KPI Explained

by Tara Duggan

Key performance indicators help managers analyze and interpret how well their organizations function. Choosing just a few operational data points to include in a review reduces complexity. Successful managers identify their informational needs and determine what data to use as business performance indicators. By examining performance levels, managers can see where problems lie and develop improvement strategies. Additionally, company executives review KPI reports to monitor the overall business and make strategic management decisions. In some cases, KPI reports produced as part of annual financial statements also allow companies to demonstrate compliance with reporting regulations.


Used appropriately, key performance indicators feature quantifiable numbers used to analyze and direct business functions. A performance indicator shows a level of performance within a specific part of the business. Executive dashboards or reports typically feature a set of KPIs to show company progress toward achieving strategic goals. Customer transactions in a day, sales closed, support service calls and customer satisfaction tend to be easily counted. Choosing the right KPIs involves analyzing the business's needs and selecting the most relevant sources. KPIs also help to reduce uncertainty about how the business is functioning.


Once executive leaders define a corporate strategy, they can design KPIs to track progress and improve company performance. KPIs provide information required to make good business decisions. Key Performance Questions help managers figure out what is really important. Monitoring KPIs using business intelligence tools and techniques allows a manager to assess the business's current state and define a course of action to achieve a desired future business condition. Without knowing which part of the business performs poorly, business professionals may just guess at the solution. Instead, by examining KPIs, managers can determine if a business is improving or declining, and decide what to do. For example, if the KPI for customer satisfaction decreases consistently for several months, a business can implement programs to address product shortcomings and customer support troubleshooting procedures.


A KPI usually consists of a directive, indicator, time frame, benchmark and target. For example, a directive could "increase customer satisfaction" for a customer support department. "From 40 percent to 50 percent" could be the indicator. "By the end of the fiscal year" typically represents a reasonable target. "Alignment with industry standards" represents a general benchmark. Another element typically describes how frequently the organization reports the data; for example, monthly, quarterly or annually.


Managers uses KPIs as a visual cue to determine how well a business runs. For example, typical KPIs show what projects have reached milestones, how much projects are behind or ahead of schedule, and what percentage of work has been completed. A system administrator or database manager usually sets up KPIs so that business professionals can easily view the operational metric data collected from company systems. Those with the right access levels can view and extract reports. In some cases, manual data entry provides enough information to produce relevant comparisons.


Overseeing KPIs can be difficult and costly. Some KPIs, such as employee morale, may be difficult to quantify and benchmark across different companies, industries or cultures. Acknowledging KPIs function as a guide to making decisions rather than a guarantee ensures proper usage in managing a successful business and making sound decisions.

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