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Measuring Performance through KPIs

by Patrick PC Ow

When measuring performance through Key Performance Indicators (KPIs), attempting to
measure quantity, quality, revenue, cost and speed around activities is a good place to start.
However, from a performance management point of view, a higher order of classification is
needed to help decide exactly what is being measured, as shown below:

• Activity – How busy are we (doing things)? These Activity KPIs measure processes or
how hard we work, but not what we achieve (e.g. how much training customer service
staff receive).

• Efficiency – How productively are we performing in our activities (doing things right by
reducing inputs for the same level of output)? (e.g. cost per unit of output).

• Effectiveness – What results are we achieving upon performing our activities (doing the
right things)? (e.g. surplus generated).

For example, the customer satisfaction index is an ideal metric (or Exact KPI) for measuring
how satisfied your customers are with our current goods and services. If an Exact KPI
cannot be practically measured frequently enough for regular decision-making, then a Proxy
KPI (or “next best” metrics to Exact KPI) is developed. Support a customer satisfaction
survey measured once a year by proxy measures such as customer complaints, contract
cancellations or customer churn.

KPIs can be expressed in the following forms:

• Numbers,

• Index,

• Percentages,

• Ratings,

• Ratios, and

• Rankings.

Well-designed performance measures answer two fundamental questions:

• Are things getting better, worse, or staying the same?

• Why?

• Timely – KPIs are time-framed • Verifiable – Independently verifiable by a third party or experts • Workload realities – As jobs are “clogged” to varying extents by routine administrative tasks.Properties of Good KPIs Here are some rules to help us decide what makes a good KPI: • Actionable/Achievable – Measures must be realistically achievable or humanly attainable • Agreed to – Open two-way communication will secure buy-in. making weighted measures and targets more relevant and valid • Aligned/Prioritised – Prioritise. vertically and horizontally • Controllable – Employees must have a significant degree of control. Turns around poor performance. • Relevance – Logical and clear relationship to an objective • Specific – Specific to the individual. who is responsible and held accountable for the job’s performance (or non-performance). Three Criteria Test All KPIs must pass the following three criteria test: • Strategic Criteria − KPIs enable strategic planning and drive the deployment of actions required to achieve objectives and strategies − KPIs align behaviour and initiatives with corporate strategy and focus the organisation on its priorities . performance feedback and open two-way communication. authority and influence over the achievement of the measures or performance • Linked to a recognition/reward system – Celebrate good performance with monetary or non-monetary rewards or recognition. Use on-going. align and integrate individual KPIs to goals and objectives. bounded by limited working hours. allocate KPIs in context with other job assignments. commitment and full understanding. formal and informal. • Measurable – Job-related and quantifiable. Use organisational chart as a guide or starting point.

However.com. rate of improvement.g. • Entitlement – Usually associated with Six-Sigma process improvements (e. e. error rates .g.g.3. Eliminate “bell-curve” manipulation. 10% above last year) • Stretch – Requires “outside-the-square” or re-engineered thinking. within 5% of budget). must be realistic. each requiring a different level of effort to achieve: • Incremental – A small-step improvement that is comfortable to achieve (e. 50%+ improvement over previous year).4 parts per million opportunities) • Impossible – Used to motivate staff to reach for the sky or leads to frustration because resources are insufficient and KPIs beyond staff capability within the period expected. Qualified as an accountant and lawyer. (e. Patrick Ow has keen interest in performance measurement and the cascading of top-level scorecards into personal scorecards. Reward objectively based on targets achieved.g. There are four types of targets.• Quantitative Criteria − KPIs provide a clear understanding of progress toward objectives and strategies – their current status.g. E-mail him at patrickow@gmail. 50% of market share in a product category by 2007. thereby highlighting improvement opportunities • Qualitative Criteria − KPIs are perceived as valuable by the organisation and people involved Targets KPIs are often associated with targets (e. . The best targets are those that are time-specific. and probability of achievement − KPIs identify performance gaps between current status and performance aspirations.