Are you, like the title, asking what the heck a KPI is?
KPI stands for “key performance indicator.” A key performance indicator is a measurement that, as it sounds, indicates performance. It is a metric that the people in charge use to determine success or failure.
Different things mean success in different industries.
- At a school, a KPI might be that 98% of students graduate.
- At a restaurant, a KPI might be a score of 99 on their health department inspection.
- At a distribution company, a KPI might be that fewer than 10% of their returns are due to shipping mistakes or product defects.
An important thing that you should notice about the aforementioned KPIs is that they are fully measurable. That is, there can be no dispute as to whether or not a KPI has been achieved – either 98% of students graduated or they didn’t. A KPI such as “generate more customers” isn’t a good KPI. “Generate ten new customers in the next three months” is a better KPI.
In this sense, KPIs are like goals – they should be SMART:
- Specific
- Measurable
- Attainable
- Relevant
- Timely
(Read our post about SMART goals here.)
It is equally important that a company’s KPIs are measuring things that are important to their success as a business. A business’s key performance indicators should reflect the organization’s overall goals and are typically long-term considerations – by quarter, fiscal year, calendar year, etc. rather than weekly or monthly.
KPIs, in addition to being specific on the point of measurability, should also be specific in other senses. For example, a company with key performance indicators that involve sales should – in advance – determine whether the number to measure is the number of units sold, the dollar value of total sales, or the dollar value of only the profit from the sales. This ensures that everyone in the company will be striving to achieve the same thing.
The major KPIs of a business are going to be the same across the board, but they’ll look different in each department of the business. For example, if company’s KPI is “increase customer satisfaction by five percent in three months,” the manufacturing department will approach this goal differently than the sales department, which will approach the goal differently than the distribution department.
The manufacturing department, for example, might try to lower the number of items that are rejected by quality control, whereas the sales department might try to decrease the amount of time a customer spends on hold; the distribution department might concentrate on (as mentioned earlier) reducing the number of returns. Success in each department will ensure that the KPI is met satisfactorily.
So what’s the worst part of KPIs? The fact that there are literally endless possibilities! It can be difficult to choose the right ones for your business – ones that are truly in line with your business’s goals, ones that, if met, will truly improve your business. You should definitely have KPIs, though; they give everyone in your organization a clear goal to work toward and can give your employees a sense of accomplishment when those goals are reached.
