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What Does 'KPI' Really Mean?

by Stacey Barr, Performance Management Specialist, Stacey Barr Pty LtdMonday, November 23, 2009

Good grief! It sounds like a performance management shopping list! But even if there were performance management shopping malls around, I’ll bet a lot of people wouldn’t find what they were looking for. And that’s simply because, they don’t really know what all these things actually are!

Let’s explore these terms, and see if we can’t get some more clarity about how they are different from one another, and why.

A measure is a quantification of something you can observe, such as the proportion of customers that have purchased from you more than once or the average time it took you to ship customer orders last week.

Tip: If a measure is not measurable, then it can’t really be a measure. You’ve probably not made the “something” specific enough to measure.

A performance measure is a type of measure that quantifies an important result, that impacts a business’ or organisation’s success. Performance measures are usually taken regularly over time, so that changes in performance can be determined. For example, as time goes by, does it take us less time or more time to ship customer orders?

Metrics and indicators are measures too. There really isn’t a strong enough body of knowledge out there to give them their own unique meaning – they are used interchangeably with the terms ‘measure’ and ‘KPI’. Some say it’s got to do with how accurate or objective they are, but it has more to do with the language an industry or sector has adopted.

KPIs, or key performance indicators, are measures too. But generally, KPIs are the most important measures for a business or organisation, usually having the highest leverage to impact its success. Due to their catchy name, the term KPI has almost become synonymous with the term performance measure. But there are many in the HR and small business arenas who use the term ‘KPI’ to mean the qualitative performance standards in employee job descriptions. So beware!

Tip: I prefer to use the term ‘performance measure’ as the generic label for any quantification of a performance result.

A lead indicator or leading indicator are terms most often used to refer to a special kind of performance measure that has predictive power. It’s a measure that gives you clues about how another performance measure might be affected in the future. Just like increases in building permits might be a predictor of a future boost in the economy.

A target is not a goal or a performance measure but rather a value that represents a level at which you want performance to be. If you have a performance measure that tracks the average number of errors in your invoices, then a target for that measure is also an average number of errors. But while your measure shows that currently you have an average of 0.14 errors per invoice, your target would represent an improvement on that, which could be 0.05 errors per invoice.

Objectives and goals are statements that link performance measures to targets and timeframes. “Reduce the average number of errors per invoice to 0.05 by December 31 2010” is an example of an objective, or a SMART goal. So it’s ingredients are a performance measure (average number of errors per invoice), a target (0.05) and a timeframe (December 31 2010).

Tip: There is no one true definition of terms like these, so you might find it useful to make your own definitions clear in your organisation, to guide how they are understood in practice. But make sure you do some research first, to scope how others use these terms, to widen your own awareness.

About the author:

Stacey Barr is a specialist in organisational performance measurement, helping corporate planners, improvement officers, business analysts and performance measurement officers confidently facilitate their organisation to create and use meaningful performance measures with lots of buy-in.
Sign up for Stacey’s free email tips at www.staceybarr.com/202tips.html and receive a complimentary copy of her renowned e-book “202 Tips for Performance Measurement”.

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Discussion:

Fernando Labastida said:

Great article! This is kind of along the lines of our mission to bring the BI industry down from our Ivory Tower, start using less jargon, and actually explain what the terms are that we use and how it impacts a company's business. Good stuff!

Stacey Barr said:

Thanks Fernando! I really agree with you how important simple and understandable language is in our field. We need to make it more accessible to people who might not be quite so comfortable with measurement and technology.

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