Key performance indicator (KPI)
A Key Performance Indicator (KPI) is a measurable value that assesses a company's progress toward achieving its organizational and strategic goals. KPIs are essential for evaluating both business performance and employee effectiveness in critical areas that contribute to success. These indicators vary widely across different industries and can encompass financial metrics, customer satisfaction levels, marketing performance, employee metrics, and the efficiency of internal processes.
KPIs can be categorized into two types: leading indicators, which predict future performance, and lagging indicators, which reflect past outcomes. For instance, net profit is a lagging indicator, while customer satisfaction might be a leading indicator. Businesses utilize KPIs through dashboards and performance frameworks, which allow managers and stakeholders to monitor success and make informed decisions.
Selecting the right KPIs is crucial; they should align with the company’s strategic objectives and provide a comprehensive view of its health beyond just financial performance. Therefore, while KPIs can be numerous, it is essential for organizations to focus on those that will most effectively drive their success.
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Key performance indicator (KPI)
A key performance indicator, or KPI, is a measurement, or metric, that gauges the progress of a company toward reaching its organizational and strategic goals. KPIs measure the performance of the business and its employees in carrying out activities that are critical to the company's success.
KPIs help managers and stakeholders determine if the company is on the right course in meeting its set targets. They vary across businesses and industries. KPIs can be used to track a company's finances, customers, marketing, employees, and internal processes. Managers then use the metrics to make decisions for the business. However, sometimes companies become so bogged down in collecting data that they fail to use it effectively. Businesses should choose KPIs that best reflect their objectives and goals.
Overview
KPIs sometimes are called key success indicators, or KSIs. They present a snapshot of a company's current success and indication of future success. The metrics help pinpoint a business's strengths and weaknesses.
There are thousands of KPIs. They can be narrowed down to the following general categories:
- Financial. Several indicators deal directly with a company's revenue and profit. The most important performance indicator of a business is its net profit, or net income, which is the bottom line of a company's financial statement. Net profit is the amount of revenue left over after a company deducts its expenses during a reporting period. Net profit shows whether the company is profiting from its activities.
- Customer service. Some KPIs measure the relationship between a business and its customers. An example is customers' overall satisfaction with the company's goods and services. If satisfaction is high, customers will likely continue buying from the business.
- Marketing. A company can track its marketing efforts and reach through indicators. This includes its market share, or the percentage of sales the business claims in its industry.
- Employee-oriented. A business can measure its relationship with its employees through KPIs. One such indicator is employee turnover rate, or the percentage of workers who leave the company within a certain time frame.
- Internal processes. Companies can use indicators to determine if their operations are efficient. This includes process waste level, which looks at whether procedures are effective without being wasteful.
Ideally, KPIs should include a mix of lagging and leading indicators. Lagging indicators measure actual results such as net profit. Leading indicators measure activities that can lead to future results such as customer satisfaction.
Managers and stakeholders keep track of KPIs over time. The metrics are presented through performance frameworks, business dashboards, and balanced scorecards. These at-a-glance displays allow managers, stakeholders, and others to evaluate and interpret the KPIs. Based on the data, managers can change plans and processes to improve KPIs. In doing so, they can steer the company in the direction of accomplishing its goals. A business also can change the KPIs it uses as it adjusts its objectives.
With so many KPIs available, a business may have trouble making sense of the various metrics it has collected. The tendency may be to focus on financial KPIs, but these KPIs do not provide a complete picture of the company's state of affairs. A business should clearly define its strategic objectives and then select KPIs that measure the activities that are vital to achieving its goals.
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