KPIs explained in less than 2 minutes

If you were to eavesdrop on just about any management or executive meeting, strategy session or performance review in any business you would hear the term ‘KPI’ mentioned many times in many different contexts. Most people in those discussions would know that the acronym stands for Key Performance Indicators but if you pressed each person to explain what a KPI actually is, it’s likely that you would hear many different definitions.

Business is challenging, especially during difficult economic times. It is also extremely competitive and our customers are becoming increasingly discerning. As a result business leaders and senior executives are all looking to improve performance, minimize errors and seek out new and novel ways to gain the edge over their competition. KPIs – when properly understood and used effectively provide a powerful tool in achieving just that.

For those wishing to separate the rhetoric and flavor-of-the-month management fad approach from the genuinely useful information, check out Key Performance Indicators For Dummies.

KPIs are a ubiquitous in modern business. They are everywhere – common almost. And yet businesses that are using KPIs correctly and effectively are not common. Knowing about KPIs and understanding their relevance is of course important but when push comes to shove KPIs are only really useful if you identify the right ones to measure for your business and only measure those ones. They will only deliver mission critical data if you then use the KPIs and analyze what they tell you on a regular basis to inform and illuminate your decision making.

In simple terms KPIs help organizations understand how well they are performing in relation to their strategic goals and objectives. In the broadest sense, a KPI provides the most important performance information that enables organizations or their stakeholders to understand whether the organization is on track toward their stated objectives or not. In addition KPIs serve to reduce the complex nature of organizational performance to a small, manageable number of key indicators that provide evidence that can in turn assist decision making and ultimately improve performance.

If you think about it – this is the same logical approach we use in our daily lives. Say you are not feeling very well and decide to visit your local doctor. He may ask you what is wrong but he’s immediately searching for evidence to qualify your subjective opinion. He may for example take your blood pressure, measure your cholesterol levels, heart rate and your body mass index as key indicators of your health. With KPIs we are trying to do the same in our organizations. And without them we are flying blind, relying on the often subjective assessment and opinion of key personnel.

In practice, the term KPI is overused and misunderstood. Too often KPIs are assumed to be financial or numerical only and yet this definition is much too narrow. KPIs do not just describe any form of measurement data and performance metrics used to measure business performance; they are anything that indicates a difference between one thing and another. If you can observe a move from one state, situation or element of performance to another that is strategically or operationally important to the success of your business then you can measure it. And that measurement is a KPI.

Unfortunately there is often a disconnect between whether something can be measured and whether it should be measured. Instead of clearly identifying the information needs and then carefully designing the most appropriate indicators to assess performance, KPIs are too often implemented using what I call 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 thinking, “What on earth does this all mean and what are we going to do with all this performance data?”

Starting with the data that does or could exist is a recipe for disaster and will have you disappearing down data dead ends wasting valuable time and money. Just because you could potentially figure out how old your customers were does not mean you should? Just because you can assess the time between orders doesn’t mean you should. When it comes to KPIs always figure out what it is you need to know first and then design the KPIs to deliver those answers.

This article is published in collaboration with LinkedIn. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Bernard Marr is a Best-Selling Author, Keynote Speaker and Leading Business and Data Expert.

Image: By Luis Argerich from Buenos Aires, Argentina (Meeting room  Uploaded by guillom) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons