KPI - key performance indicator
A performance indicator or key performance indicator (KPI) is a type of performance measurement. KPIs evaluate the success of an organization or of a particular activity in which it engages. Often success is simply the repeated, periodic achievement of some levels of operational goal (e.g. zero defects, 10/10 customer satisfaction, etc.), and sometimes success is defined in terms of making progress toward strategic goals. Accordingly, choosing the right KPIs relies upon a good understanding of what is important to the organization. 'What is important' often depends on the department measuring the performance - e.g. the KPIs useful to finance will really differ from the KPIs assigned to sales. Since there is a need to understand well what is important, various techniques to assess the present state of the business, and its key activities, are associated with the selection of performance indicators. These assessments often lead to the identification of potential improvements, so performance indicators are routinely associated with 'performance improvement' initiatives. A very common way to choose KPIs is to apply a management framework such as the balanced scorecard.
Categorization of indicators
There are four types of performance measures, which fall into two groups:
- Result Indicators (RIs) / Key Result Indicators (KRIs): they reflect the fact that many measures are a summation of more than one team's input. These measures are useful in looking at the combined teamwork but do not help management fix a problem as it is difficult to pinpoint which teams were responsible for the performance or nonperformance.
- Performance Indicators (PIs) / Key Performance Indicators (KPIs): they are measures that can be tied to a team or a cluster of teams working closely together for a common purpose. Good or bad performance is now the responsibility of one team: these measures thus give clarity and ownership.
KPIs represent a set of measures focusing on those aspects of organizational performance that are the most critical for the current and future success of the organization. KPIs are rarely new to the organization. Either they have not been recognized or they were gathering dust somewhere unknown to the current management team.
KPI Story: How an airline was turned around by one KPI
KPI story is about a senior official, who set about turning around British Airways (BA) in the 1980s, reportedly by concentrating on one KPI. The senior official employed some consultants to investigate and report on the key measures he should concentrate on to turn around the ailing airline. They identified one critical success factor (CSF), the timely arrival and departure of airplanes. (Finding CSFs and narrowing them down to no more than five to eight is a vital step in any KPI exercise, and one seldom performed.) While everybody in the airline industry knows the importance of timely planes, the consultants nevertheless pointed out that this is where the KPIs lay and proposed that he focus on a late plane KPI. The senior official arranged to be notified whenever a BA plane was delayed over a certain time and the BA managers at the relevant airport knew that if a plane was delayed beyond a certain threshold, they would receive a personal call from the senior official based around Blanchard’s one-minute manager reprimand. Whatever the excuse is, quite frankly, was not good enough. The senior BA official would point out that the manager had over six hours of advance notice that the plane was already late and needed to use this window of opportunity to take actions that would bring the plane back on time. Prior to the “personal call policy,” the airport manager (and many other airline employees ) had the “not our fault” syndrome. A late plane created by another BA team was “their problem, not ours.” But after receiving the personal call from the senior official, the airport manager undertook many proactive steps to recapture lost time, no matter who had created the delay. Actions included:
- Doubling up the cleaning crew, even though there was an additional external cost to this;
- Communicating to the refueling team which planes were a priority;
- Providing the external caterers with late plane updates so they could better manage re-equipping the late plane;
- Asking staff on the check-in counters to watch for at-risk customers and escort them to the gate;
- Not allowing the business-class passengers to check in late, as was previously allowed;
- Possibly asking traffic control for a favor or two.
It was not long before BA planes had a reputation for leaving on time. The late planes KPI was linked to many other critical success factors for the airline including the ‘delivery in full and on time’ critical success factor, the ‘timely arrival and departure of airplanes’; the ‘increase repeat business from key customers’ critical success factor, etc. The late planes KPI affected many aspects of the business. Late planes:
- Increased costs, including additional airport surcharges and the cost of accommodating passengers overnight as a result of planes being curfewed due to late-night noise restrictions.
- Increased customer dissatisfaction and alienated people meeting passengers at their destination (possible future customers).
- Increased ozone depletion (environmental impact) because additional fuel was used in order to make up time during the flight.
- Hurt staff development as they learned to replicate the bad habits that created late planes.
- Adversely affected supplier relationships and servicing schedules, resulting in poor service quality.
- Increased employee dissatisfaction, as they were constantly dealing with crises and with frustrated customers.