KPI stands for “Key Performance Indicator” and usually designates a metric providing specific information about actual performance in a mission-critical area. Some companies use the term KSI (Key Success Indicator) to mean the same thing.
As a rule, a KPI should be:
2. Clearly related to organizational goals
3. Carefully defined
4. Very important (“key”) to performance/success
Once KPIs have been identified, the relevant information has to be tracked and reported. KPI information is often displayed in the form of a “scorecard,” which usually shows change over time, or on a “dashboard,” which usually gives a snapshot of performance at a specified time. A dashboard may show KPIs in a variety of formats, and may display scorecards along with other types of reporting.
Another way of looking at the KPI: it’s typically a metric that represents distance to target. If your goal is to increase sales by 10% quarter over quarter, then you may want to know in February whether you are on track for a happy outcome. That’s easy to see if a dashboard shows figures in green (“this pace will meet the goal”), yellow (“we can make it, but only with more effort”), or red (“game over”).
B: Why does it matter?
Obviously, defining success and monitoring progress are crucial endeavors for most companies. But to be useful, KPIs have to be anchored in high-quality data, smartly collected, and effectively analyzed. So even though a display made up of smilies and frownies or tachometers and pressure gauges may look appealing and important—those representations are only as useful as the information that generates them.
Which means that Business Intelligence processes (from requirements gathering to final definition to documentation and training) play a vital role in both creating and utilizing KPIs. Although it may not be obvious to the end-user, KPIs are essentially signals that represent first, a vision of the organization and its goals, and second, a data-driven picture of how reality relates to that vision.
The ability to create representations and reports based on KPIs is built into analytics software today, but the apparent ease of the process could be deceptive. To be really useful, performance indicators have to reflect a deep understanding of the business—and that can’t be built into even the best BI tool. Most companies will reap significant benefits by committing plenty of time and resources to the development of KPIs. It’s also important to recognize that what’s “Key” to the business may change over time, so KPIs need to be sharpened and/or updated regularly.
C: What’s next?
An Aberdeen study focusing on KPIs and performance management found that “the faster and more accurately KPIs can be accessed, reviewed, analyzed, and acted upon, the better an organization can manage day-to-day operations and customer interactions.” For most organizations, improving the speed and accuracy of KPI information is challenged by the continuing increase in volumes of data. So in many instances, improvements in the quality of KPIs will depend on development of a data analytics infrastructure that can process a great deal of data very efficiently. Meanwhile, the near future will see a continuing emphasis on implementation of mobile dashboards and other tools for data ubiquity.