Key Performance Indicators (KPI) are a set of agreed measures of critical success factors of an organization and hence their measurement reflects the progress towards the achievement of corporate objectives.
Key performance indicators provide organization a high level snap-shot of the health of the business. Meticulously selected key performance indicators provide a common point of reference for the organizations’ current performance and also those factors that drive the future competitiveness of the company. Performance against the specified target for each of the key performance indicator provides comprehensive measurement of strategic issues of the company.
Measuring strategy is not the only thing about deployment or implementation of strategy. More important components of strategy implementation include cascading strategic measures as operational parameters and communicating the fact how each of operational measures contributes to the fulfilment of the corporate objectives of a company.
The starting point is the objectives of a company. Against each objective identify those few factors of performance which have to be accomplished to realise the targets. These factors should be a mix of current and future drivers of performance towards fulfilment of the objective. For example to maximise the equipment utilization, current drivers of performance could be to reduce breakdown hours or reducing idle times or to minimise times required for changeover etc. and drivers of future competitiveness could be modernization or automation plans, which would yield results in subsequent periods. Considering another example of improving the revenues, where driver for current performance could be subtle change in product mix and driver for future performance could be building customer loyalty or building brand image etc., tangible business outcomes of which in terms of revenue will become apparent only in the time to come.
These drivers of performance along with their metrics represent key performance indicators for an organization. These key performance indicators can be assigned to next level of management as their targets, where once again important factors that would drive performance to achieve these targets can be identified. This set of factors become key performance indicators at this level of hierarchy.
Thus key performance indicators of the organization can be cascaded along three to four levels of management levels by considering cause and effect linkage as described above and once this exercise has been done till a department or unit level, what you will have before you is a clear linkage between corporate objectives at the top of the organization to the measures that you use to measure and improve your work through strong cause and effect relationship.
Individual responsible for each of the key performance indicator at all levels must be identified, which may enable executives to see their role in implementation of the company strategy.
Thus KPIs clarify what is important at each level and what is to be done through the inherent cause and effect relationship. This way KPIs provide improved visibility of the operations and their effect on strategy, which helps an organization to keep focus on the areas that need attention. Key performance indicators provide a basis for measurement, comparison and review of implementation of a company’s strategy.