Key Performance Indicators KPIs Basics

Key Performance Indicators (KPIs) Basics

KPIs are a measurement designed to assist in the decision making processes to enhance performance and increase profitability.
KPIs should be formulated from the key business drivers of the business to ensure that the entity performs at a high degree of efficiency at all times of the operating cycle.
Continual measurement of the KPIs enable adjustments or remedial action to be taken to prevent causes of inefficiences to prevail.

KPIs need to be defined and measured in a timely manner. A monthly measure cannot be a key measure to the business as it may well be too late to be timely.
British Airways (BA) was reportedly turned around by focusing on one KPI, late planes in the sky. Key personnel were notified immediately if a plane was delayed. The manager at the relevant airport knew that if a plane was delayed beyond a certain threshold, they would receive an immediate call from key personnel. With this focus it was not long before BA planes had a reputation for leaving on time.

There are at least seven characteristics of successful KPIs:
1. Are non financial measures i.e. not expressed in dollars.
2. Are measured frequently at all times during the operating cycle daily, or weekly.
3. Are acted upon by key personnel.
4. Clearly indicate what action is required by team members i.e. they understand the measures and know what to fix.
5. Are measures that can be allocated to a particular team that can take the necessary action and be held accountable.
6. Have a significant impact on performance of one type or another e.g. labour hours or units of materials.
7. Encourage appropriate action to be taken by team members using tested methods which will have positive impacts on performance.

It is the non financial nature of the measure that is the characteristic that is the key to the success of the KPIs.
Financial measures are a quantification of an activity. We have placed a value on the activity, hence behind every financial measure is an activity.
Financial measures may thus be referred to as result indicators and a summary measure.
It is the actual activity that you will want more or less of, it is the activity itself that drives the dollar value. Thus it is the non financial measure that is the true KPI.

Every measure can have a negative consequence. In order to make measures work they need to be discussed with team members to ascertain what actions they are likely to take.
Trial measures and observe behaviour, and then make adjustments as to how the measure is used so that the behaviours it will promote are appropriate. Team members will do what management inspects, not necessarily what management expects.