04 Dec Definition of a KPI
What do we need to measure?
In the question above, what do we need to measure, a part of the definition of KPI is hidden. A performance indicator or key performance indicator (KPI) is a measure of performance. Such measures are used by companies to define and then evaluate the success of their business. Before to evaluate a business and create a software, the first goal to achieve is to define the parameters that characterize the specific business. After that it is possible to monitor these parameters to fully understand the present state of the business and to define future actions.
Who and which areas are involved in the definition of KPIs Before giving concrete examples, there are other elements to consider defining KPIs: who and which areas are involved in this bi process.
The first question is who is involved in bi process, that means who can gain from that. Generally those are:
- High level management
Considering them, it is natural to see the business intelligence process as a common involvement of all the lines of an organization.
Since the answer to the first question, it is possible to guess the areas involved. The 3 main areas are:
How to define good and bad KPIs KPIs are different according to specific business. Since this bi approach is very analytical and measurable, a mandatory element is the KPIs have to be SMART. That means:
- Specific for the business
- Measurable to get a concrete value for the KPI
- Achievable, attainable to get real values
- Relevant to measure
- Timely, time-bound to define them in time frames
According the SMART definition, it is possible to identify good and bad KPIs. If the KPI is not SMART, then it is a bad KPI. An example can show this concept.
A KPI like Increase Sales that is defined as Change in Sales volume from month to month and it is measured by Total of Sales By Region/Products for all region or products with the target to Increase each month seems a good KPI. Looking deeper into that there are other questions arising that show how the KPI is not SMART. Does this measure increases in sales volume by Euro or units? If by Euro, does it measure list price or sales price? Are returns considered and if so do the appear as an adjustment to the KPI for the month of the sale or are they counted in the month the return happens? How do we make sure each sales office’s volume numbers are counted in one region, i.e. that none are skipped or double counted? How much, by percentage or Euro or units, do we want to increase sales volumes each month?
Categorization of KPIs As we can see from the above KPIs, it is possible another categorization.
- Quantitative indicators which can be presented as a number
- Practical indicators that interface with existing company processes
- Directional indicators specifying whether an organization is getting better or not
- Actionable indicators are sufficiently in an organization’s control to effect change
- Financial indicators used in performance measurement and when looking at an operating index
The most used KPIs The most used metrics concerns the above 3 ares.
Investigating on costs means understand cycle time, ability to conform to market standards, quantity and quality.
Information on product are about pipeline work, research and development, time to market, and product customization.
A modern approach on marketing is more focused on customer behaviour. Therefore some metrics are: environmental appearance, complaint management, employee empathy, product expertise, and responsiveness, customer acquisition, demographic analysis applying to become customer, turnover by segment, bad debts, profitability by segment.
Before the tools, Companies need to understand what they need, what to measure and how to do that. There is the SMART approach to define the KPIs and then several examples of common used KPIs.