Key Performance Indicators (KPI)
Meaning and definition of Key Performance Indicators (KPI)
The KPI can be expressed as a set of irrefutable measures used by an industry or a company to estimate or determine performance in terms of congregating their strategic as well as operational goals. The KPIs differ between companies and industries, depending upon the performance criteria or the priorities. KPI is also, sometimes, referred as ‘Key Success Indicators (KSI).’
As explained by Investopedia, it is essential for a company to establish the strategic and operational goals and then select the KPIs which best indicate those goals. For instance, if the aim of a software company is to achieve fastest growth in the industry, its KPI would be the measure of revenue growth year-on-year. The KPI is stated in the annual report. Also, KPIs are generally industry-wide standards, such as “same store sales”, in the retail sector.
Components of a Key Performance Indicator
The main components of a KPI can be seen as:
Simply ‘key’ when it is of fundamental importance in obtaining competitive benefit and is a vital element in the accomplishment or breakdown of an enterprise. For instance, the level of labor yield is a significant operating ratio, but hardly one that is a make or break component in the success or failure of the company.
The next component of KPI is only related to ‘performance’ when it can be evidently measured, quantified, and easily predisposed by the organization. For instance, various tourist related operations are influenced by weather, but the weather cannot be influenced by the weather. Sales growth might be a significant performance criterion but the targets set need to be measureable.
The final component, only an ‘indicator’, if it provides most important info related to future performance. A substantial amount of data inside the organization itself holds vale for historical objectives, like creditor and debtor length. By contrast, rates of fresh product development facilitate excellent leading edge info.
Wrapping up, KPIs can obviously not operate in vacuum. Moreover, KPI cannot be established without a clear understanding of what is possible. It is, therefore, important to set upper and lower limits of the KPI with regards to the market and with the performance of the competitors.