Key Performance Indicators (KPIs) are the critical (key) indicators of progress toward an intended result. KPIs provides a focus for strategic and operational improvement, create an analytical basis for decision making and help focus attention on what matters most. As Peter Drucker famously said, ‘What gets measured gets done’.
Managing with the use of KPIs includes setting targets (the desired level of performance) and tracking progress against that target. Managing with KPIs often means working to improve leading indicators that will later drive lagging benefits. Leading indicators are precursors of future success; lagging indicators show how successful the organization was at achieving results in the past.
√ Provide objective evidence of progress towards achieving a desired result Key performance indicator
√ Measure what is intended to be measured to help inform better decision making Key performance indicator
√ Offer a comparison that gauges the degree of performance change over time Key performance indicator
√ Can track efficiency, effectiveness, quality, timeliness, governance, compliance, behaviors, economics, project performance, personnel performance or resource utilization
√ Are balanced between leading and lagging indicators Key performance indicator
Or visualised: Key performance indicator
Examples are: Key performance indicator
Customer Lifetime Value (CLV): Minimizing cost isn’t the only (or the best) way to optimize your customer acquisition. CLV helps you look at the value your organization is getting from a long-term customer relationship. Use this performance indicator to narrow down which channel helps you gain the best customers for the best price.
Customer Acquisition Cost (CAC): Divide your total acquisition costs by the number of new customers in the time frame you’re examining. Voila! You have found your CAC. This is considered one of the most important metrics in e-commerce because it can help you evaluate the cost effectiveness of your marketing campaigns.
Customer Support Tickets: Analysis of the number of new tickets, the number of resolved tickets, and resolution time will help you create the best customer service department in your industry.
Percentage Of Product Defects: Take the number of defective units and divide it by the total number of units produced in the time frame you’re examining. This will give you the percentage of defective products. Clearly, the lower you can get this number, the better.
Employee Turnover Rate (ETR): To determine your ETR, take the number of employees who have departed the company and divide it by the average number of employees. If you have a high ETR, spend some time examining your workplace culture, employment packages, and work environment.
Percentage Of Response To Open Positions: When you have a high percentage of qualified applicants apply for your open job positions, you know you are doing a good job maximizing exposure to the right job seekers. This will lead to an increase in interviewees, as well.
Process Performance Indicators
Process Performance Indicators (PPI) are automated measurements which evaluate the operational success of process-oriented organizations. The focus here is on operations and the automated assessment of process performance. While Key Performance Indicators (KPI) are unanimously employed to deliver a strategic overview of how a company is doing, PPIs offer a drilled-down perspective focused on individual processes. Key performance indicator
PPIs are not a replacement for KPIs, but rather a supplement for organizations whose competitive advantage lies within processes excellence. Process-driven organization exist beyond the typical realms of manufacturing and banking. Any organization which acknowledges business processes as the core of existence, and further, prioritizes process performance as a means to competitiveness, is a process-driven organization.
Whether processes are explicitly defined in formal documentation or only vaguely implied through repetitive actions, processes are what make or break organizations. When embraced, monitored and measured process performance is a strong indicator of the bottom line, as well as employee happiness, operational risks and customer satisfaction.
Both KPIs and PPIs require a SMART (specific, measurable, achievable, realistic, time-based) approach to definition, however, PPIs often focus on more minute aspects of operations.
While both performance indicators impact the bottom line, PPIs are less directly connected to financial results and focus more on process quality, efficiency, effectiveness and time. KPIs, however, are almost always focused on reducing costs or increasing revenue.
A few examples:
1. A process quality indicator may be measured by percentage of products rejected. A financial association exists, but it’s not the focus of process quality. The process aims for maximum optimization and 100% product acceptance for reasons beyond costs. Flaws in process quality may also relate to process compliance and deeper issues within a supply chain. Squarely focusing process quality based on finances is a short-sighted approach.
2. A process time indicator may be measured by the time it takes to complete invoicing. Faster invoicing will improve cash flow which has a clear financial implication. The process itself, however, is being measured based on time between issuing of an invoice and payment of an invoice. On the other hand, a KPI related to cash flow will be directly tied to overall cash flow and less specifically focused on speed of invoices.
Selecting Process Performance Indicators
Organizations will develop different PPIs based on operational needs. Common areas of process performance measurement include quality, time, cost and flexibility. Time and cost indicators work inversely to quality and flexibility indicators making trade offs a necessary part of process optimization. Time and cost aim to be low while quality and flexibility aim to be high.
Business strategy and organizational focus will dictate which of the four criteria are of top importance. For most enterprise business processes (e.g. P2P, O2C etc.), time and cost are the most important factors, followed by quality and flexibility.
Time is both a source of competitive advantage and a fundamental performance measurement. Analyzing performance on this dimension can be done by looking at lead time and throughput time (consisting of service time, queue time, wait time, move time and setup time).
Cost is related to time because time costs money (manual labor has an hourly rate, machine labor has costs including machine depreciation and power consumption). Costs are also closely related to quality and flexibility. Poor quality causes costly rework and a rigid process results in a costly process execution.
Quality can be considered as either external or internal quality. External quality indicates the customer’s perception of quality, whereas internal quality is seen from within the manufacturer’s side.
- Customer satisfaction is the most important measure of external quality. This satisfaction can be related to the product (i.e. the output) or the process leading up to the product.
- Product quality takes product performance, conformance and serviceability into account. Process quality considers information ability and bureaucratic language simplification. The quality of the workflow, as seen from an operator’s point of view, is internal quality. Job characteristics indicate high internal quality, additionally group and leader factors influence motivation and job satisfaction.
Flexibility is the ability to react to changes. This dimension can be identified for individual resources, individual tasks and for the process as a whole. Five types of flexibility are stated: mix flexibility, labor flexibility, routing flexibility, volume flexibility, and process modification flexibility.