Definition of KPI

Selecting and defining KPIs is not very easy. In the current marketplace, when you purchase a business intelligence (BI), enterprise resource planning (ERP), customer relationship management (CRM), supply chain management (SCM) or business performance management (BPM) system, you have the choice of choosing 20 to 30 KPIs from the hundreds (or thousands) metrics that are included in the package. How do you differentiate KPIs from ordinary metrics? How do you ensure that the selected metrics are critical business drivers? How do you find that the selected metrics actually lead to enterprise rather than localized optimization? How do you balance the short- and long-term goals? Do you have the data available to support the metrics?

To find out the answer to these questions, let's start our KPI journey with a basic definition. KPIs are quantifiable metrics that reflect the performance of a company in achieving its goals. KPIs are defined for strategic value drivers rather than just measuring non-critical business activities. All levels of an organization (business units, departments and individuals) are aligned with KPIs with clearly defined and cascaded targets and benchmarks so as to create accountability and track progress. Seamless and collaborative planning across the organization is accelerated by KPIs and ensure that everyone is operating from the same playing field. Selecting the correct KPIs steers the success of any performance management program. Selection of the wrong KPIs can result in counter productive procedures and non optimized results. It is important to understand that even though all KPIs are metrics, not all metrics are KPIs. 

The Primary KPI Challenges

It has been well-documented in management literature that "what is measured is managed," and "what is not measured merits little or no attention." It is important that the KPIs measure those vital few activities and processes that monitor the health of the organization. Its also needd to ensure that KPIs are not defined in functional or siloed terms but rather as cross-business enterprise standards.

You need to address the following issues in the KPI definition and development process:

• What should you measure?
• How many metrics should you have?
• How often should you measure?
• Who is accountable for the metric?
• How complex should the metric be?
• How do you normalize the metric?
• What should you use as a benchmark?
• How do you ensure the metrics reflect strategic drivers?

KPIs must emanate from the vision level and cascade through the organization. In the strategic alignment pyramid (see Figure 1), we can see that converting the enterprise vision into KPIs and key action initiatives requires several intermediary steps such as creating strategies, objectives and critical success factors. It is not enough to just know "where you are heading" and select relevant KPIs. The vision of the future (mission) must be supported by the what (objectives), the how (strategy), the focus areas (critical success factors), the metrics (KPIs) and the action plan (key action initiatives) to realize full actuation. A comprehensive and consistent alignment is needed up and down the pyramid.