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Stacey Barr
Stacey Barr
Performance Measure Specialist

Stacey Barr Pty Ltd
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What Does 'KPI' Really Mean?

Posted about 10 years ago

Good grief! It sounds like a performance management shopping list! But even if there were performance management shopping malls around, I’ll bet a lot of people wouldn’t find what they were looking for. And that’s simply because, they don’t really know what all these things actually are!

Let’s explore these terms, and see if we can’t get some more clarity about how they are different from one another, and why.

A measure is a quantification of something you can observe, such as the proportion of customers that have purchased from you more than once or the average time it took you to ship customer orders last week.

Tip: If a measure is not measurable, then it can’t really be a measure. You’ve probably not made the “something” specific enough to measure.

A performance measure is a type of measure that quantifies an important result, that impacts a business’ or organisation’s success. Performance measures are usually taken regularly over time, so that changes in performance can be determined. For example, as time goes by, does it take us less time or more time to ship customer orders?

Metrics and indicators are measures too. There really isn’t a strong enough body of knowledge out there to give them their own unique meaning – they are used interchangeably with the terms ‘measure’ and ‘KPI’. Some say it’s got to do with how accurate or objective they are, but it has more to do with the language an industry or sector has adopted.

KPIs, or key performance indicators, are measures too. But generally, KPIs are the most important measures for a business or organisation, usually having the highest leverage to impact its success. Due to their catchy name, the term KPI has almost become synonymous with the term performance measure. But there are many in the HR and small business arenas who use the term ‘KPI’ to mean the qualitative performance standards in employee job descriptions. So beware!

Tip: I prefer to use the term ‘performance measure’ as the generic label for any quantification of a performance result.

A lead indicator or leading indicator are terms most often used to refer to a special kind of performance measure that has predictive power. It’s a measure that gives you clues about how another performance measure might be affected in the future. Just like increases in building permits might be a predictor of a future boost in the economy.

A target is not a goal or a performance metric but rather a value that represents a level at which you want performance to be. If you have a performance measure that tracks the average number of errors in your invoices, then a target for that measure is also an average number of errors. But while your measure shows that currently you have an average of 0.14 errors per invoice, your target would represent an improvement on that, which could be 0.05 errors per invoice.

Objectives and goals are statements that link performance measures to targets and timeframes. “Reduce the average number of errors per invoice to 0.05 by December 31 2010” is an example of an objective, or a SMART goal. So it’s ingredients are a performance measure (average number of errors per invoice), a target (0.05) and a timeframe (December 31 2010).

Tip: There is no one true definition of terms like these, so you might find it useful to make your own definitions clear in your organisation, to guide how they are understood in practice. But make sure you do some research first, to scope how others use these terms, to widen your own awareness.

ABOUT THE AUTHOR

Stacey Barr is a specialist in organisational performance measurement, helping corporate planners, business analysts and performance measurement officers confidently facilitate their organisation to create and use meaningful performance measures with lots of buy-in. Sign up for Stacey’s free email tips at www.staceybarr.com/202tipsKPI.html and receive a complimentary copy of her renowned e-book “202 Tips for Performance Measurement”.

Comments (12)

Prashant Dhodapkar
Prashant Dhodapkar
Dy CRS at Oil India Limited

A good article, that clears up lot of doubts and misconceptions. What I would like to know is: What is the process for selecting performance measures for an organization and its units?

Posted about 10 years ago | permalink
srini n
srini n
Director at Fastbreak

Good simple explanations, Stacy. Tnx.

Posted about 10 years ago | permalink
Abdulrahman Muhaimid
Abdulrahman Muhaimid
It Performance measurement at Saudi Aramco

KPI is clear now. What about LOI (Level of Operations Index)? Thank you Stacy.

Posted about 10 years ago | permalink
Randa Fathy
Randa Fathy
Human Resources Manager at ITWorx

Thank you.. a very simple yet clear explanation of common terms that usually causes a lot of confusion.

Thanks again Stacey

Posted about 10 years ago | permalink
Ade Cahyat
Ade Cahyat
Good Governance Advisor at Public Administration support

Thanks Stacy, it confirm to my current understanding. Just to add another discussion: I think we have to define result first before defining KPIs, otherwise we don’t have clear understanding about the formulated KPIs. To me, the sould of KPI is “result”, the KPI is only a tool to help us to understand our progress in achieving the result.

Posted about 10 years ago | permalink
srini n
srini n
Director at Fastbreak

@Ade Cahyat: You hit the nail its head! Result si what we want to watch thru the window called KPIs. Until recently the buzz word was KRA – Key Result Area which defined the areas of operation on which one was supposed to focus on.

There should be a cascading relationship from overall business/organizational objective(s) to KRAs down to KPIs if a business/organization seeks to move forward.

Posted about 10 years ago | permalink
Ade Cahyat
Ade Cahyat
Good Governance Advisor at Public Administration support

Dear Srini, thanks to share your knowledge. please share to me if you know any link ellaborate that issue in more detail, particularly of how to break the overall objective to KRAs and KPIs.

Posted about 10 years ago | permalink
Edy Santos
Edy Santos
Operation at Persada

Thanks a lot stacy… my memory will be added

Posted about 10 years ago | permalink
Stacey Barr
Stacey Barr
Performance Measure Specialist

In reply to Abdulrahman Muhaimid:

I’ve never come across the term “Level of Operations Index”, Abdulrahman, so I’m afraid I can’t comment!

Posted about 10 years ago | permalink
Stacey Barr
Stacey Barr
Performance Measure Specialist

In reply to Ade Cahyat:

I absolutely agree with your Ade: we have to be clear about the performance results we want (expressed in everyday language) before we can find meaningful KPIs – or before any KPI will make sense.

Posted about 10 years ago | permalink
Leen van Doorn
Leen van Doorn
Alliander

1. And how about Critical Succes Factors?
2. Does anybody know of a de facto standard business terms dicitonary or so?

Posted about 10 years ago | permalink
Hussein Wehbe
Hussein Wehbe
Career Development Specialist at ADNOC Distribution

Thank you for your clear explanation.

Posted about 10 years ago | permalink

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