Understanding Key Performance Indicators

Key Performance Indicators (KPIs) are used to assess the present state of a business so that a prescribed course of future action can be determined.
A Key Performance Indicator is a financial or non-financial measurement used to quantify progress towards strategic objectives set as part of a Strategic Business Plan using techniques such as the Balanced Scorecard. They will differ depending upon the nature of the business and its strategic objectives, especially those involving difficult to quantify activities, explains Nathan Jurczyk.

Monitoring business activity and performance in real time uses KPI’s as part of a measurable strategic objective, which is in turn made up of a direction, the KPI, a benchmark, a target, and a timeframe.

When looking at overall business activity the “Gross Margin” KPI above is easy to identify. Making a Strategic Business Plan using the Balanced Scorecard technique is necessary for the business to identify Key Performance Indicators which may be non-financial as well. According to Nathan Jurczyk, the key points for identifying suitable ones are:

a. They must represent a defined business process
b. The process must have clear goals or performance requirements
c. There must be a quantitative/qualitative measurement of the
results, and comparison with the goals or performance requirements
d. There must be a procedure for investigating variances and changing processes to achieve the goals within the business strategy

Using the four perspectives of the Balanced Scorecard, examples of KPIs are:

a. Financial Perspective – Gross Margin, Overheads, New Business, Debtors
b. Customer Perspective – On time contracted delivery, complaints, Customer Survey index, New customers acquired
c. Internal Processes Perspective – Rework, Labor utilization, Lost time injuries, Overtime
d. Learning and Growth Perspective – Employee satisfaction index, Number of trained deputies, Closing of skills gap, Number of cross functional teams

These are just a few of the possibilities, says Nathan Jurczyk, but by carefully selecting the KPIs for performance forecasting, and concentrating management effort on the objectives they measure, the progress and health of a business can be easily established.

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