A key performance indicator (KPI) is a measure used to reflect organisational success or progress in relation to a specified goal.
The purpose of KPIs is to monitor progress towards accomplishing the strategic objectives that are typically communicated in a strategy map.
KPIs are typically included in a reporting scorecard or dashboard that enables top management, the board or other stakeholders to focus on the metrics deemed most critical to the success of an organisation.
Financial KPIs are generally based on income statement or balance sheet components, and may also report changes in sales growth (by product families, channel, customer segments) or in expense categories. Non-financial KPIs are other measures used to assess the activities that an organisation sees as important to the achievement of its strategic objectives. Typical non-financial KPIs include measures that relate to customer relationships, employees, operations, quality, cycle-time, and the organisation’s supply chain or its pipeline. Some prefer to use the term ‘extra-financial’ rather than non-financial, suggesting that all measures that contribute to organisational success are ultimately financial. In addition to financial and non-financial, other common categorisations of performance indicators are quantitative versus qualitative; leading or lagging; near-term or long-term; input, output or process indicators etc.
The critical element in developing KPIs is determining what is important or ‘key’ to the organisation. Operational measures are also important – they can be termed as just ‘performance indicators’, or ‘PIs’, to distinguish them from KPIs.
Developing KPIs should be part of an overall strategic management process that connects the overall mission, vision and strategy of an organisation, and its short- and long-term goals, to specific strategic business objectives and their supporting projects or initiatives. Understanding the organisation’s value drivers and the core activities and competencies that underpin its value proposition is an important first step in this process.