What Are Key Performance Indicators (KPIs)?

Key Performance Indicators (KPIs) are a set of defined, quantifiable measures that help organizations, departments, and managers understand how they are performing by measuring progress towards a goal. Just like an individual golfer’s scorecard and the leaderboard at a golf tournament, measurement and communication are essential to understanding performance. Continuing this analogy, for the average golfer, par may represent the goal—for top athletes the goal may be an even lower score. For either, however, the players’ actual score becomes the measure. Just as golfers measure and compare their performance to par, organizations use KPIs to gauge and compare performance in terms of meeting their strategic goals and objectives.

Key performance indicators, sometimes referred to as key success indicators (KSI), are quantifiable measures and can be expressed in either financial or non-financial terms reflecting the nature of the business. They essentially show a snapshot of progress towards something that can be measured and reflect the critical success factors of an organization. By observing the right KPIs and business metrics, managers gain valuable insight into the performance of their business and, more importantly, gain the strategic awareness needed to make informed decisions at the right time.

KPIs exist for individuals, teams, departments (like HR), projects, OD interventions, divisions, or organizations. They will vary between companies and industries, and even projects within companies, depending on their priorities or performance criteria, but generally speaking, KPIs are often the same across an industry. For example, if an online retailer’s goal is to have the largest growth in their market segment, the main KPIs might include unit sales, market share, service quality, and return on investment. These measures allow for comparisons with competitors. A second example, “cost per square foot,” allows companies in the commercial construction industry to benchmark against their peers.

Linking KPIs to Strategy and Organizational Goals

It’s important to understand the strategic objectives and goals of the organization, business unit, or department when selecting the right KPIs. Key performance indicators must be linked to the organization's strategy and goals, be key to the organization’s success, and be quantifiable (measurable). An organization must first establish its strategic and operational goals and then choose the KPIs which best reflect those goals. A very common way to choose KPIs is to apply a management framework such as the balanced scorecard. But, it is critical to limit KPIs to those factors that are essential to the organization reaching its goals.

Key performance indicators are usually long-term considerations, meaning that the definition of what they are and how they are measured does not change often. However, the goals (or target for a particular KPI) could change as the organization's goals or objectives change. This might also occur due to shifts in the economy, changes within an industry, or as an organization gets closer to achieving its goals. Key performance indicators should stay with the same definition from year to year to allow for consistent, longitudinal comparisons (i.e., repeated observations of the same variables over long periods of time).

It’s important to note that what’s important (what gets measured) depends upon who’s measuring performance. For example, the KPIs used by customer service will be significantly different from HR or operations.

Another way to think of key performance indicators is as an actionable scorecard that keeps an organization’s strategy on track, enabling you as a leader to manage, control, and achieve your desired business results. Therefore it’s important for an OD practitioner to understand various techniques to assess the present state of the business and its key activities. These assessments often lead to the identification of potential improvements, so performance indicators are routinely associated with performance improvement initiatives.

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