Key performance indicators

Encyclopedia : K : KE : KEY : Key performance indicators

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Key Performance Indicators (KPI) are financial and non-financial metrics used to quantify objectives to reflect the strategic performance of an organization. A KPI is used in Business Intelligence to assess the present state of business and to prescribe the course of action. When KPI's are monitored in realtime. this is known as business activity monitoring. KPIs are frequently used to "value" difficult to measure activities such as the benefits of leadership development, engagement, service, and satisfaction. KPIs are typically tied to an organization's strategy (as exemplified through techniques such as the Balanced Scorecard).

The KPIs differ depending on the nature of the organization and the organization's strategy. They help an organization to measure progress towards their organizational goals, especially difficult to quantify knowledge-based activities.

A KPI is a key part of a measurable objective, which is made up of a direction, KPI, benchmark, target and timeframe. For example: "Increase Average Revenue per Customer from £10 to £15 by EOY 2008". Where 'Average Revenue Per Customer' is the KPI.

KPIs should not be confused with a Critical Success Factor. For the example above, a critical success factor would be something that needs to be in place to achieve that objective; for example, a product launch.

Identifying indicators

Performance indicators differ with business drivers and aims (or goals). A school might consider the graduation 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 return customers as a potential KPI.

But it is necessary for an organization to at least identify its KPIs. The key conditions before properly identifying KPIs are:

• Having a pre-defined business process.
• Having clear goals/performance requirements for the business proceses.
• Having a quantitative/qualitative measurement of the results and comparison with set goals.
• Investigating variances and tweaking processes or resources to achieve long-term goals.

Areas to be analyzed

Some of the areas which top management analyses are:

1. Customer related numbers:
2. # New Customers Acquired
3. # Status of existing customers
4. # Attrition of Customers
5. Turnover generated by segments of the Customers - these could be demographic filters.
6. Outstanding balances held by segments of customers and terms of payment - these could be demographic filters.
7. Collection of bad debts within Customer relationships.
8. Demographic analysis of Individuals (potential customers) applying to become customers, and the levels of approval, rejections and pending numbers.
9. Delinquency analysis of customers behind on payments.
10. Profitability of customers by demographic segments and segmentation of customers by profitability.

Many of these afforementioned customer KPI's are developed and improved with customer relationship management.

This is more an inclusive list than an exclusive one. The above more or less describes what a bank would do, but could also refer to a Telephone company or similar service sector company.

What is important is:

1. KPI-related data which is consistent and correct.
2. Timely availability of KPI related Data.

Faster availability of data is beginning to become a concern for more and more organizations. It usually took a month or two to sort through the existing data and summarize meaningful information, which might not be the best idea if you want to hit Wall Street targets. Of late, several banks have tried to move from availability of data at shorter intervals and lesser delays. For example, in businesses which have higher operational/credit risk loading (that involve credit cards, wealth management), Citibank has moved onto a weekly availability of KPI related data or sometimes a daily analysis of numbers. This means that data should usually be available within 24 hours at most times, necessitating automation and the use of IT systems to achieve this.

Categorization of indicators

Key Performance Indicators define a set of values used to measure against. These raw sets of values fed to systems to summarize information against are called indicators. Indicators identifiable as possible candidates for KPIs can be summarized into the following sub-categories:

• Quantitative indicators which can be presented as a number.
• Practical indicators that interface with existing company processes.
• Directional indicators specifying whether an organization is getting better or not.
• Actionable indicators are sufficiently in an organization's control to effect change.

See also

• Business Intelligence
• Business Performance Management
• Retail performance

 

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