What Are Key Performance Indicators (KPI)?

Key Performance Indicators (KPIs) help organizations understand how well they are performing in relation to their strategic goals and objectives. They provide the most important performance information that enables organizations, or their stakeholders, to understand whether the organization is on track or not, and reduce the complex nature of organizational performance to a small number of key indicators in order to make the information more digestible. This is the same approach that we use in our daily lives.

The problems with KPIs

In practice, the term ‘KPI’ is overused, and often describes any form of measurement data and performance metrics that measure business performance. Instead of clearly identifying the information needs, and then carefully designing the most appropriate indicators to assess performance, we often observe what we have termed the ‘ICE’ approach:

• Identify everything that is easy to measure and count
• Collect and report the data on everything that is easy to measure and count
• End up scratching your head and thinking, “What the heck are we going to do with all this performance data stuff?”

Why do we measure performance?

The reason why we measure performance in organizations is often reduced to simple platitudes, such as, “you can’t manage anything unless you measure it” or “what gets measured gets done.” The three main reasons for measuring performance are:

1. To learn and improve
2. To report externally and demonstrate compliance
3. To control and monitor people.

Measuring to learn and improve performance

Measuring for learning and improvement is the most natural form of using KPIs, and something we do every day in our daily lives. The aim is to equip our employees with the information they need to make better informed decisions that lead to improvements. In this context, KPIs are used internally as the evidence to inform management decisions, to challenge strategic assumptions and for continuous learning and improvement.

Measuring to report externally and demonstrate compliance

Another reason for collecting KPIs is to inform external stakeholders and to comply with external reporting regulations and information requests. When measuring for external reporting and compliance purposes, any reports and associated indicators can either be produced on a compulsory basis, such as annual financial statements, accounts, or performance reports for regulators; or can be on a voluntary basis, such as environmental impact reports, for example.

Measuring to control and monitor people

KPIs can also be used in a top-down command-and-control fashion to guide and control people’s behaviors and actions. Here, measures are used to set goals or rules, to objectively access the achievement of these goals, and to provide feedback on any unwanted variance between achievements and goals. In such cases, the aim of measurement is to eliminate variance and improve conformity. In this context, measures are often tightly linked to reward and recognition structures. Research has shown that this approach is dangerous, and often leads to a culture in which people focus on delivering the measures but not the performance.

Using KPIs correctly

Best practice organizations (a) clearly understand what indicators are required for learning and improvement, and focus on those; (b) separate out the external reporting indicators if they are not relevant internally, to avoid confusion and data overload; and (c) try to avoid using indicators for controlling people.

KPIs are more than numbers

We often associate KPIs with quantifications and numbers. The perceived intention is to provide us with an objective, uniform and rigorous picture of reality. However, this seems to work in some areas better than in others. We find it easy to quantify things like money earned, customer transactions in a day or number of patients treated, and we can count incoming complaints or number of service visits. Some things, though, are not easily counted: things like overall service delivery, organizational culture, our know-how, the strengths of customer relationships or the reputation of your organization are all inherently difficult to quantify in simple numbers.

How to design KPIs

KPIs should be clearly linked to strategy; i.e. to the things that matter the most. Once you have agreed, defined and mapped your strategy, you can design KPIs to track progress and gain relevant insights to help manage and improve performance. KPIs have to provide you with answers to your most important questions. KPIs should be designed primarily to empower employees and provide them with the relevant information to learn. This in turn should improve the decision making and lead to improved performance.

A good starting point is, therefore, to come up with the questions you want to have an answer to before you start designing KPIs. One or two so-called Key Performance Questions (KPQs) are identified for each strategic objective. For more information, see our white paper on KPQs. KPQs will help you articulate the information needs which, in turn, allow you to design the right performance indicators to help you answer your KPQs. For detailed guidance on designing indicators, please refer to our white papers, books and articles, which include easy-to-follow templates and step-by-step frameworks for designing KPIs.