Do you know about on how to set properly the Key Performance Indicator in your organization?
If you don't know the exact formula in setting KPI, the only thing that you should know about KPI is that KPIs should always be S.M.A.R.T. - Specific. Measurable. Achievable. Realistic. And Timely.
Key Performance Indicators are quantifiable measurements, agreed to beforehand, that reflect the critical success factors of an organization. They will differ depending on the organization.
A Key Performance Indicator (KPI) is a measurable value that demonstrates the effectiveness of a business process at contributing to the attainment of key business objectives. By monitoring the right KPIs and business metrics, you gain valuable insight into the performance of your business and, more importantly, gain the strategic awareness you need to make the right decision at the right time. Use these KPI examples and templates to cultivate a data-driven culture within your organization.
Whatever Key Performance Indicators are selected, they must reflect the organization's goals, they must be key to its success, and they must be quantifiable (measurable). Key Performance Indicators usually are long-term considerations.
Before setting KPI's you have to understand what your business objectives are. Once the strategies of the business have been clearly defined and communicated, then you can go about setting your strategic KPI's.
You also then have to set your short term goals and objectives to enable you to achieve your strategic goals. Once again, KPI's need to be set to monitor these.
A KPI's is nothing more than a way of monitoring your performance against your objectives. If you cannot see a direct link between your goals and KPI's then you have the wrong measures in place.
Also, try and make as many of your KPI's as possible lean indicators. Lead indicators enable you to see gaps in your performance very early so you can make smaller, more frequent adjustments rather than large less frequent changes.
Setting SMART targets is always a useful way of defining a KPI once you have one in mind.
I would suggest a slightly different approach 1st. You need to ask yourself some questions about your business. A good place to start may well be to define the following.
Who am I doing this work for?
Who are my clients?
What else is involved?
Why am I doing this?
What is it for?
What reason would
What will it look like when I have finished it?
How will I know when it is done?
How will I measure the end result?
Cost, Time, Quality?
Ensure standards are SMARTER
Assess relevant facts, ideas, skills, experience & resources
… That we already know or have
…That we need to obtain
Consider the options & identify the RISKS
WHAT HAS TO BE DONE
Stating those things that will need to be done!
What will be done
What will indicate that we have been successful?
How can we assess the end product to be confident that it is what is required?
Once you have considered these things you will be able to set yourself some KPIs that make sense and that are achievable.
It depends on your organization and what you are going for. I would recommend a great book I had to read for school, http://financialintelligencebook.com/
I think the title was different when I read it, and I don't think the bottom line is the only thing you should worry about it any kind of business, but it is rather important to understand the numbers behind a business. And in order for your business to run, you will have to turn a profit eventually.
Personally, I feel it is difficult to quantify the impact a business is having on the external environment, but it is important to have multiple quantifiable indicators.
In Lean Startup, Eric Ries talks about setting up hypotheses that are testable. I think the key is the step before that where you figure out what problem you are trying to solve, what need you are fulfilling. The numbers are important but it is of the utmost importance that indicators such as KPI are actually answering the right questions. And that is dependent on the type of business you are running.
We select KPIs for companies as it is very difficult, if not impossible, for insiders to select their own for many reasons. This is an art for that requires many years business experience in management and executive roles. These are driven off a Strategic Plan and must be tracked in a time series to be valuable. SMART is for goal setting (MBOs), not KPIs. KPIs are numbers by definition and hence by definition already Specific and Measurable.
You have to first have a process set to determine the overall goals of the organization, people themselves, etc. Without a clear plan it is hard to determine success.
Take a look at this link, it might provide an outline for you: http://focuxagency.com/success
Key Performance Indicators are usually the result of a Strategic Planning Process that integrates the business strategy with the department and individual goals for the company's success. They become the metrics that are monitored routinely to determine the progress of the company with its strategic business plan.
Ask yourself what is the desired outcome of the event/project you are measuring, then what are the key S.M.A.R.T. factors that help you achieve your targets.
They also need to be relevant. Too often when i consult with companies i find their KPIs are not aligned with the business goals, when they are not correctly aligned it doesn't matter how SMART they are.
KPI's are relative to the goals and functions of any product or position.
People typically have some performance benchmarks to assess position viability, bonuses and performance growth.
Products have KPI's to measure profitability, growth, brand exposure or failure rates (ask GM).
