The following BPM tool guide is one of a series produced for ICAEW by Professor Mike Bourne of Cranfield University.
KPI stands for “Key Performance Indicator”. Some people call KPIs “performance measures” or “performance metrics” although the latter term usually combines the performance measure and the target level of performance to be achieved. KPIs can refer to financial measures, but they usually refer to the key non-financial measures that the organisation is striving to achieve.
KPIs are used to track the performance of an organisation and are widely used in the UK and USA. They are supposed to reflect “Key” indicators that are important to the company or organisation being measured. In reality, many organisations have a significant number of KPIs, so there is some debate about how “key” they are.
The “I” refers to “indicator”. I stress this point because KPIs are an indicator of performance and not real performance itself. This may seem an academic point, but it is a really important issue. People respond to KPIs.
Research and experience shows that people focus on improving the indicator not real performance. This is because the KPI is the number that everyone sees, reports and talks about. The result is that the indicator increases whilst the performance of the organisation does not.
To put KPIs in context, they need to fall into the following structure (See figure 1).
- Organisations have a set of goals or objectives. These are developed from the mission, vision and purpose of the organisation (see success mapping) and should reflect the strategy – what the organisation is trying to achieve.
- These goals and objectives are often presented in frameworks, such as the Balanced Scorecard or a Success Map, but many organisations manage without having an organising framework for their KPIs.
- Goals and Objectives are often quantified. This is done by creating a KPI for each goal or objective.
- It is common for each KPI to have a target. The target is the level of performance to be achieved by a point of time in the future. Both the level of performance and time frame should be specified.
- Measuring a goal or objective focuses attention, but it doesn’t ensure that the goal or objective will be achieved. The whole strategy, objectives, KPIs and targets should be underpinned by a set of improvement initiatives. These are the projects that are designed to change how the organisation operates and to improve performance.
Background to KPIs
Most people are aware that GE (General Electric) used non-financial measures as early as the 1950s but in France, the Tableau de Bord (which captures the strategy of an enterprise in a set of performance indicators) has been around from the early years of the last century.
More recently, KPIs have been developed in an attempt to move away from purely financial measures of performance. Financial measures are supposed to be the outcome of everything else that happens in managing the business, so it has become important to measure non-financial activity and hence our fixation with KPIs.
|What is this KPI called? A title should be selected so that it captures the essence of what is being measured
|What is the purpose of measuring this aspect of performance? If there isn’t a good reason, then the need for the KPI should be questioned.
|To which top-level business objective does this KPI relate? KPIs should be designed to support the achievement of the top-level objectives. Completing this box on the record sheet ensures this link is made. This may seem obvious, but many organisations have floating KPIs which are not linked to objectives and this causes confusion.
|What performance should be achieved and by when? This communicates precisely what you are trying to do.
|How is the KPI calculated? The formula must include precisely what is being measured. The formula will also influence behaviour, so this is often where KPIs fall down.
|Decide how often this KPI is to be measured and how often the KPI is to be reviewed.
|Identify who is responsible for producing this KPI.
|Source of data?
|Specify the source of the data so that the KPI is reported consistently. In this way, performance between periods can be accurately compared.
|Who takes action?
|This identifies who has been allocated the responsibility for taking action on this KPI.
|What do they do?
|Specify in outline the types of action people should take to improve the performance of this KPI. You should be able to give guidance here rather than simply leaving this for others to interpret.
Benefits of having KPIs
There are a number of benefits that can arise from having a set of KPIs:
Issues and pitfalls to be avoided
There are a number of issues to be aware of when developing and using KPIs:
- Mike Bourne & Pippa Bourne (2011), Handbook of Managing Organisational Performance, John Wiley & Sons, London.
- Andy Neely, John Mills, Michael Gregory, Hugh Richards, Ken Platts, & Mike Bourne, M.C.S., (1996), Getting the measure of your business, Findlay, London.
- Bernard Marr, (2012), Key Performance Indicators (KPI): The 75 Measures Every Manager Needs to Know, Pearson Education ltd, Harlow, UK.
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Further reading on KPIs and performance measurement is available through the resources below.
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- 02 Dec 2015 (12: 00 AM GMT)
- First published
- 06 Jun 2023 (12: 00 AM BST)
- Page updated with Latest research section, adding further reading on KPIs. These new articles and ebooks provide fresh insights, case studies and perspectives on this topic. Please note that the original article from 2015 has not undergone any review or updates.