Key Performance Indicator
Key Performance Indicators
Key Performance Indicators (KPI) are financial and non-financial metrics used to quantify objectives to reflect strategic performance of an organization. KPIs are used in Business Intelligence to assess the present state of the business and to prescribe a course of action. The act of monitoring KPIs in real-time is known as business activity monitoring. KPIs are frequently used to "value" difficult to measure activities such as the benefits of leadership development, engagement, service, and satisfaction. KPIs are typically tied to an organization's strategy (as exemplified through techniques such as the Balanced Scorecard.
The KPIs differ depending on the nature of the organization and the organization's strategy. They help an organization to measure progress towards their organizational goals, especially toward difficult to quantify knowledge-based processes.
A KPI is a key part of a measurable objective, which is made up of a direction, KPI, benchmark, target and time frame. For example: "Increase Average Revenue per Customer from $10 to $15 by EOY 2008". In this case, 'Average Revenue Per Customer' is the KPI.
KPIs should not be confused with a Critical Success Factor. For the example above, a critical success factor would be something that needs to be in place to achieve that objective; for example, a product launch.
Performance indicators differ with business drivers and aims (or goals). A school might consider the failure rate of its students as a Key Performance Indicator which might help the school understand its position in the educational community, whereas a business might consider the percentage of income from return customers as a potential KPI.
But it is necessary for an organization to at least identify its KPI's. The key environment for identifying KPI's are:
- Having a pre-defined business process.
- Having clear goals or performance requirements for the business processes.
- Having a quantitative or qualitative measurement of the results and comparison with set goals.
- Investigating variances and tweaking processes or resources to achieve short-term goals.
When identifying KPI's the acronym SMART is often applied. KPI's need to be:
Areas to be analyzed
Among the areas top management analyzes are:
- Customer related numbers:
- New customers acquired
- Status of existing customers
- Customer attrition
- Turnover generated by segments of the customers - these could be demographic filters.
- Outstanding balances held by segments of customers and terms of payment - these could be demographic filters.
- Collection of bad debts within customer relationships.
- Demographic analysis of individuals (potential customers) applying to become customers, and the levels of approval, rejections and pending numbers.
- Delinquency analysis of customers behind on payments.
- Profitability of customers by demographic segments and segmentation of customers by profitability.
Many of these aforementioned customer KPIs are developed and improved with customer relationship management.
This is more an inclusive list than an exclusive one. The above more or less describe what a bank would do, but could also refer to a telephone company or similar service sector company.
What is important is:
- KPI-related data which is consistent and correct.
- Timely availability of KPI related Data.
Faster availability of data is beginning to become a concern for more and more organizations. Delays of a month or two were commonplace. Of late, several banks have tried to move from availability of data at shorter intervals and less delays. For example, in businesses which have higher operational or credit risk loading (that involve credit cards, wealth management), Citibank has moved onto a weekly availability of KPI related data or sometimes a daily analysis of numbers. This means that data is usually be available within 24 hours as a result of automation and the use of IT.
Categorization of indicators
Key Performance Indicators define a set of values used to measure against. These raw sets of values fed to systems to summarize information against are called indicators. Indicators identifiable as possible candidates for KPIs can be summarized into the following sub-categories:
- Quantitative indicators which can be presented as a number.
- Practical indicators that interface with existing company processes.
- Directional indicators specifying whether an organization is getting better or not.
- Actionable indicators are sufficiently in an organization's control to effect change.
In reality organizations and businesses often when looking for Key Performance Indicators discover that they cannot get the performance indicators that they would like to get. Often they are stuck with various non-key indicators. These are used as if they were Key Performance Indicators and often called KPI's since something is better than nothing.