Knowing the goals of the people or products will give you the data benchmarks to establish your KPI's
Key Performance Indicators should be those 6 or 7 indicators that the management team should be focused on that represent the predictors of the health of the business. Typically everything that has an impact on CASH. Some obvious examples are: total and age of receivables, value of inventory, total and age of payables, backlog of orders to be shipped, and value of incoming orders. Other indicators that are specific to a type of business should also be included. Since CASH is king everything that keeps it positive needs to be closely monitored preferably weekly, but definitely monthly.
Keep your KPIs simple. The calculations that underlie your KPIs should also be simple. The basic one is THROUGHPUT defined as REVENUES less (only) TRULY VARIABLE COSTS (those costs that vary directly and incrementally with any incremental change in revenue). The second is this: OPERATING EXPENSES--the amount of money your firm pays out every month (or some other period) supporting operations that produce THROUGHPUT.
PROFIT, then, becomes a very simple calculation: for any given period PROFIT = THROUGHPUT - OPERATING EXPENSES.
A third factor is INVESTMENT--which includes inventories, of course.
You're well on your way with these basics, and it doesn't take an expensive ERP system to gather these basic KPIs either (in many cases).
In reviewing the responses, I see that you have received some very good advice on the definition and use of KPI. I would add to that collection, the following:
1) Remember that for an organizational KPI to be a good measure and effective management tool, you must be able to translate the KPI into key behaviors and goals at the deparmental and individual levels. For example, if Sales Volume is a KPI for your organization, it must be backed up by realistic goals and behaviors for sales personnel, processing personnel, customer service personnel, etc. Without a tie in to the KPI of the organization, the individual will not recognize, directly at least, how they contribute to success.
(2) Be very careful on the number of KPIs you have at the organizational level. For most of my clients, if they try to put in more than 5 KPIs, I question their focus and level of approach.
(3) KPIs can come in several forms. Whatever you do, make sure that one of the KPIs is an integrating KPI...that is, multiple departments are responsible for directly affecting the results shown by the KPI. In my prior example of Sales Volume as a KPI, the Sales Department is probably the one department to focus on. But if I use a Sales Volume / Revenue Collected, I get an indicator of quality of Sales from both a volume perspective and ability to collect perspective. This is a quick example and I would be happy to get very specific if you would like to provide more information.
KPIs are the handful of numbers you most want to watch to monitor the performance of your company. Not necessarily numbers from your financials. Could be ratios or percentages. Many of these are forward-looking indicators.
They need to be sensitive, so that if they shift, you notice the significance immediately so you can take corrective action. Some examples from my small business owner clients:
-- Restaurant. Food cost and labor cost as a percentage of revenue. It must stay within a narrow range. Too high, and there's no profit. Too low, it means service or quality is slipping. He watches this every week.
-- Installer of high-tech equipment. Backlog of jobs. Dollar amount, likelihood that they will come through, and when
-- Architect/designer. Must closely watch the number of hours spent on jobs, because employees tend to spend too much time
-- Bakery. Tracking labor costs to produce different goods is crucial, and difficult to get employees to keep track accurately
-- Contractor. Comparing job estimates with final job costs, to see if they made their target margin, and if not, why not.
-- Retail chain with several stores. Tracks figures across Nov, Dec, and Jan, since that is the busy season. Sales per selling employee is a key number.
As you can see, these vary a lot, but each number is critical to tracking performance of that company. Each must have:
- a reliable tracking system
- procedures to collect and tabulate the data
- regular reports and review process
- be displayed so the owner (or key managers) can quickly grasp the significant information
- rules on how to respond, depending on what the numbers say.
Sometimes the owner is not the best one to watch these numbers. We neglect them in the course of busy days. So a skilled CFO or other financial person is often an important adviser for the owner
They should also relate to the goals and purposes of the group, organisation or company. They are a measure of the products one needs to attain in order to achieve the goals and purposes of the group. Simply setting KPIs that are specific, Achievable, Realistric and Timely does not say WHAT KPIs to set, only how they should be set.
KPIs are appropriate for cascading goals from higher levels to lower levels. Generally speaking, KPIs are more appropriate for operational management than for use in deploying strategy.
Should you be using KPSs for in support of a strategy, make sure you actually have a strategy that addresses a core challenge for the organization and that you are looking for points of leverage that actually move the needle and don't just contribute the ever-present "metrics clutter."
First question would be does everyone who contributes to the performance understand the metric, its relevance and what part they play in its delivery?
I think you should start with asking questions right from business goals of an organization. So lets say, organization wants to achieve 10 % growth year on year. What does it mean for your department, how will your department/function align with these goals, where will you need help, when will you be able to deliver on these goals etc. Once you start asking these questions and find answers, you can apply a S.M.A.R.T theory to jot down goals for each individuals.