KPI Definition

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KPI stands for Key Performance Indicator. A Key Performance Indicator or Performance Indicator is an industry word for a kind of Measure of Performance. KPIs are commonly used by an organization to assess its success or the success of a specific activity in which it's engaged. A Key Performance Indicator is a financial or non-financial measurement used to quantify advancement towards strategic objectives set as element of a Strategic Business Plan by techniques such as the Balanced Scorecard. These will differ depending upon the nature of the business and its strategic objectives, specially those involving difficult to quantify activities. In other words a key performance indicator (KPI) is a business metric used to evaluate factors that are crucial to the achievements of a business. KPIs differ per organization; business KPIs may be net revenue or a customer loyalty metric, whereas government might regard unemployment rates.

A KPI offers the most significant performance information that enables organizations or their stakeholders to recognize whether it's on track or not. KPIs serve to decrease the intricate nature of organizational performance to a small number of key indicators so as to make it more digestible for us. This is the same approach we make use of in our on a daily basis. For example, when we visit doctor he may measure blood pressure, cholesterol levels, heart rate and our body mass index as key indicators of our health. With KPIs we are trying to execute the same in the organizations.

Thus, choosing the accurate KPIs is dependent upon having a good understanding of what is significant to the organization. 'What is significant frequently depends on the department measuring the performance - the KPIs helpful to a Finance Team will be quite different to the KPIs allotted to the sales force. Due of the need to develop a good understanding of what is significant; performance indicator choice is often directly associated with the use of various techniques to assess the current state of the business, and its key activities. These assessments frequently lead to the identification of potential improvements; and as a result, performance indicators are normally associated with 'performance improvement' initiatives.

When looking at on the whole business activity the "Gross Margin" KPI above easy to identify. Making a Strategic Business Plan using the Balanced Scorecard method it's essential for the business to recognize KPIs that may be non-financial as well. The key points for identifying appropriate ones are firstly, the KPI should signify a defined business process and the process must have clear goals or performances requirements. There must be a quantitative/qualitative measurement of the results, and comparison with the performance requirements. There should be a method for examining variances and altering processes to accomplish the goals.

Some examples of KPIs are Financial Perspective - Gross Margin, Overheads, New Business, Debtors, Customer Perspective – On time contracted delivery, complaints, Customer Survey index, new customers acquired, Internal Processes Perspective– Rework, Labor utilization, lost time injuries, Overtime, Learning and Growth Perspective – Employee satisfaction index, Number of trained and deputies, Closing of skills gap, Number of cross functional teams.

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