Key Performance Indicators - Explained
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What are Key Performance Indicators (KPIs)?
Key performance indicators are a set of measures that companies and corporations use to evaluate their progress financially and to what extent they have met their strategic goals. These quantifiable measures are also important when evaluating how a business is fairing against its competitors.
Back to: Management & Organizational Behavior
A Little More on What are Key Performance Indicators
Also christened Key Success Indicators, KPI measures are different in different companies and industries.
The factors that determine measures to use include priorities, strategic goals and performance criteria.
For instance, one company might have strategic goals to grow the fastest in its industry while another might have a goal to exland its reach wide within a year. For the first company, KPI will be annual revenue while for the second; KPI will be same-store sales.
Financial KPI are common in most companies. Usually companies compare their annual revenue from different years to assess progress.
In this case, the company calculates the net profit, which is the amount of revenue that remains after deducting expenses, interests paid and taxes.
Net profit is calculated in dollars and it must be shown as a percentage of the gross revenue for effective comparison. If, for instance, the standard net profit in a given industry is 50 percent, new companies need to create strategic plans that propel then to 50 percent net profit.
Companies also consider gross profit margin, revenue after deducting production costs, when analyzing performance.
Companies also use their current ratio as KPI.
Here, the companies divide its assets by its debts. A financially healthy company should have enough funds to sustain itself for the next 12 months.
Since different industries calculate current ratios differently, a company can assess its financial health by comparing its current ratio with other companies in the industry to evaluate whether it fails within industry standards.
KPI is more about financial health but there are other factors that determine performance including its relationship with customers and employees.
Companies can use KPIs such as employee turnover, foot traffic or number of new and repeat customers.
Non financial KPIs are linked to company's aims and they keep changing as the company progresses.
Academic Research on Key Performance Indicators
- Key performance indicators for measuring construction success, Chan, A. P., & Chan, A. P. (2004). Benchmarking: an international journal, 11(2), 203-221. This paper examines KPI in the construction industry. It shows that key performance indicators in the construction industry have remained ambiguous. In many cases, time, cost and quality are considered the main KPIs but there are authors who feel that the indicators in construction are more complex than three mostly used. The paper develops a simple model of measuring KPI.
- Beyond the 'iron triangle': Stakeholder perception of key performance indicators (KPIs) for large-scale public sector development projects, Ogunlana, S. O. (2010). International journal of project management, 28(3), 228-236. Performance indicators differ from project to project in the construction industry. This paper examines KPIs in key construction projects in Thailand. The author notes that key players in a project, including clients, contractors and consultants, play a role in performance of a project. Other KPIs that the author examines include safety of the project, satisfaction of stakeholders, economic use of resources and reduced disputes and conflicts.
- Intellectual capitaldefining key performance indicators for organizational knowledge assets, Marr, B., Schiuma, G., & Neely, A. (2004). Business Process Management Journal, 10(5), 551-569. This author in this paper notes that knowledge-based assets of organizations contribute to the overall performance of the organization. It discusses the importance of incorporating knowledge-based assets in KPI measures. It explores approaches used in measuring knowledge-based assets and suggests a model that can be used to effectively incorporate these measures into KPIs.
- Management's perception of key performance indicators for construction, Cox, R. F., Issa, R. R., & Ahrens, D. (2003). Journal of construction engineering and management, 129(2), 142-151. The author in this paper notes that the construction industry needs to come up with a standard way of measuring performance. For effective performance evaluation, both qualitative and quantitative indicators have to be considered. The paper shows six key indicators that are important in the construction industry.
- Key performance indicators and assessment methods for infrastructure sustainabilitya South African construction industry perspective, Ugwu, O. O., & Haupt, T. C. (2007). Building and Environment, 42(2), 665-680. This paper examines the different KPIs used in the infrastructure industry for various projects. It identifies the different KPIs used and how some are not effective in assessing performance. The paper concludes by showing how the model it develops can be applied in different industries.
- Key performance indicators (KPIs) and priority setting in using the multi-attribute approach for assessing sustainable intelligent buildings, Alwaer, H., & Clements-Croome, D. J. (2010). Building and environment, 45(4), 799-807. This paper aims at identifying keys issues linked to sustainable intelligence buildings, to develop a model for identifying KPIs in the infrastructure industry, and to test the perceptions of the stakeholders of different KPIs.
- Key performance indicators in European hotel properties: general managers' choices and company profiles, Harris, P. J., & Mongiello, M. (2001). International Journal of Contemporary Hospitality Management, 13(3), 120-128. This paper aims at identifying key performance indicators used by hotel managers. It explores the key factors that influence decision making by managers in national and global chains of hotels. Particularly, it assesses the standard indicators, the general interpretation of these indicators and the way these interpretations affect decision making.
- Prioritization of key performance indicators: An integration of analytical hierarchy process and goal setting, Shahin, A., & Mahbod, M. A. (2007). International Journal of Productivity and Performance Management, 56(3), 226-240. This paper analyzes organizational KPIs in terms of SMART goal setting by a company's management. It uses analytical hierarchy process method to develop a new model through which the management can prioritize SMART goal and decision making. It shows the guidelines to be followed when creating goals and concludes by offering a better approach for KPI prioritization. The proposed model aims at enhancing the decision making process to enhance production and profits.
- Developing key performance indicators for supply chain: an industry perspective, Chae, B. (2009). Supply Chain Management: An International Journal, 14(6), 422-428. Key performance indicators in supply chain show where there are gaps between planning and implementation. This paper offers an approach that supply chain companies can use to determine performance. This paper suggests that less is better when developing performance indicators metrics. The paper also explores the benefits of KPIs in supply chain management. Even though KPIs are important in SCMs, most companies struggle to incorporate KPIs into their measurements. This paper offers an approach into how KPIs can successfully be used in SCMs.
- A framework to create key performance indicators for knowledge management solutions, del-Rey-Chamorro, F. M., Roy, R., van Wegen, B., & Steele, A. (2003). Journal of Knowledge management, 7(2), 46-62. This paper is an analysis of KPIs for knowledge management solutions. It paper uses a set of key indicators as leads when developing a model for use in knowledge management solutions KPIs.
- Environmental, social and governance key performance indicators from a capital market perspective, Bassen, A., & Kovacs, A. M. M. (2008). When evaluation the performance of a firm, some factors considered performance include environmental, governance and social influences. The challenges of using these factors are that they are qualitative and thus numerical values cannot be used. This paper analyzes approaches that enhance quantification and representation of qualitative data.