KPI or Key Performance Indicator is an indicator, gauge or metric used to measure the performance of a business.
However, not just any indicator will make this elite group of business measures. To belong to this club, a business metric must firstly be considered as “key” or important in showing the direction a business is heading. This is not to say other metrics and indicators are not important, they could be, but are just not as important as others. (Unfortunately not all indicators are created equal).
What Makes an Indicator Key?
Imagine the dashboard of your car at the halfway point of a 287 mile journey. At this moment, you probably have access at a glance to see 10, 12 or more “indicators” giving you all sorts of information and data about your trip, the car and the environment in and around the car.
Of these indicators, there’s probably only a handful that provide you data or information needed for you to arrive alive and keep you on the right road without breaking the law. We call these the non-negotiable indicators (or more appropriately – “ignore them at your own peril” indicators).
Examples of such indicators could be the speed you’re travelling at, turn by turn GPS map instructions, fuel level (or distance to empty tank), traffic announcement information (to avoid traffic jams) and so on.
At the same time you also have indicators such as the Track Number of the CD you’re listening to (a Bob Marley Legend track if its my car), the outside temperature, the oil temperature and of course today’s date.
It’s blatantly obvious which of the two sets of indicators constitute a KPI for your objective of reaching your destination in one piece and without infringing on the traffic laws.
The same is true in your business. KPI’s are parameters and indicators in your business, considered critical to chart the direction for your business and confirm whether you’re still on course to reach your destination (business objectives).
If we take the analogy of the car a little further, there are additional indicators such as when service is due, or brake fluid level which, although critical to reach our destination, do not require us to regularly check them on this 287 mile journey.
KPI’s therefore fall into three generic buckets related to validity periods. Hence, in a business, you’ll always get a combination of the 3 types of KPI’s:
short term (e.g. speed of car)
medium term (fuel gauge)
long term (next service due in xxx miles)
Take a moment to identify the Real McCoy indicators in your business considered absolutely “mission critical”. Next, classify whether the KPI’s are short, medium or long term.
Why should Your Business care about KPI’s?
It’s easy to see why KPI’s are Business Improvement’s best friend or is it vice versa? KPI’s in Business Improvement programs confirm the impact all efforts and initiatives taking place within the business at large. KPI’s are like a high court judge whose final ruling should be respected and always stands.
The relationship between effective Improvement efforts and a movement in KPI needs to be linear. Having said this, you should however be wary of the fact that KPI’s can be moved by a number of factors. KPI Movement (sounds like a political party) can also be down to other factors such as seasonality, new product launches, your competition folding up (nice for you!) etc.
Its good practice to look at a few KPI’s in groups at a time whilst attempting to correlate their movements (e.g. a new product launch confirms sales going up whilst at the same time, the number of new customer complaints is shooting through the roof – I wonder why, hmmm?).
KPI’s provide us the trigger moments, the happy moments and the decisive moments where we need to take bold action akin to staying on course the road trip whilst avoiding speeding ticket and accidents.
What 3 KPI’s do you consider “Mission Critical” in your business ?
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