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KPI: What is a (good) KPI – Key Performance Indicator?

Knowledge
By Nicolas Oury On January 21, 2016
KPI: What is a (good) KPI – Key Performance Indicator?

A Key Performance Indicator (KPI) is numeric (sometimes textual) value measuring the actual achievement of a given activity or unit.

KPIs are generally used through dashboards helping managers to monitor the progresses of their activity.

Examples of KPIs

Hundreds of KPIs can be defined per domain. Here are some typical KPIs per function:

  • Executive Management: Net Profit, Revenue, Number of employees, Employee Churn…
  • Finance: Turnover, Assets, Operating Expenses (OpEx), Investments, Gross Margin…
  • Procurement: Savings, Delivery Quality, Supplier Risk…
  • Sales: Total Sales, Average Basket, Number of customers…
  • Marketing: Net Promoter Score, New customers, Marketing Campaign Efficiency…
  • Digital Marketing: Engagement rate, Active advocates, Number of channels addressed…
  • Social Media: Number of Followers, Interractions, Social Impact Index, Conversions…
  • Manufacturing: Produced Quantity, Productivity, Scrap Rate, Equipment Occupation Ratio…
  • Product Development: New Product Market Share, Employees in R&D, Costs of Investment, Number of Patents…
  • Supply Chain / Logistics / Inventory: Inventory days, Shipment Achievement, Return Rate, Delivery Frequency…
  • Call Center: Number of Calls, Call Resolution Rate, Call Waiting Time, Service Level…
  • Human Resources: Headcount, New Hires, Average Tenure, Compensation…
  • Information Technology: IT Users, Applications, Incidents, Availability…

 Common interpretation

To be efficient and widely used, a KPI must be understood the same way by all persons having to work with it. Different understandings would lead to wrong decisions. Sometimes, just a clear naming of the KPI helps to remove wrong interpretations.

For instance, “Market Share” is a bad name. What is this KPI about? Market share, ok. But, in quantity? in money? And a market share of what? Which market are we talking about? Which periodicity? Monthly? Yearly? “Yearly Coca-Cola Market Share (in units) vs All Beverages – Europe” leaves no ambiguity.

Transparent, simple calculation

Defining a KPI with a simple, clear and transparent calculation allows people to clearly understand what is behind the KPI and how the performance is actually measured, what is the perspective of the KPI.

Quantitative vs Qualitative

To get a better understanding of the different possible perspectives of an event, it is always interesting to analyze at the same time, quantitative KPI and qualitative KPI.

For instance, “Number of Complaints” represents the actual volume of works to be performed by the Customer Service, whereas “Number of Complaints per Customer” really indicates the quality of the job done.

KPI and Drivers

A KPI provides a sense what the performance looks like. It rarely provides by itself the explanation of the performance.

This is where you would need to complement your KPI by “Drivers”: measures which provides the underlying root causes of the KPI performance.

“Sales” KPI can be explained for instance by “Sales Pipeline” and “Win Rate %”.

KPI and Counter KPI

A KPI just provides a perspective on what is happening, and does NOT represent the whole picture what is happening. It is essential to balance a KPI perspective by counter KPIs, meaning additional KPIs enriching our understanding of what is happening but with other perspectives.

In Finance, “Gross Margin” is an excellent counter KPI to “Revenues”.

In Logistics, “Late deliveries %” KPI is an excellent counter KPI to “Average Late (in minutes)”.

Communicate with meaningful KPI

For communication purposes, a KPI must be meaningful in the sense anyone must feel what the actual performance looks like.

Let’s take an example: “Amazon annual turnover is 100 billions USD“. It seems huge but actually quite difficult to understand what it means because so far away from numbers we are used to. Now, saying that “Amazon is selling for 3’170 USD each single second” gives a better and very concrete idea of what amazing performance this is.