Understanding Key Performance Indicators

Performance indicators are an easy way for a business to measure its development. Businesses use key performance indicators (KPIs) to track performance in relation to set goals. To increase effectiveness and profitability, organizations define the key indicators of success.

It is not sufficient to simply define these indicators. To effectively use KPIs, an organization must consistently track their progress and reexamine how they are related. Managers and executives must periodically review these indicators to track the business' progress. These individuals should focus their attention on meeting or exceeding set targets. To ensure their success, organizations must set correct indicators from the beginning. Managerial examination will fail if indicators address the wrong facets of the business or are set too high.

When defining KPIs, organizations must consider how the indicators will change over time. Executives should periodically review all defined KPIs and verify their relevance to evolving relationships and market changes. KPIs set before a major business decision, such as a new contract, will not necessarily apply to the environment after the contract takes effect.

Organizations benefit from defining all key performance indications, even those that will not be tracked immediately. Through defining these indicators, executives ensure and expand their understanding of their business model and factors necessary to its success. Understanding the importance and interaction of these factors is vital to the business' operation. Additionally, by creating extesive KPIs, executives can identify errors and shortcomings in their business plan.

KPIs must be effective and quantitative. For example, employee happiness is a valid KPI only if it corresponds to a measurable metric. Organizations can track this indicator by creating and regularly conducting employee satisfaction surveys. While this process may be time consuming, executives should not ignore a desired KPI simply because there is no obvious metric available.

To simplify the process, businesses should avoid "reinventing the wheel". Similar key performance indicators exist for nearly all business in the same industry. Executives should research the KPIs used by other companies and examine each indicator's relevance to their business model. By duplicating KPIs from other organizations, executives streamline the development process and create a concrete comparison to the performance of other organizations. This examination may also yield insight to new and useful indicators that the executive did not consider.