What is a Key Performance Indicator?
Before we start it is important for you to know what is meant when people talk about key performance indicators.
A key performance indicator is a measurable value that can be applied to a process in order to measure its compliance with key business objectives.
There are two different types of key performance indicators that can be used and these are high-level KPI and low-level KPI's.
The difference between the two indicators or that the High-Level KPI is used for measuring the organization's performance in a wider scope against its long-term goals and strategies.
On the other hand, low-level KPI's are used to measure specific processes in crucial areas of the organization.
What types of KPI's will I need in my workplace?
Furthermore, you can break down the KPI into types of indicators such as financial and non-financial.
Financial KPI's are used to determine how well the organization is generating income and how it is performing against set financial goals and profits.
Non-financial in general are used for the measurement of people, machinery cycle times and other process related actions.
It is important to find key performance indicators that will benefit your organization. In order to do this you have to ask yourself the following questions:
- What are my business objectives and goals?
- What is a business long-term strategy?
- Which processes are important in reaching these goals?
- How can the measuring of these processes be changed for the benefit of the company by means of intervention?
- Will I be able to obtain the correct data through measuring?
- Who will benefit from and look at information extracted from data collected?
- How am I going to present the outcome of KPI measurement in order to create an overall understanding throughout the organization?
- Is consensus been reached with other parties in the organization on the use of KPI measurement?
How can KPI measurement be used?
Unless you intend to measure purely for your own benefit it is very important that other parties are on board and willing to accept the outcome of KPI measurement.
This is where low-level KPI measurement comes into play.
KPI measurement can be defined to certain individual departments in the company such as production, supply chain efficiency, call center, and customer care, sales output and other focus areas.
A department manager in charge of sales will be interested in some of the following KPI's:
The rate of contact - In other words how many customers can be reached within a certain time period?
The rate of new leads per month - How many potential customers are contacted?
Customer conversion rate - How many of these potential customers actually open accounts or make sales?
Customer lifetime value - Is the customer a long-term opportunity or is it a once off purchase?
Customer profitability benchmarking - What are the company input cost vs the spending value of the customer.
These are just some of the examples to show how we can use KPI measurement in the sales department.
There are many more opportunities for creating key performance indicators that will assist management in the decision-making process that might follow.
What are the criteria for developing Key Performance Indicators?
Finally, in order to know what KPI's you can put into place it is necessary that you follow the commonly known S M A R T criteria.
Be sure to come back to productivity by design for our next post on " Using Key Performance Measurements Feedback"