For any company, is imperative to understand its current and ongoing performance. This is usually evaluated by comparing financial metrics, such as utilities and costs. But, how can we understand the reasons behind an underperformance? This article explores those indicators commonly used in organizations and the relevance of their thoughtful implementation.
There are different types of indicators. For instance, utilities and costs are classified as Results Indicators (RI) since they are used to define performance. However, while it is important to understand performance, it is more useful if the cause is identified. For this purpose, Performance Indicators (PI) are needed. The PIs consider operational aspects of the business, such as utilization and quality. (Parmenter, 2010)
PIs differ with RIs in function, end user and required frequency. For instance, PIs are commonly present at an operational level and must be referred in short periods to assure an opportune corrective action. On the other side, RIs are used at a managerial level and considers long periods of time, such as monthly or yearly basis. (Parmenter 2010) (PwC 2007)
Key Indicators are not the same for every company. For that reason it is important to identify those that are closely related to the company’s strategy and therefore have the biggest impact in the company. For example, a Key Performance Indicator (KPI) for a company with specialized products will probably be related to costs of production instead of other common indicators such as “customer retention”.
Overall, the used KPIs should be as few as possible and must meet certain characteristics. The SMART criteria can be used to evaluate a KPI, which use the following questions. The indicator must be corrected or discarded if it is unable to answer any of the questions.
- S (Specific) – Is it specific? (well defined and focused)
- M (Measurable) – Is it measurable?
- A (Acceptable) – Is it possible?
- R (Realistic) – Is it relevant?
- T (Time-bound) – Does it have time frame? (Parmenter 2010) (CDC 2012)
This evaluation is necessary to prevent the usage of incorrect and poorly defined KPIs that could generate an undesirable impact on the company. For example, evaluating a bus driver with his arrival time to stops could lead to an in-a-rush driver that may degrade the quality of the service and impacts negatively the company’s image. (Parmenter, 2010)
Once the KPIs to use have been defined and identified, it is important to embrace them within the organization. The adoption of the indicators within the company is the most difficult step but it’s equally necessary to improve the company according to its strategy. One of the tools commonly used to visually display the performance indicators is through a Balanced Scorecard (BSC). This framework considers both types of indicators and relates them by causality. This way the BSC easily communicates the individual key indicators’ performance, their own relationship and trends.
A successful adoption of KPIs within the company will facilitate the identification of underperforming departments and processes. An early identification gives an opportunity for corrective action, which helps to fulfil the strategy and increases competitiveness.
CDC. 2012. “Develop SMART Objectives.” Centers for Disease Control and Prevention. http://www.cdc.gov/phcommunities/resourcekit/evaluate/smart_objectives.html.
Parmenter, D. 2010. Key Performance Indicators. Segunda Edición. Hoboken, New Jersey: John Wiley & Sons, Inc.
PwC. 2007. “Guide to Key Performance Indicators.” PwC: Building Relationships, Creating Value. http://www.pwc.com/gx/en/corporate-reporting/assets/pdfs/UK_KPI_guide.pdf.