Many people want to know what does a KPI mean?  What does a KPI stand for?

By David Parmenter

Well, a Key Performance Indicator (KPI) is an indicator that focuses on the aspects of organizational performance that are the most critical for the current and future success of the organization.  KPIs have seven characteristics:

Non-Financial (not expressed in $s, Yen, Pounds, Euro etc)           When you put a dollar, yen, pound, or euro sign on a measure, you have already converted it into a result indicator (e.g., daily sales are a result of activities that have taken place to create the sales). The KPI lies deeper down. It may be the number of visits to contacts with the key customers who make up most of the profitable business.

Timely (Measured frequently e.g., 24 by 7, daily, or weekly)       KPIs should be monitored 24/7, daily, or perhaps weekly for some. A monthly, quarterly, or annual measure cannot be a KPI, as it cannot be key to your business if you are monitoring it well after the horse has bolted. I have yet to see a monthly performance measure improve performance.

CEO focus            All KPIs will have the CEO’s constant attention with daily calls being made to the relevant staff enquiring about exceptions or recognizing their outstanding performance. Staff will perceive talking about poor performance with the CEO, on a regular basis, as career-limiting and will take innovative steps to prevent recurrences.

Simple (All staff understand the measure and what corrective action is required)            A KPI should tell you about what action needs to take place. The British Airways ‘late plane’ KPI communicated immediately to everybody that there needed to be a focus on recovering the lost time. Cleaners, caterers, ground crew, flight attendants, and liaison officers with traffic controllers would all work some magic to save a minute here and a minute there whilst maintaining or improving service standards.

Team based (A team can be phoned, and they will accept responsibility, and can take action to improve the KPI)                A KPI is deep enough in the organization that it can be tied to a team. In other words, the CEO can call someone and ask, “Why did this happen?” and that manager will take on the responsibility to fix the issue. Return on capital employed has never been a KPI, because the CEO would get nowhere saying to a GM, “Pat, I want you to increase the return on capital employed today.”

Significant impact (on the organization’s critical success factors)               A KPI will affect more than one critical success factor and most of the balanced scorecard perspectives. In other words, when the CEO focuses on the KPI, and the staff follows, the organisation scores goals in all directions.

Limited dark side (unintended consequence being of minor significance)             All measures have a dark side, an unintended consequence where staff will take some remedial actions that will be contrary to the desired intentions. Before becoming a KPI, a performance measure needs to be tested to ensure that it helps teams to align their behaviour in a coherent way to the benefit of the organization. The possible unintended consequence associated with measuring all the selected KPIs being checked to ensure they are not major or of significance.

So, the Board get a different measure a Key Result indicator

In contrast, Key Result Indicators (KRIs) are measures that have often been mistaken for KPIs. The common characteristic of these measures is that they are the result of many actions carried out by many teams, hence the use of the term “result”. They give a clear picture of whether your organization is traveling in the right direction at the right speed. They provide the board or governing body with a good overview as to the progress with regard to the organization’s strategy. These measures are easy to ascertain and are frequently reported already to the board of government body.

15 examples of KPIs you might be interested in

Measuring any exception that relates to delivery in full on time to key customers including:

  1. Late deliveries over two hours late to key customers—reported intraday to the CEO
  2. Incomplete deliveries to key customers—reported intraday to the CEO
  3. Late planes in the sky over two hours late—reported intraday to the CEO
  4. Late projects which have passed their original deadline—reported weekly to the executive team
  5. Complaints from our key customers that have not been resolved within __ hours—reported intraday to the executive team
  6. Key customer service requests outstanding for more than 48 hours—reported intraday to the executive team
  7. Date of next visit to major customers by customer name—reported weekly to CEO and GMs

Measures that relate to recruiting the right people all the time

  1. Key position job offers that are over 48 hours old and have not yet been accepted by the chosen candidate—reported daily to the executive team
  2. Names of shortlisted candidates for whom the next round of interviews has yet to be scheduled—reported daily to the executive team

Measures that relate to staff satisfaction

  1. Number of planned CEO recognitions for next week/two weeks— reported weekly to the CEO
  2. Number of initiatives implemented after staff satisfaction survey— reported weekly to the executive team for up to two months after survey
  3. Staff in vital positions who have handed in their notice in the last hour—reported within one hour to the CEO.

Measures that relate to training

  1. Number of vacant places at an important in-house course— reported daily to the CEO in the last three weeks before the course is due to run

Measures that relate to innovation

  1. Number of innovations planned for implementation in the next 30, 60, or 90 days—reported weekly to the CEO
  2. Number of abandonments to be actioned in the next 30, 60, or 90 days—reported weekly to the CEO

 

To understand more

This information has been extracted from David Parmenter’s Key Performance Indicators (4th Edition) which is the highest rated KPI book on Amazon.

To understand more about the difference of these two types of measures, you can access, free of charge, chapter one, “The Great KPI Misunderstanding”.

In my KPI book, I have setout a number of examples of reporting templates. See an extract of my Chapter 10 Reporting Performance measures from Key Performance Indicators 4th edition.

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