Key Performance Indicators for Business Success
The Application and Use of KPIs in your New Zealand Business
Key performance indicators (KPIs) are measurements of progress toward organisational goals. They do not exist by themselves. They are always part of a framework or a system such as the classic Management by Objectives (MBO) or its successor Performance Management.
Definition: Key Performance Indicator (KPI)
A Key Performance Indicator (KPI for short) is a quantifiable measure used to evaluate the success of an organisation, employee, etc. in meeting objectives for performance.
KPIs should be constructed using the SMART principles of objective-setting, and are normally developed as part of a performance management system.
An effective business person will focus on achieving a number of KPIs that define success for them, their team or organisation. A KPI should be well understood and regularly reviewed.
Definition adapted from Oxford.
Management by Objectives (MBO)
MBO, a system or management tool introduced in 1954 by Peter Drucker, makes it possible for management to concentrate on attainable goals and produce the best possible outcomes from available resources.
Peter Drucker’s Management by Objectives (MBO) Process.
One particular aim of MBO is to improve performance in the organisation through the alignment of goals and lower-level objectives. According to Drucker, MBO works if managers know the objectives; however, 90% of the time they do not, because managers tend to get inordinately involved in activities and lose track of the main purpose or objective.
Therefore, properly identifying objectives is crucial to the success of MBO.
The underlying principle of MBO is to ensure that every person in the organisation clearly understands its objectives and is aware of one’s own roles and responsibilities in relation to those objectives.
When staff are competent, knowledge-based organisations are the most suitable environments for the MBO system.
A good way of using it is to learn from the example at Intel, where they include the following directions in their Manager’s Guide:
Start with a few well-chosen overriding objectives.
Set your subordinates’ objectives that fit in with your overriding objectives.
Allow your subordinates to set their own key results to enable them to meet their objectives.
In MBO, objectives are written down for each level of the organisation, and individuals are given specific aims and targets.
This is where KPIs come in.
Key Performance Indicators (KPI)
KPIs are intimately tied with Key Result Areas (KRAs).
KRAs are outcomes that are crucial to the survival of the organisation.
Key results vary from one organisation to another, but they might include some of the following:
Human Resource
Hiring quality people in the organisation, developing them, and keeping them.
Product/Service
Continually developing existing products or services to match changing needs of customers or clients; introducing product or service innovations.
Customers
Acquiring new customers, maintaining a harmonious relationship with them, and keeping them.
Financial
Keeping the organisation profitable, solvent, and liquid.
Operations
Continually finding ways to improve efficiency in all activities that are performed for the attainment of the organisation’s ultimate mission.
KRAs answer the question: “What all-important results do the organisation seek to achieve on a continuing basis?”
KPIs answer the question: “How does the organisation know that the results sought have been achieved?” They are, in effect, the standards by which attainment of KRAs is measured. If the KPI is not paired with a KRA, it tends to be confusing because it is not clear what performance is being measured, and performance can only be observed in the result.
Key performance indicators must meet the 3 following requirements:
1. They are quantifiable.
To be of any value, KPIs must be accurately definable and measurable. For example, if a KRA in Human Resources is “Quality entry-level hiring”, a good matching KPI would be “New hires for entry-level positions have an average IQ of 100”, not “New hires are intelligent”.
2. They reflect organisational goals.
KPIs must be relevant to the results expected by the organisation. The expected results themselves must also be relevant to the organisation’s ultimate mission. For example, if the organisational mission is to be a world-class manufacturer of desktop computers, a relevant KRA would be “ISO compliant desktop PC production”, and the corresponding KPI would be “All units released at the final assembly area are 100% in conformity with ISO checklist upon quality inspection.”
3. They are key to organisational success.
To be true to the “key” part of the phrase Key Performance Indicator, the KPI must correspond to a truly key result area. If a KRA is off-tangent, to begin with, the KPI that goes with it is automatically invalid.
To go back to the earlier example on the organisation whose mission is to be a world-class manufacturer of desktop computers, the following KRA would be off the mark: “Lowest price in Asia-Pacific region”. While the idea may be good, it has no significance to the attainment of the organisation’s ultimate mission. Any KPI built around this KRA would not be key to organisational success.
A better KRA would be: “Recognition as a world-class PC manufacturer” and the KPI to measure it would be “consistent inclusion in the Top 5 PC Manufacturers list in annual international industry reviews.”
Application of KPIs
Once KPIs are established, they become performance targets to work for. An example of this is shown below in the 2 screenshots from the 2007-2010 Business and Improvement Plan of the Australian Wound Management Association Inc.
The second KRA and its corresponding KPI are encircled.
This information is used in the action plan (or performance target worksheet) found on the next page.
The header information of the action plan/performance target worksheet is taken from the KRA and the KPI in the previous picture. The strategies and activities listed in the first two columns are the steps to be taken to realise the stated KPI.
The planned outcomes are listed in the third column; these are to be compared later on with the actual outcomes that will be entered in the last column just before the performance review.
As the foregoing example shows, KPIs lead to the formulation of performance target worksheets (PTW), where the following details are shown:
· Strategy or strategies for meeting the target
· Precise actions to be performed in each strategy
· Planned outcome(s) of every strategy
· Persons or groups responsible for performing the actions listed
· Timeframes for completing each action.
· Actual outcome(s) of every strategy at the end of stated timeframes
