Key Performance Indicator (KPI)
KPIs evaluate the success of an organization or of a particular activity (such as projects, programs, products and other initiatives) in which it engages.
Often success is simply the repeated, periodic achievement of some levels of operational goal (e.g. zero defects, 10/10 customer satisfaction, etc.), and sometimes success is defined in terms of making progress toward strategic goals. Accordingly, choosing the right KPIs relies upon a good understanding of what is important to the organization. What is deemed important often depends on the department measuring the performance – e.g. the KPIs useful to finance will differ from the KPIs assigned to sales.
Since there is a need to understand well what is important, various techniques to assess the present state of the business, and its key activities, are associated with the selection of performance indicators. These assessments often lead to the identification of potential improvements, so performance indicators are routinely associated with ‘performance improvement’ initiatives. A very common way to choose KPIs is to apply a management framework such as the balanced scorecard.
Focusing on the word “performance” as a measure of an ‘element’ of an activity. An activity can have four elements as: input, output, control and mechanism. At a minimum it is required to have two elements: input and output. Something goes into the activity as an “input”; the “activity” transforms it by making a change to its “state”; and it produces an “output”. An activity can also have enabling “mechanisms” that are typically broken into “human” and “system”. It can also be constrained in some fashion by a “control”. And lastly, its actions can have a temporal construct of “time”.
- Input indicates the inputs required of an activity to produce an output.
- Output captures the outcome or results of an activity or group of activities.
- Activity indicates the transformation produced by an activity (some form of work).
- Mechanism is something that enables an activity to work – a performer – human or system.
- Control is an object that controls the activity’s production through compliance.
- Time indicates a temporal element of an activity.