Key Performance Indices (KPI)

Key performance indices in short KPI are measurable values in a business which purpose it is to measure key business objectives. They are supposed to show the achievement of these business objectives and as a result allow the responsible person to quickly identify deviations leading to further investigations and corrective measures.

Choosing KPIs

Choosing KPIs depends on the target audience, business model and strategy of the company. A good starting point if you never worked with KPIs are:

  • Sales
  • Gross profit margin
  • HR costs
  • EBIT
  • EBIT ratio

These KPIs are very generalized and don't give a lot of detailed information. If KPIs are too general no one feels responsible for them because the reasons for missing a KPI can be related to too many factors. Nevertheless these KPIs still help with showing the overall company performance which is very important, the responsibility for them however shouldn't be at one person but the whole management.

In order to assign responsibilities to single KPIs you should choose them very carefully and in cooperation with the responsible person. The responsible person has to be able to "own" and influence them. At the same time they should be easily measurable because a complicated calculation can also leave a lot of room for interpretation and make the KPI less verbose. Additionally the time-frame for them has to be well defined. During a budgeting process it often makes sense to define KPIs on a monthly basis (the KPI goals should be well defined based on the budget and it's strategy). In the budgeting process it is also necessary to check if the required resources in order to achieve them are or will be available.

Clear and easy to understand KPIs can actually motivate employees since they are able to see how certain measures effect them. In this context the amount of KPIs also plays an important role. Too many KPIs per responsible person can dilute the actual focus and overwhelm people.

Controlling & Reporting

KPIs should be analyzed and reported regularly so that you can actually implement measures in time. They are also ideal starting points for discussions between the management or management and head of departments during meetings.

Some of the deviations in KPI and their expected goal could be:

  • Changes in requirements
  • Insufficient resources
  • Internal changes (e.g. strategy)
  • External changes (e.g. regulations, market)
  • Over/Under-estimations during the budgeting process

Psychologically it's important to make people understand that KPIs are not the be all end all benchmark their performance is getting measured against. By communicating their importance for the whole company and showing that their input is a important contribution factor resulting in a positive output (represented as KPI) can help to show employees that their efforts are recognized and taken seriously.