Understanding the KPIs

Md. Tabish Nasim | July 05,2013 12:52 pm IST

What is KPI?

KPI that is Key Performance Indicator are the few identified important metrics which indicate evolution and alignment of the business operations towards organization’s strategic objectives.

The main objective of identifying and Implementing Key Performance Indicators are to monitor and guide the continued improvement of the various operational areas of an organization.

They are generally used to identify when agreed goals and objectives of an organization or function are met but they also act as input to identify and initiate improvement initiatives across various functional areas of an organization.


Is KPI a mere target / Number to achieve?

A KPI is technically a metric; it is just not a target or number to achieve. A number or target set against a KPI keeps on changing with the evolution of industry or organization, so a target number set against KPI is a temporary attribute of a KPI.


KPI being a metric has features like ratio, percentage, formula and other UoM which allows parameters to be measured historically over time to provide trends of performance. And this trend becomes the true indicator for any organization to measure their performance and identify areas of improvement. To illustrate that let us take an example say for KPI – Problem resolution time, present target value is 5 days. Now if you are just concentrating on achieving 5 days then you might miss on quality on resolution and ultimately again problem reoccurs. But on the same place if you see this resolution as resolving problem with agreed quality then while achieving it in 5 days you will not only adhere to agreed quality but also identify related improvement initiatives. Other very general example is that“Actual number of complaints” which is considered as KPI by many organizations is actually not a KPI but just information.


Characteristics of a KPI
KPIs as mentioned before are “KEY” indicators, which mean they are few vital indicators which are directed towards organizational goals and objective. Thus ideally every KPI should be characterized by below characteristics

Strategic objectives of organization like Revenue enhancement, Profitability, cost optimization etc
Specific goals to attain like increase in revenue by 25%, Lower cost by 30% etc.
Critical Success Factors to achieve these goals like lower cost without losing sales etc.
Formula to actually calculate, monitor & measure performance towards achievement of these goals


Components or attributes of a KPI
KPI should have a set of details and attributes which enables them to be defined, measured and reviewed. Some of the components which every KPI should have are

Strategic Area or Objective: Defining strategic objective or intent such as: Cost, Quality, Safety, etc. helps you to identify right set of KPI
Unit of Measure (UoM): what is the unit of measurement for this KPI i.e. square feet, hours, incidents, Dollar value etc.
Calculation Formula: The formula used to calculate KPI value, i.e. (Total Revenue / Total Cost), (High Resolution quality / Total Number of Resolutions) etc.
Measurement Frequency: How frequently KPI will be measured i.e. weekly, monthly, quarterly, etc.
Measurement Procedure: How will you measure the KPI i.e. manual, Automated, through software, Surveys etc.
Weightage: What is the importance of this KPI against other KPIs i.e 25% weightage towards cost reduction objective etc.
Target Value: what is the target goal for reporting period, it can be tagged with Industry best, can be self-improvement based can be ambitiously exploratory etc.
Minimum Threshold: The minimum acceptable value of KPI, below which serious attention or improvement initiatives are must like 40% of Industry value, 50% of the nearest competitor etc.


How to establish and define Process KPIs within Organization

Similarly like other KPIs, process KPIs are also defined based on clarity of understanding over objective of the process and their association towards strategic objective of the organization. Below figure demonstrate what are the pre-requisite for defining process based KPIs

The above figure clearly demonstrate that process KPI definition is also Top-Down in nature and starts from Business objective definition to Target goals to finally arriving at set of KPIs.


Overall approach towards KPI aligned process within an Organization

Methodology: How to design and Manage process based KPIs

Apart from linkage with strategic objective and business drivers, there are other considerations towards selecting process KPIs listed below

• Availability of data
• Ease of collecting specific data
• Potential ambiguity in understanding data (Level of clean data)

Once the format and measures of process based KPIs are defined, the focus shifts to the measurement process of KPIs like How the data is going to be collected, analyzed and reported ?, Who is responsible for such measurement activities?. These are very critical for establishing the identified process KPIs and thus needs to be defined. The overall intent is to use the process KPIs is to evaluate and improve the processes. Thus the process KPIs should provide insight into:

• Quality – How well is the process working? Are we improving toward goals thatwere established for this process?
• Efficiency – Is the throughput of the process sufficient?
• Compliance – Is the process being followed?
• Value – Are we doing what we are supposed to be doing?



A self motivated, team player and analytical person, Tabish has gained experience in Business Consulting / Strategy/ Market Research/ Business Development/ Channel Management/ Project Management during past 68+ months of corporate exposure.Professional Record...