Role of Key Performance Indicators in Successful Business Organizations

by Linda Williams on July 18, 2011

The role of Key Performance Indicators (KPIs) in the organization is to provide internal and external clients with actionable metrics in easily accessible, customizable formats they can use to increase the effectiveness and efficiency of their operations. What differentiates KPIs from the wealth of metrics that can be generated from any business is that they are key leading and lagging indicators that can be used to reflect the strategic performance of the organization.

In selecting your KPIs it is important not to be tempted to label as KPIs the “top 40” metrics but rather generally at the top level you should limit yourself to the top 1-3 KPIs per strategic objective. These should only include those metrics that are essential to the success of the organization. In addition, each department will have their own contributing KPIs. The departmental KPIs should be selected so that they can be rolled up in support of the overall strategic goals.

The effectiveness of KPIs can be directly related to the care with which they are defined and implemented. Critical questions to consider when developing your KPIs include:

  1. How does this measure contribute to the strategic goals?
  2. Is it quantifiable?
  3. Is the data currently available?
  4. Can current performance, benchmarks, and target values be defined?
  5. How will it be used as a management tool?
  6. What is the high level plan for the establishment of reporting?
  7. Is there an outline for how continuous improvement activities will be implemented?
  8. Has a cascading plan to all levels of the organization been developed?

A brief discussion of the detailed considerations for each of the above questions is included to assist with the process of initiating a KPI program.

  •  How does this measure contribute to strategic goals? –  The success of using KPIs will be dependent on how effective they are at contributing to a better understanding of what drives the success of the organization. Keep in mind that KPIs will differ based on the type of organization and its goals. For example, a non-profit organization such as a school or a hospital will have different fiscal KPIs than a publically traded company. Each KPI should reflect the mission and goals of the organization.
  • Is it quantifiable? – A common mistake in developing KPIs is to take too general a statement such as “Improve customer service” as a KPI. To be effective it needs to be specific and measurable so “improve customer service satisfaction scores or increase customer repeat order rates” would be more appropriate measures.
  • Is the data currently available? – Another factor to be considered is whether the data to be used for each potential KPI is currently available. The expense of gathering additional data including system changes should be weighed against the value that the measure will provide.
  • Can current performance, benchmarks, and target values be defined? – To be effective a KPI must define a clear target so success can be determined. Industry benchmarks can often be useful in setting these targets. For example, an IT department may have as a target 99.999% availability of key systems. Meeting this target in turn will enhance customer satisfaction, ordering functions, etc. and support the other strategic objectives.
  • How will it be used as a management tool? – A clear understanding of how this KPI will be used, how improvement opportunities will be developed, and consequences for deteriorating performance should all be clearly mapped out before implementation.
  • What is the high level plan for reporting? – Publishing and reporting of KPIs is critical to monitoring progress. Formats for reports should be customized by role and function so that executives will see a summary view while department heads would have a much richer set of detailed metrics. Consideration should be given to the mix between dashboards, scorecards, detailed reports, and self-service tools for ad hoc analysis.
  • Is there an outline for continuous improvement activities? – A process improvement process allows the KPI values to be used to identify where focus should be placed to enhance performance.
  • Has a cascading plan been developed? – Each level of the organization needs to understand how their operations support the overall strategic goals. Cascading the KPIs clearly delineates their contributions and their opportunities for improvement.

Implementing a well thought out and comprehensive set of KPIs is the first step to a more proactively performance- based operation. This program will provide all levels of the organization clear targets and objectives with the ultimate goal of materially contributing to the success of the organization.

Written by Linda Williams who is partnered with Datacenter Trust and also has a Business Intelligence consulting practice where she provides businesses with assistance in performance measurement, process improvement, and cost reduction.
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