What is a Key Performance Indicator (KPI)?

What is KPI?

Key performance indicators (KPIs) are a set of performance measurements that demonstrate how effectively an organization is achieving key objectives. KPIs not only provide an organization with a focus for strategic and operational improvement, but a way to compare achievements to similar organizations.

The History of KPIs

Performance appraisals in industry were most likely initiated by Robert Owen in the early 1800s (George, 1972). Owen monitored performance at his cotton mills in Scotland through the use of “silent monitors.” 

The Silent Monitor was used by Robert Owen in New Lanark Mills around 1800 and was his plan to test the conduct of each worker employed. It consisted of a four-sided piece of wood, about two inches long and one broad, each side coloured – white, yellow, blue and black.

White = Super Excellence in Conduct

Yellow = Moderate Goodness

Blue = A Neutral State of Morals

Black = Excessive Naughtiness

Robert Owen silent monitors

Owen said, “that although the Black was in the ascendant at first, it gradually gave way to the Yellow and White which ultimately prevailed. Quietly but surely the Silent Monitor did its work.”

Robert Owen

DuPont Analysis

In the 1920s, the management at DuPont Corporation developed a model called DuPont Analysis for a detailed assessment of the company’s profitability. DuPont explosives salesman Donaldson Brown invented the formula in an internal efficiency report in 1912.

Tableau De Bord

The “tableau de bord” has been quite popular in France ever since its introduction in 1930s, as a “dashboard” used by managers to monitor the operational performance of their organisations (Bessire & Backer, 2005). Although the majority of the large companies in France were using it, due to the limited availability of translated literature it had a minimal overseas diffusion (Bontis et al., 1999).

Balanced Scorecard

The Balanced Scorecard was originally developed by Dr. Robert Kaplan of Harvard University and Dr. David Norton as a framework for measuring organizational performance using a more balanced set of performance measures in 1990. Traditionally companies used only short-term financial performance as the measure of success. The “balanced scorecard” added additional non-financial strategic measures to the mix in order to better focus on long-term success. The system has evolved over the years and is now considered a fully integrated strategic management system.

A mere 7% of employees today fully understand their company’s business strategies and what’s expected of them in order to help achieve company goals.

Robert S. Kaplan

Benefits of management with KPIs

• Clarification – KPIs help to clarify the current business position and performance expectations
• Benchmarking – KPIs provide a point of reference for making future or past comparisons
• Focus – KPIs outline the important aspects for attention within the business
• Consistency – KPIs enable a consistent approach to achieving business goals
• Motivation – KPIs engage employees with company goals
• Accountability – KPIs will highlight both good performance and under performance
• Elimination of waste – KPIs help identify inefficiencies within the business

5 Characteristics of Effective KPIs

• Simple: KPIs should be simple enough that employees know what the KPI is measuring and how it is being calculated. It also helps to keep KPIs to a small, manageable level so as to not overwhelm yourself with too much information at once.
• Measurable: Even if a KPI can’t be quantitative, it must still be measurable with clear, concise measurement attributes.
• Actionable: A KPI isn’t effective if employees don’t know what to do with the information. An effective KPI should answer a question and provide a further decision to be made based on that answer.
• Timely: The frequency of which a KPI is reported on is important – too often, and employees can be overwhelmed with data. Too infrequently, and data can be incomplete or out of date. Businesses should consider the particular nature of a KPI before deciding on the most effective frequency of which to report on it.
• Visible: Making KPIs visible across the organization incentivizes employees to be more productive and pay attention to their performance. When the business is more aware of everyday performance, it can make more informed decisions on how to improve.

How many KPIs do you need?

It is quite difficult to estimate the number of KPIs you will need. The number of KPIs depending on the size of the companies. Generally companies have 8-10 KPI per department. Assuming the average company has 6-10 departments, that means the companies have average 100 KPIs.

Final Words

Every company, regardless of size, needs to be managed with a KPI. KPIs must be determined together with the employee or their opinions should be taken. Teamwork takes place if the same KPI is included in the score card of more than one employee. It is extremely difficult for a company without KPI to achieve sustainable success.

It’s not enough to do your best; you must know what to do & then do your best.

W Edwards Deming

References