 1975. It was the second of the Indochina Wars and was officially fought between North Vie ...

, US soldiers were shown to be effective in kill ratios and high body counts, but this was misleading when used to measure aims as it did not show the lack of progress towards the US goal of increasing South Vietnamese government control of its territory. Another example would be to measure the productivity of a software development team in terms of lines of source code written. This approach can easily add large amounts of dubious code, thereby inflating the line count but adding little value in terms of systemic improvement. A similar problem arises when a footballer kicks a ball uselessly to build up their statistics.