Key Performance Indicators (KPIs) are measurable values related to essential business objectives.
A KPI provides a means to monitor the performance of a specific function.
In larger organizations, with sales & marketing, research & development, operations, supply chain and other teams working to bring products to market, each department has a specific role.
For example, the sales team engages with potential customers to assist with the customer’s purchase decision. The organization and the sales team may want to focus on sales growth or average profit margin as KPIs.
KPIs provide visibility within a team and to the team managing the overall organization. Setting appropriate objectives and measuring them frequently provide a dynamic scorecard or dashboard useful to local and organizational decision making.
KPIs are business metrics primarily used to monitor the status of specific business processes. They influence tactical decision making for the team responsible for the metric’s outcome.
7 Characteristics of Effective KPIs
In the book, Key Performance Indicators: Developing, Implementing, and Using Winning KPIs, 2nd Ed., David Parmenter describes elements of effective KPIs.
1. Non-Financial
The KPI is not measured in dollars, Yen, Euro’s, etc. In part, we are not interested in the amount of profit, for example, rather the direction or trend of profit growth.
The KPI measure focuses on business process outcomes that do impact the organization’s bottom line, yet focus on the performance of the selection process.
2. Timely
As with any measure, it provides meaningful information is it accurately reflects the current situation and trend. If the thermometer outside my door only reported the temperature from a week ago, it would not be a useful piece of information.
If possible the measure should be real-time or as close to real-time as possible. Daily and weekly updates for some business processes are acceptable.
3. CEO Focus
Besides guiding the local team, say the sales team, the measures guide the decision making of the senior management team. Setting up and monitoring business processes takes resources to accomplish, thus providing measures useful for business operation decisions ensures the investment in the measurement process provides value.
4. Simple
Not simplistic, rather easy to understand. Easy to interpret. The measure or calculation involved for the KPI should not shroud how the values reported reflect the actual business process status.
5. Team-based
In most cases, a business process has a team or cluster of teams responsible for the process performance. The KPI thus reflects on the efforts of the team or group of teams.
6. Significant impact
One guard from setting up KPIs for every process or element of a process is each KPI should measure something important to the organization. Ideally, each KPI should connect to a strategic critical success factor for the organization.
7. Limited dark side
Be careful what you measure as people tend to do what is measured.
Each measure certainly can be optimized and appear to be meeting goals, yet at the detriment of other important performance factors.
Establishing measures that contain or limit the unbridled optimization of one measure (similar to a balanced scorecard approach) permits the team to optimize the overall system of business processes making appropriate business tradeoffs.
Why No KPIs for Reliability?
While it’s an important business performance measure and directly related to customer satisfaction, it is difficult to measure frequently.
It is not the responsibility of one team or small group of teams within the organization. And, key elements of accessing product reliability performance is the customer satisfaction and performance relative to alternative solutions, which is beyond the direct control of the organization.
Unfortunately, there are business processes that benefit with the use of KPI monitoring, yet tend to erode the organization’s ability to achieve product reliability objectives.
For example, a procurement organization may focus on reducing the purchase price of components year over year. This measure tends to ignore the impact of increasing failure rates by using less robust components.
Or, a KPI for sales growth may encourage the sale of products into new applications and environments, beyond the original design’s capability to perform well.
Or, a KPI for factory throughput, essentially deferring preventative maintenance thus increasing corrective maintenance and line shut down events. Then the pressure is on to quickly get the line running again, without performing effective corrective maintenance.
Summary
If you are using KPIs in your organization, think through and detail the eventual impact on reliability performance of your product or system.
Most decision makers understand the importance of reliable performance for the success of their product or services, yet find it difficult to measure in a meaningful manner.
KPIs help focus an organization on what’s important, yet it does not work when left unchecked concerning the longer term implications to reliability.