What is a KPI?
‘The most important performance information that enables organisations or their stakeholders to understand whether the organisation is on track or not.’
Bernard Marr – author and futurist
What is a KPI?
A KPI (Key Performance Indicator) is used to measure the process towards an organisation’s goals.
Most managers and business owners know what KPIs are, based on the concept that ‘what gets measured gets done’. However, in many instances, organisations do not know what to measure and this results in poor management, mixed messages and focusing on the wrong things. One mistake is to confuse KPIs with goals. The goal of a business may be to increase sales to $20 million – however, it is not a KPI.
One of our first customers in our logistics business was a major Australian retailer who built a new store in a major shopping centre. Retailers normally have a KPI which measures sales per metre of their retail area. The ‘whiz kids’ at the retailer’s head office decided to minimise the ‘in-store’ storage areas to increase the total sales area. Within weeks of opening the new store, sales were suffering. The stock could not be replenished from the back of the store because not enough stock could be stored there. This resulted in reduced staff morale and new requirement to operate an off-site warehouse to replenish the store daily, which increased costs considerably. This is an example of a poor implementation of a KPI. The challenge is to select the right KPIs.
Why are KPIs important?
KPIs, if structured correctly and measuring activities towards a business’s goals, can have a positive impact on performance at all levels of a business. For example, KPIs can empower staff by showing how they can make a difference to the business, as well as holding them accountable.
In our logistics business, we designed a system that collected productivity data by customer, job and product category. The warehouses were divided into sections, each headed by a supervisor responsible for the customers and staff in their section. Each week, we produced productivity data by job and customer – which we called ‘the marking rate’. This information was shared with the supervisor, empowering them to make a difference to the business, holding them accountable, involving their team and demonstrating how important their team was in the business. They were empowered, which increased their levels of job satisfaction immeasurably. The marking rate was a measure which drove the business’s profits.
Not only do some organisations have the wrong KPIs, they often too many KPIs. In my experience, the number of KPIs should be restricted to between three and five, otherwise they can become too hard to measure and manage. I have seen large companies with literally dozens of KPIs, which rarely relate to the company’s goals. The challenge is to identify the key indicators that help the business succeed.
What are the three main considerations in setting KPIs?
- Ensure they are simple and are easily measurable and understood.
For example, in long-distance road transport, KPIs could be revenue per kilometre, kilometre per vehicle and fuel cost per kilometre. These performance indicators are easily understood and measurable.
- The measures must be key indicators of performance and directly linked to strategy.
Using road transport, the strategy is to maximise both kilometres travelled and revenue – so measuring revenue per kilometre is sensible.
- Minimise the number of KPIs, thereby making them relevant to all.
KPIs can be more precisely developed by using Key Performance Questions (KPQ), which assist in objectively developing activity measures that lead towards meeting the business’s goals. Here are some examples:
- What are the activities we should measure that lead to high customer retention?
- What should we measure that indicates profitability by customer?
- Are the current productivity measures linked to the business’s goals?