Key Performance Indicators (KPIs) have emerged to be the most significant source of business performance information that helps guide businesses to the right track. However, many companies trip right on the first step, which is understanding what KPIs really are.
First of all, businesses may be too eager to consider every measureable aspect a KPI. In fact, they may be looking at result indicators (RIs) or key result indicators (KRIs) instead. There are 4 types of performance measures:
- RIs: presenting a summary of performance in a specific area, e.g. number of sales in a department
- KRIs: presenting an overview of the company’s past performance
- PIs: presenting targeted measures to improve performance
- KPIs: presenting targeted measures to improve performance dramatically
As such, KPIs are more future-oriented, closely linked with strategic objectives and explicitly indicative of required actions. Another way to distinguish KPIs from other performance measures is by asking whether these metrics are strategic or operational. With KPIs, it is not a priority to get close to real time measurement as they are more strategically focused. Hence, while operational measures are monitored hour-by-hour, day-by-day or adjusted more frequently, KPIs do not change that often.
Secondly, KPIs are quantifiable but not necessarily expressed in monetary terms. That means, there are financial and non-financial KPIs. Recently, the integration of these two types of KPIs using the Balanced Scorecard framework has become more popular. “This approach combines the traditional backward-looking financial measures with information on what is currently happening in the business, generally using quantitative but non-monetary terms” (CGMA, 2012).
According to Kaplan and Norton’s balanced scorecard approach, there are 4 dimensions in a business where appropriate KPIs may be formed:
- Financial perspective: e.g. sales growth, return on investment
- Customer perspective: e.g. market share, customer satisfaction
- Internal business processes perspective: e.g. labour efficiency, turnover of material assets
- Employee learning and growth perspective: e.g. employee satisfaction, investment in innovation and research
This is the second article in our series of 5 on KPIs. Wondering how to design effective KPIs? Don’t miss our next blog entry, as we show you the step-by-step guide or you can discover them now in the full report: "The key to Key Performance Indicators (KPIs)"
Click to read the previous article “Why we measure business performance and caution points”.