What is a KPI?

The term KPI is well known. But do you really know what is behind this term?

A Key Performance Indicator, or KPI in short, is a measure that represents the condition of factors that directly influence the realization of the organizational strategy.

A KPI only has a meaning if it is reflected against a certain dimension. For example: the KPI ‘turnover’ is only relevant if one knows the time dimension: the period in which this turnover has been realized (e.g. turnover per year). Furthermore the product group or department dimension might be relevant: the product group or department that has generated the turnover (e.g. turnover of bread or turnover of the bakery).

KPIs are often explained as pure financial measures: an outmoded habit. Because of the necessity to anticipate quicker to changes in the environment, organizations have to search for KPI’s measuring factors that are directly affecting the financial figures. Today, organizations are not solely steering on financial dimensions but also on dimensions like customers and internal processes. If the actuals of these KPI’s differ from the standards or targets, the organization knows the financal figures are likely to differ as well. A well known method that combines different dimensions to make the organization more proactive, is the Balanced Scorecard of Kaplan & Norton (1987).

During the selection of a set of KPI’s, there are some golden rules to avoid the most occurring pitfalls.

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