KPIs or key performance indicators are mentioned several times in executive meetings, strategy sessions or performance reviews in any business. Many participants in those conversations will know that the acronym KPIs stands for Key Performance Indicators, but if you asked each person to clarify what a KPI is, you would probably hear several different meanings. KPIs are omnipresent in modern business and yet the word is still misunderstood and overused. Although KPIs are quite common, this means that businesses that use KPIs effectively are not quite as common. This, however, is a real shame because KPIs can make a big difference to a business’s success if used properly.
To fix the problem, let us proceed to fully explain what KPIs are, which types of KPIs exist, give KPIs examples and explain employee's KPIs.
Related: A guide for developing Key Performance Indicators
What are key performance indicators?
What is a KPI? According to Oxford's Dictionary, a KPI is a quantifiable measure used to evaluate the success of an organisation, employee, etc. in meeting objectives for performance. It is a tangible attribute that indicates how successfully a firm is achieving key business goals. Organisations use multi-level KPIs to measure their performance in achieving goals. High-level KPIs can concentrate on the overall company performance, while low-level KPIs can concentrate on departmental processes such as sales, marketing, HR, support and others. In simple terms, KPIs provide a way to measure how well companies, business units, departments or individuals are performing about their strategic goals and objectives.
Related: Key performance indicators by functional area
KPIs vary based on market goals from organisation to organisation. For instance, one of the main performance indicators for a public company would likely be its stock price, while the number of new customers added per quarter could be a KPI for a privately-owned start-up. They help to cut the complexity associated with performance tracking by reducing a large number of measures into a practical number of 'key' indicators. Unlike basic indicators used for measuring and displaying values, like the number of visits to a website. KPIs can integrate one or many different indicators for tracking a business goal. For example, a KPI that is associated with a strategic marketing goal may look like this:
· Objective: Increase the website conversion rate to 20%.
· Description: The current conversion rate has stalled at 12%. To be competitive the conversion rate needs to increase in line with our competitors.
· Completion: By the End of the year.
· Reporting Frequency: Monthly.
· Data Source: Number of Trials / Number of conversions.
· Owner: Product Manager.
A well-built KPI helps companies translate goals into plans and track initiatives' effects. Companies benefit from a variety of advantages, such as better knowledge and information for making educated decisions in real time. KPIs equate organisational vision with individual behaviour. An optimal scenario is where an organisation's KPIs cascade from level to level. This can be visualized by thinking of your organisation as below a pyramid:
At the top, the pyramid has a strategic vision that feeds down on specific actions at the bottom. In the centre, you will find the KPIs which were extracted from the organisation's plan, priorities, and essential success factors ( CSFs). CSFs are the areas of operation the company needs to perform well to be competitive. KPIs are the means of calculating certain CSFs. The acts behind the KPIs are the activities and programs you are undertaking to reach the KPIs. When used, the KPIs endorse the goals and plans of the company. They help you to focus on what matters most and track progress.
The importance of KPIs
Key performance indicators illustrate just how well a company is doing. Without KPIs, it would be impossible for the leaders of an organisation to evaluate that meaningfully, and then make organisational adjustments to fix performance issues. Without approved KPIs, keeping employees focused on the business initiatives and tasks that are essential to organisational performance may also be difficult to reinforce the significance and value of such activities. In addition to highlighting business successes or issues based on current and historical performance measurements, KPIs can point to future outcomes, give early warnings to executives about possible business problems or advance guidance on opportunities to maximize return on investment.
KPIs help an organisation, department, team or manager to quickly react to events that may impact the business. However, these indicators can be used to set business-wide goals for meeting strategic objectives. KPIs help companies concentrate on a mutual target and ensure it's compatible with the company. Therefore businesses must know exactly what to measure. Equipped with this knowledge, they can more proactively handle business processes, with the potential to gain competitive advantages over less data-oriented rivals.
Types of key performance indicators
There are a lot of different kinds of KPIs you can use in your company. The common theme is that all of these are targets and you can use those which make the most sense for your business strategy. The KPI types include:
· Quantitative indicators can be presented with a number.
· Qualitative indicators that can’t be presented as a number.
· Leading indicators that can predict the outcome of a process.
· Lagging indicators that present the success or failure post hoc.
· Input indicators that measure the number of resources consumed during the generation of the outcome.
· Process indicators that represent the efficiency or the productivity of the process.
· Output indicators that reflect the outcome or results of the process activities.
· Practical indicators that interface with existing company processes.
· Directional indicators specifying whether or not an organization is getting better.
· Actionable indicators are sufficiently in an organisation’s control to effect change.
· Financial indicators used in performance measurement and when looking at an operating index.
Related: Key Performance Indicators: A Guide for Managers
Key performance indicators examples
KPIs are ultimately related to the strategic objectives of an organisation, managers use the indicators to determine whether they are on track as they work towards those objectives. Managers and key stakeholders track these indicators over time and change strategies and initiatives in support of the company's strategic priorities to increase the KPIs. The following are some examples of defined KPIs by type:
· Quantitative indicators - a 50% increase in the number of people who enrol their children in ethnically mixed schools by the end of the project.
· Qualitative indicators - rating satisfaction from 1 to 10, or ranking satisfaction according to pre-defined categories such as 'very satisfied', 'satisfied', and 'unsatisfied'.
· Leading indicators - an increase in orders for auto parts suggests a rise in new auto production and sales soon.
· Lagging indicators - unemployment rate, corporate profits, and labour cost per unit of output.
