A Key Performance Indicator is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organisations use KPIs at multiple levels to evaluate their success at reaching targets. High-level KPIs may focus on the overall performance of the business, while low-level KPIs may focus on processes in departments such as sales, marketing, HR, support and others.
What are KPIs
Indicators are statistical values to measure current conditions as well as forecast trends and outcomes.
- A Key Performance Indicator is a measurable value that demonstrates how effectively a Transport project is achieving key business objectives.
- The outcome of a project always involves uncertainty, especially if more than one dimension of performance is considered.
- Measurement results (MI) often viewed as “snapshot in time”, uses for forecasting trends and providing insights to management.
- Most decision-making systems will focus on leading indicators, to ensure tracking in the right direction. They will then use the KPIs to make changes to project behaviour or environment while there is still time to impact profit margins and reduce right-downs.
- Systematic view of measurement needed to anticipate and understand project performance, enables definition of “leading indicators” or “headlights.
What makes a KPI effective?
Too often, organisations blindly adopt industry-recognized KPIs and then wonder why that KPI doesn’t reflect their own business and fails to affect any positive change. One of the most important, but often overlooked, aspects of KPIs is that they are a form of communication. As such, they abide by the same rules and best-practices as any other form of communication. Succinct, clear and relevant information is much more likely to be absorbed and acted upon.
In terms of developing a strategy for formulating KPIs, your team should start with the basics and understand what your organizational objectives are, how you plan on achieving them, and who can act on this information. This should be an iterative process that involves feedback from analysts, department heads and managers. As this fact finding mission unfolds, you will gain a better understanding of which business processes need to be measured with a KPI dashboard and with whom that information should be shared.
Defining KPIs for your organisation
Defining key performance indicators can be tricky business. The operative word in KPI is “key” because every KPI should be related to a specific business outcome with a performance measure. KPIs are often confused with business metrics.
Although often used in the same spirit, KPIs need to be defined according to critical or core business objectives. Follow these steps when defining a KPI:
- What is your desired outcome?
- Why does this outcome matter?
- How are you going to measure progress?
- How can you influence the outcome?
- Who is responsible for the business outcome?
- How will you know you’ve achieved your outcome?
- How often will you review progress towards the outcome?
As an example, let’s say your objective is to increase sales revenue this year. You’re going to call this your Sales Growth KPI. Here’s how you might define the KPI:
- To increase sales revenue by 20% this year
- Achieving this target will allow the business to become profitable
- Progress will be measured as an increase in revenue measured in dollars spent
- By hiring additional sales staff, by promoting existing customers to buy more product
- The Chief Sales Officer is responsible for this metric
- Revenue will have increased by 20% this year
- Will be reviewed on a monthly basis
KPI Measures and Leading Indicators
‘Early detection’ system which should be planned into the project rather than a reactive option. Using a six sigma approach to adopt a KPI leading approach:
- Y=f(X) + ε: All outcomes and results (the Ys) are determined by inputs (the Xs) with some degree of uncertainty (å).
- To change or improve results (the Y), you have to focus on the inputs (the Xs), modify them, and control them.
- Leading Indicator = f (measure, time, interpretation)
- Under specific conditions, an individual measure or collection of measures may be predictive of future performance
- No generic answer as to exactly what to measure for a specific project
- Many common measurement practices obscure the actual situation, providing “lagging” instead
- No “measure” is intrinsically a leading indicator
Strategies for leading indicators
- One measure predicts future values of another measure
- Values of a measure predict future values of the same measure
- A measure tracks a basic constraint or limit to performance
- A measure captures risk or uncertainty