I was conducting an orientation session for a group of newly joined trainee engineers , guiding them about company’s performance assessment system when one of the trainee interrupted and asked – What is meant by “Key Performance Indicator”?. Since, KPI wasn’t part of my presentation and my listeners were technical guys with very basic understanding of management and HR concepts, so I started explaining them in the easiest way I could think of and began..
Lets split the words –
Key = Main/ crucial
Performance = achievement/ work/action
Indicator = sign/clue/mark/hint
Key performance Indicator= Crucial sign of achievement .
We practice KPI in our day to day life too. Like for example – Its is assumed that person is in good health if :
- His body temperature is 37C or 98.6 F.
- His Blood Pressure level is less than 120 mmHg systolic and less than 80 mmHg diastolic.
So here, Body Temperature and Blood Pressure are KPI for good health.
KPI therefore is a measure of performance. In business, success depends on performance and to ensure success , performance standards are set at various levels and KPI are determined to measure the performance.
Some of well accepted definitions of KPI in business are-
KPI is a great tool to control and measure performance at any given time.
A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their strategic and operational goals.
KPI are determined for each business activity and function. Some of the examples are –
KPI for marketing & Sales department
- Ratio of total calls made by sales team to calls converted into business per month.
- Number of new customers acquired per month.
- Number of customers lost per month.
- Estimate of expenditure on advertisement and promotion activities and earning through new business generated.
KPI for Customer Service Team
- Average response time per call per executive.
- Ratio of total calls received to total complaints resolved.
- Number of VIP customers acquired per month.
- Customer satisfaction survey records.
KPI in Appraisal System
In Employee Appraisal system , KPI serve as a control mechanism and indicate the precise level of an employee’s performance. In practice, at the start of an performance evaluation cycle, each employee is made aware if his Key Result Areas (KRA)* and the Key Performance Indicators (KPI) linked with these KRA’s. HR department reviews and measures these KPI periodically or as an when required. Some important characteristics of KPI are-
- KPI must performance linked controls.
- KPI must be specific and achievable targets.
- KPI must be measured periodically to maintain its relevance.
KRA and KPI are two related but yet different concepts. Generally speaking, KRA can be thought of as the job an employee has to perform and KPI is the result he is expected to deliver in his job areas.
Hope the post was helpful in understanding the concept of KPI.
*KRA will be discussed in coming post.