A key performance indicator (KPI) is a management tool. Key performance indicators are not goals. KPIs are measures used to gage the progress or advancement toward the organizations’ purpose; its mission, operational or department goals, and strategic goals.
Key performance indicators, when not linked to the organizations purpose, can lead to perverse incentives and unintended consequences as a result of people not understanding the real purpose behind the measures or working to manipulate the specific measurements at the expense of the actual quality or value of their work. In other words, Leadership must precede Management.
Although in some instances organizations use qualitative indicators, the best, most precise KPIs are quantitative indicators that are both specific and measurable, they can be represented with a number, or a simple yes/no statement and therefore are not subject to human interpretation and disagreement.
The most powerful KPIs are quantitative.
Many organizations use process indicators that measure compliance with, or the efficiency, or effectiveness of a process. Process indicators can be very informative and powerful if used in conjunction with or in the context of outcome indicators that reflect the outcome or results. Measuring results is the only real gage of effectiveness, and informs users of their progress toward the organizations mission, departmental goals and strategic goals. Measuring only process goals may feel safer to some because people can be assured that “I am doing it right” but only outcome measures really inform users as to whether they are “getting the job done.” Any initiative to develop effective KPIs should always begin with outcome measures.
There are 2 distinct types of outcome indicators: lagging indicators and leading indicators:
Lagging indicators measure the ultimate success or failure of the goal post hoc, or after the conclusion of activities.
Leading indicators measure the potential success or failure well in advance of the ultimate (lagging) outcome measure.
In addition, input indicators that measure the amount of resources consumed during the generation of the outcome are critical in ensuring that an activity, process or project is sustainable.
Once the categories of KPIs have been established, future targets must be declared. Targeted KPIs have a timeframe in the future. They can be 5 years, 1 year, quarterly, monthly, weekly… even hourly.
In order for KPIs to be effective, one individual must promise to be accountable for ensuring that the future targeted KPI is achieved.