KEY PERFORMANCE INDICATORS AS A METHODOLOGY FOR MEASURING

ORGANIZATIONAL PERFORMANCE (SUCCESS)

Definition

Key performance indicators (KPIs), also known as success indicators refer to a set of
quantifiable measurements used to gauge a company’s overall long-term performance. KPIs
specifically help determine an organizational’s strategic, financial, and operational
achievements, especially compared to those of other businesses within the same sector.

Summary

 Key performance indicators (KPIs) measure a company’s success vs. a set of targets,
objectives, or industry peers.
 KPIs can be financial, including net profit (or the bottom line, net income), revenues
minus certain expenses, or the current ratio (liquidity and cash availability).
 Customer-focused KPIs generally center on per-customer efficiency, customer
satisfaction, and customer retention.
 Process-focused KPIs aim to measure and monitor operational performance across the
organization.
 Businesses generally measure and track KPIs through analytics software and reporting
tools.

Understanding Key Performance Indicators (KPIs)

Also referred to as key success indicators (KSIs), KPIs vary between companies and between
industries, depending on performance criteria. For example, a software company striving to
attain the fastest growth in its industry may consider time to time periodic revenue growth as its
chief performance indicator. Conversely, a retail chain might place more value on same-store
sales as the best KPI metric for gauging growth.

At the heart of KPIs lies data collection, storage, cleaning, and synthesizing. The information
may be financial or nonfinancial and may relate to any department across the company. The
goal of KPIs is to communicate results succinctly to allow management to make more informed
strategic decisions.

Key performance indicators (KPIs) gauge a company’s output against a set of targets,
objectives, or industry peers.

Categories of KPIs

Most KPIs fall into four different categories, with each category having its own characteristics,
time frame, and users.

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1. Strategic KPIs are usually the most high-level. These types of KPIs may indicate how a
company is doing, although it doesn’t provide much information beyond a very high-
level snapshot. Executives are most likely to use strategic KPIs, and examples of
strategic KPIs include return on investment, profit margin and total revenue of an
organization.

2. Operational KPIs are focused on a much tighter time frame. These KPIs measure how
a company is doing month over month (or even day over day) by analyzing different
processes, segments, or geographical locations. These operational KPIs are often used
by managing staff and to analyze questions that are derived from analyzing strategic
KPIs. For example, if an executive notices that company-wide revenue has decreased,
they may investigate which product lines are struggling.

3. Functional KPIs is focused on specific departments or functions within a company. For

example, the finance department may keep track of how many new vendors they register
within their accounting information system each month, while the marketing department
measures how many clicks each email distribution receives. These types of KPIs may be
strategic or operational but provide the greatest value to one specific set of users.

4. Leading/lagging KPIs describe the nature of the data being analyzed and whether it is
signaling something to come or something that has already occurred. Consider two
different KPIs: the number of overtime hours worked and the profit margin for a
flagship product. The number of overtime hours worked may be a leading KPI should
the company begin to notice poorer manufacturing quality. Alternatively, profit margins
are a result of operations and are considered a lagging indicator.

5. Financial Metrics and KPIs Key performance indicators tied to the financials typically
focus on revenue and profit margins. Net profit, the most tried and true of profit-based
measurements, represents the amount of revenue that remains, as profit for a given
period, after accounting for all of the company’s expenses, taxes, and interest payments
for the same period. Financial metrics may be drawn from a company’s financial
statements. However, internal management may find it more useful to analyze different
numbers that are more specific to analyzing the problems or aspects of the company that
management wants to analyze. For example, a company may leverage variable costing to
recalculate certain account balances for internal analysis only.

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Examples of financial KPIs include:

 Liquidity ratios (i.e., current ratios which divide current assets by current liabilities):
These types of KPIs measure how well a company will manage short-term debt
obligations based on the short-term assets it has on hand.
 Profitability ratios (i.e., net profit margin): These types of KPIs measure how well a
company is performing in generating sales while keeping expenses low.
 Solvency ratios (i.e., total debt-to-total-assets ratio): These types of KPIs measure the
long-term financial health of a company by evaluating how well a company will be able
to pay long-term debt.
 Turnover ratios (i.e., inventory turnover): These types of KPIs measure how quickly a
company can perform a certain task. For example, inventory turnover measures how
quickly a company can convert an item from inventory to a sale. Companies strive to
increase turnover to generate faster churn of spending cash to later recover that cash
through revenue.

6. Sales KPIs The ultimate goal of a company is to generate revenue through sales.
Though revenue is often measured through financial KPIs, sales KPIs take a more
granular approach by leveraging nonfinancial data to better understand the sales process.
Examples of sales KPIs include:

 Customer lifetime value (CLV): This KPI represents the total amount of money that a
customer is expected to spend on your products over the entire business relationship.
 Customer acquisition cost: This KPI represents the total sales and marketing cost
required to land a new customer. By comparing CAC to CLV, businesses can measure
the effectiveness of their customer acquisition efforts.
 Average dollar value for new contracts: This KPI measures the average size of new
agreements. A company may have a desired threshold for landing larger or smaller
customers.
 Average conversion time: This KPI measures the amount of time from first contacting
a prospective client to securing a signed contract to perform business.
 Number of engaged leads: This KPI counts how many potential leads have been
contacted or met with. This metric can be further divided into mediums such as visits,
emails, phone calls, or other contacts with customers.