· Input indicators - inputs to conduct a training course may include facilitators, training materials, and funds.
· Process indicators - holding of meetings, the conduct of training courses, distribution of medicines, development and testing of health education materials.
· Output indicators - the number of women and children admitted to shelters (often every month).
· Practical indicators - tracking the number of customer complaints.
· Directional indicators - average directional movement index
· Actionable indicators - number of new contracts signed per period.
· Financial indicators - revenue growth.
Key performance indicators for employees
Regardless of industry, managers look for competency in critical areas when conducting employee appraisals. In short, managers want to see workers achieve set targets, act as active team members and apply critical thinking skills to help ensure effective business operations. Employee performance indicators are crucial to monitoring how well workers are doing. Implementing them the right way is tricky. However, employee performance indicators benefit the organisation, as well as the employee, when done correctly. The following list consists of the most important ones and some practical examples of each indicator are included. These can be split into four main categories which are:
1. Work quality indicators
2. Work quantity indicators
3. Work efficiency indicators
4. Organisational performance indicators
Work quality indicators
Work quality indicators say us about the efficiency of employee quality. The best-known indicators are a direct manager of a subjective appraisal.
1. Management by objectives
A way to arrange a manager's subjective appraisal is through the use of objective management. Objective Management is a management philosophy that seeks to enhance an organisation's efficiency by transforming organisational objectives into concrete individual goals. Sometimes these goals take the form of targets set by the employee and the boss. The employee works towards those goals and reports their progress back to the manager. These targets may even be given some weight (several points). Points are given to the employee after the complete completion of these objectives. In turn, managers can make goals more tangible, and more data-driven performance reviews.
Related: How to Master the Four Functions of Management
2. Subjective appraisal by the manager
Performance is evaluated several times a year in most enterprises during bi-annual performance reviews. Employees are measured on many factors, the most common being the quality of their work. The so-called 9-box grid is an extension of the scheme. The 9-box grid is centred on a 33 table in which the efficiency and ability of the employee are measured. Highly performing yet low-potential workers are ideal for their current job. Employees in the top right corner, those that score high on results as well as potential, are frequently assigned to progress rapidly through the corporate ranks because they can bring more value up the ladder. This 9-box grid is a simple way to measure employees' current and future interests and is a valuable method for succession management (that is, you want to maximize your high potential).
Related: Performance appraisal: Everything you need to know
3. Product defects
Measuring quality (production) objectively is tricky. Calculation of the number of product defects would be an approach often seen by more traditional manufacturing industries. Defects, or goods which are improperly made, are a sign of the poor quality of work and should be kept as small as possible. Although increased standardization of production processes has made this indicator almost useless, the employee performance measurement approach can be applied to other areas.
4. Number of errors
The number of input errors could serve as an alternative to the product defects mentioned earlier. The same applies to the number of corrections in written work or software code bugs.
One single error, particularly in computer programming, may stop a whole program from running. This can have a big impact on the business, particularly for companies that release new software versions weekly or monthly. The significant consideration for consistency is the conciseness of a piece of code. When 10 lines of code can achieve the same numerical result as 100 lines of code, the former is a higher quality indicator.
Related: Attention to Detail Test
5. Net promoter score
Net promoter score (NPS) will serve as a performance indicator for employees. NPS is a number (usually between 1 and 10) that represents a client's willingness to recommend the service a company provides to other potential clients. Customers who score a 9 or 10 are likely to be extremely pleased and serve as advocates for the company. This score is used routinely to determine sales workers, for example in car sales, where it is used in the final document that customers will sign. NPS benefits from its simplicity. The disadvantage is that employees are not uncommonly to instruct clients to give a certain rating (i.e., 9 or 10).
Related: Net promoter score: Everything you need to know
6. 360-degree feedback
A further tool for measuring employee performance is 360-degree feedback. To determine the performance of an employee, its colleagues, supervisors, clients and managers are asked to provide input on specific subjects. Sometimes this feedback provides a detailed and multi-perspective view of the efficiency, ability level and points of the progress of an employee.
Related: How to Get the Best Out of 360-degree Feedback
7. 180-degree feedback
A simpler version of the 360-degree feedback method is 180-degree feedback. Only the employee's direct colleagues and managers provide feedback in the 180-degree feedback system. Thus, the system is often used by workers who do not manage people and/or have no direct contact with customers.
8. Forced ranking
Forced ranking (also called the vitality curve) is a way to rate workers by asking managers to make a list of their best, in that order, to their worst employees. In this way, all the employees of the company are compared and measured on their results. Each ranking is for the advancement of the workforce. The bottom 10 per cent of the workforce can be fired and replaced by the top applicants from the talent pool of the company, a practice claimed to lead to a significant improvement in the potential of the workforce. There has been a lot of scepticism about this \"rank and yank\" strategy, however, and most companies have stopped the practice, including General Electric, whose then-CEO Jack Welch popularized it.
Work quantity indicators
Because quantity is often easier to quantify than consistency, this employee performance indicator can be calculated using several forms.
1. Number of sales
Sales numbers are a particularly easy way to identify the output of a sales employee. This holds especially true with ‘simple sales’. For example, this means that coordinated street vendors just directly on the number of transactions, and when given enough time, the people with the best expertise will sell the most at the same location within an hour. This is an example of an indicator result. However, if the sales are more complicated (i.e. a longer selling cycle), the number of transactions is less accurate as lower frequency and randomness/luck can play a larger role in the outcome of the positive sale. Specific selling cycles are better calculated by other indicate