Understanding Key Performance Indicators

Working with Key Performance Indicators (KPIs) has become increasingly difficult due to reasons like lack of standards in definition, terminology and most importantly, their use. Therefore, it is mandatory for experts to bring clarity on these topics so that organisations formulating and using KPIs may get most out of them. It has become important for business leaders, executives and line managers to define KPIs and determine how to link metrics with them.

What are KPIs?

Key Performance Indicators can be defined as “a set of quantifiable measures used by different organisations to compare performance in terms of operational and strategic goals”. It is pertinent to note that different organisations have different KPIs depending upon their performance criteria or set goals.

The KPI Institute defines KPIs as “a measurable expression for the achievement (indicator) of a desired level of results (performance) in an area relevant to evaluated entity’s activity (Key)”.

The Role of KPIs:

KPIs play a very important role in measuring the targets and goals achieved by the organisation over a certain time period. In short, the main roles of KPIs include helping companies and organisations to be clear about their performance and reflect on the big picture. Furthermore, KPIs enable them to focus on things which really matter in addition with facilitating them to improve their performance and achieve the desired results.

KPI Typology:

Different organisations around the globe use different terms for almost the same concept. For instance, the White House uses the term Performance Measures to evaluate the performance whereas the term becomes Performance Indicators in Local Governments in United Kingdom.

In fact, organisations usually adopt two different approaches as far as implementation of KPIs is concerned. For example, some companies use more structured approach in which they make use of Key Risk Analytics, Performance Indicators or Key Performance Indicators in combination. On the other hand, some organisations use the term KPIs for measuring performance and Metrics to inform decisions taken about KPIs and so on.

It is also pertinent to note that Metrics, KPIs, KRIs and Analytics are somehow related to each other. People have been measuring different things in all fields of life for time immemorial. This is usually accomplished by measuring several variables against certain criteria. One can measure almost anything in his life ranging from air pollution in his city to his body temperature and this in general is known as the Data Universe.

As soon as these metrics becomes relevant to any organisations, it elevates them from something measurable to two main categories. If these metrics represent performance, they become Key Performance Indicators whereas those who represent risks or help organisations to evaluate risk become Key Risk Indicators. Both KPIs and KRIs inform organisations about different trends prevalent in their respective market, helping them to better analyse the situation and make right decisions.

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Key Risk Indicators:

Just like KPIs, Key Risk Indicators are metrics used by organisations to provide an early signal of risk exposures in various areas of the enterprise. The objective of the KPIs is clear that is to prevent losses by managing the collection of accounts in best manner possible. For example, some organisations analyse reported financial results for a certain time period or their 20 or 25 largest clients. This analysis is usually more than helpful in highlighting trends signalling future collection concerns.

Finally, it is imperative for organisations to understand what KPIs actually are and how to use them correctly in order to survive the increasing competition. The evolving business world requires organisations to denounce traditional working style and adopt new techniques to improve their performance and KPIs is one of the most important of them which can greatly help them to achieve sustainable growth.

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