Management may tie bonuses to KPIs. For salespeople, their commission rate may depend on
whether they meet expected conversion rates or engage in an appropriate number of leads.

7. Process Performance Metrics and KPI

Process metrics aim to measure and monitor operational performance across the organization.
These KPIs analyze how tasks are performed and whether there are process, quality, or
performance issues. These types of metrics are most useful for companies with repetitive
processes, such as manufacturing firms or companies in cyclical industries.

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Examples of process performance metrics include:

 Production efficiency: This KPI is often measured as the production time for each stage
divided by the total processing time. A company may strive to spend only 2% of its time
soliciting raw materials; if it discovers it takes 5% of the total process, then the company
may strive for solicitation improvements.
 Total cycle time: This KPI is the total amount of time needed to complete a process
from start to finish. This may be converted to average cycle time if management wishes
to analyze a process over a period of time.
 Throughput: This KPI is the number of units produced divided by the production time
per unit, measuring how fast the manufacturing process is.
 Error rate: This KPI is the total number of errors divided by the total number of units
produced. A company striving to reduce waste can better understand the number of
items that are failing quality control testing.
 Quality rate: This KPI focuses on the positive items produced instead of the negative.
By dividing the successful units completed by the total number of units produced, this
percentage informs management of its success rate in meeting quality standards.

KPI Levels

An organization can use KPIs across three broad levels:

Organization level KPIs are focused on the overall success and performance of the
organization as a whole. These types of KPIs are useful for informing management of how
things are going. However, they are sometimes insufficient enough to make decisions. These
KPIs often kick off conversations on why certain departments are performing well or poorly.

Given this weakness, an organization digs into department-level KPIs. These are more specific
than company-wide KPIs. Department-level KPIs are often more informative as to why specific
outcomes are occurring. Many of the examples mentioned above are department-level KPIs, as
they focus on a very niche aspect of a company.

If an organization to dig even deeper, it may engage with project-level or sub-department-

level KPIs. These KPIs are often specifically requested by management as they may require
very specific data sets that may not be readily available. For example, management may want to
ask very specific questions to a control group about a potential product output.

How to Create a KPI Report

With companies seemingly collecting more data every day, it can become overwhelming to sort
through the information and determine what KPIs are most useful and impactful for decision-

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making. When beginning the process of pulling together KPI dashboards or reports, consider
the following steps:

1. Discuss goals and intentions with business partners. KPIs are only as useful as the users
make them. Before pulling together any KPI reports, understand what you or your
business partner are attempting to achieve.
2. Draft SMART KPI requirements. KPIs should have restrictions and be tied to SMART
(specific, measurable, attainable, realistic, and time-bound) metrics. Vague, hard-to-
ascertain, and unrealistic KPIs serve little to no value. Instead, focus on what
information you have that is available and meeting the SMART acronym requirements.
3. Be adaptable. As you pull together KPI reports, be prepared for new business problems
to appear and for further attention to be given to other areas. As business and customer
needs change, KPIs should also adapt with certain numbers, metrics, and goals changing
in line with operational evolutions.
4. Avoid overwhelming users. It may be tempting to overload report users with as many
KPIs as you can fit on a report. At a certain point, KPIs start to become difficult to
comprehend, and it may become more difficult to determine which metrics are important
to focus on.

Advantages of KPIs

A company may wish to analyze KPIs for several reasons. KPIs help inform management of
specific problems; the data-driven approach provides quantifiable information useful in strategic
planning and ensuring operational excellence.

KPIs help hold employees accountable. Instead of relying on feelings or emotions, KPIs are
statistically supported and cannot discriminate across employees. When used appropriately,
KPIs may help encourage employees as they realize their numbers are being closely monitored.

KPIs are also the bridge that connects actual business operations and goals. A company may set
targets, but without the ability to track progress toward those goals, there is little to no purpose
in those plans. Instead, KPIs allow companies to set objectives, and then monitor progress
toward those objectives.

Limitations of KPIs

There are some downsides to consider when working with KPIs. There may be a long time
frame required for KPIs to provide meaningful data. For example, a company may need to
collect annual data from employees for years to better understand trends in satisfaction rates
over long periods of time.

KPIs require constant monitoring and close follow-up to be useful. A KPIs report that is
prepared but never analyzed serves no purpose. In addition, KPIs that are not continuously
monitored for accuracy and reasonableness do not encourage beneficial decision making.

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KPIs open up the possibility for managers to “game” KPIs. Instead of focusing on actually
improving processes or results, managers may feel incentivized to focus on improving KPIs tied
to performance bonuses. In addition, quality may decrease if managers are hyper-focused on
productivity KPIs, and employees may feel pushed too hard to meet specific KPI measurements
that may simply not be reasonable.

Pros
 Informs management of how a company is performing in countless ways
 Helps hold employees accountable for their actions (or lack of)
 Can motivate employees who feel positively challenged to meet targets
 Allows a company to set goals and measure progress toward those objectives

Cons
 Results in potential time commitment to consistently gather data over long periods of
time
 Requires ongoing monitoring for accuracy and reasonableness in data
 May encourage managers to focus on KPIs instead of broader strategies
 May discourage employees if KPI targets are unreasonable