What is a Key Performance Indicator (KPI)?
Article by Bernard Marr
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Definition
Key Performance Indicators (KPIs) can be defined as measures that provide managers with the most important performance information to enable them or their stakeholders to understand the performance level of the organisation. KPIs should clearly link to the strategic objectives of the organisation and therefore help monitor the execution of the business strategy.

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Key Performance Indicators

Key Performance Indicators (KPIs) help organisations understand how well they are performing in relation to their strategic goals and objectives. In the broadest sense, a KPI can be defined as providing the most important performance information that enables organisations or their stakeholders to understand whether the organisation is on track or not.

Measuring what matters the most

KPIs serve to reduce the complex nature of organisational performance to a small number of key indicators in order to make performance more understandable and digestible for us. This is the same approach we use in our daily lives. For example, when you go to your doctor he might measure blood pressure, 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 organisations.

The problems with KPIs

In practice, the term KPI is too loosely defined and very much overused. For many it describes any form of measurement data and performance metrics used to 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:

  1. Identify everything that is easy to measure and count
  2. Collect and report the data on everything that is easy to measure and count
  3. End up scratching your head 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 organisations is often reduced to simple homilies, 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 (see also Figure below):

Of these three the first is the most important, the second is something organisations just have to do and the third one can cause major problems.

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 either have to 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. Here, 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, if not implemented well, can be dangerous and often leads to a culture in which people focus on delivering the measures but not the performance (i.e. hitting the target but missing the point).

Using KPIs correctly

Best practice organisations (a) clearly understand what indicators are required for learning and improvement and focus on those, (b) they separate out the external reporting indicators if they are not relevant internally to avoid confusion and data overload, and (c) they create the right culture to drive high-performance.

KPIs go beyond counting

We often associate KPIs with quantifications and numbers. The perceived objective 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 eared, customer transactions in a day, 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, organisational culture, our know-how, the strengths of customer relationships or the reputation of your organisation are all inherently difficult to simply count.
Therefore measurement in our modern world goes beyond simply counting and can equally include words, pictures and videos to describe and assess performance. Measurement is much more of a social activity. Just think about choosing a restaurant for the next special occasion. You reflect on your previous experiences of the restaurants you have visited and you might read reviews of new restaurants on restaurant websites or restaurant guide books in order to form an opinion about the different restaurants in your area. You might watch videos of the restaurant and look at pictures. Based on the different reviews, star ratings and pictures you then subconsciously, or even consciously, rank different elements such as food quality, service, atmosphere and price to choose the right restaurant for that occasion. In our organisation we also have to balance quantitative and qualitative measures to gain a real understanding of performance.

Can we measure anything?

Yes, there is nothing that we cannot measure. But at the same time we have to be aware that we can’t design perfect indicators that will measure things perfectly. KPIs are there to give us information which helps us to make better informed decisions. It is about reducing uncertainty and it is therefore okay to use proxy indicators. In the same way we are used to using proxies when measuring things like temperature - where we might measure the expansion of mercury in a thermometer as a proxy for the actual temperature.

Words, numbers, star ratings or traffic lights are all valid forms of measurement. What matters the most is that you measure the relevant things that will help you answer the questions that matter the most in your organisation. We prefer therefore to use the word ‘indicator’, rather than ‘measure’. A performance indicator ‘indicates’ a level of performance, but it does not claim to ‘measure’ it (see Figure above). If, for example, we introduce a new indicator to assess customer satisfaction, this indicator will give us an indication of how customers feel; however, it will never ‘measure’ customer satisfaction in its totality. In the same way that an IQ test will give us an indication of intelligence (especially our mathematical and logical reasoning), but will never completely measure all dimensions of human intelligence (e.g. emotional intelligence, hand-eye coordination, special awareness).

How to design KPIs: The question is the answer

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) should be 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 (e.g. ‘How to design a Key Performance Indicator’, as well as our books and articles which include easy to follow templates and step-by-step frameworks for designing KPIs

Practical KPI Examples

The API Knowledge Hub features many real-world examples and best practice case studies of how organisations have designed and used performance indicators. Explore the white papers, case studies and articles for more in-depth information on this fascinating subject.