KPI Dashboard - What is a KPIs
What are KPIs and How are they Used
Note: This post is first part of Building KPIs dashboard Series.
IV. Wireframing A Dashboard
VI. Best practices for KPI analysis
What is a KPI
Peter Drucker once said, ”What gets measured gets managed.” Since then the quote has been so much overused, it has almost lost its essence and has become a cliché. But just because something has become cliché doesn’t mean it doesn’t hold true any longer.
Imagine it is the start of nice spring weather and you have bought yourself a pair of running shoes. You are pretty pumped up and determined to run every day. You start waking early, go for a run. Few days pass, your running goes well, and you feel good about it. However, now a few questions start coming to your mind like
How many days it’s been since I started to run?
Am I running consistently?
How fast am I running?
Is my running speed increasing?
How far can I run?
Does running have an impact on my health?
In other words, you want to measure the performance of your running system. Now each question above can be answered with a number. That single number that answers your question is called KPI or Key Performance Indicator.
The KPIs which may monitor the performance of a system like above might be something like:
Number of days passed since day of first run
Length of current running streak in days
Running Speed
Change in Running Speed Current Week vs Previous Week
Average Running Distance
Change in BMI since first day of running
How to Define a Good KPI
Business world is not as simple as your daily running. It is full of uncertain, complexity where different people from various departments operate within. Even though as an organizations they may have single goal, sometimes different functions of a business might have conflicting short term goals. For example, a sales department in an insurance department might be interested in selling as many insurances as possible, underwriting department is not happy to give approval to for all those sales because they want to assess risk of every insurance sold.
Organizations define a set of KPIs at the level of organization as well at department level to measure these kind of activities. For important KPIs, annual and monthly targets are set too in the advance. However, some thumb-rules must be ensured by both management before an organization sets these KPIs and the department which is responsible for calculating these KPIs which usually is business intelligence department of IT, must ensure that a mechanism to calculate them is kept in place.
Some of best practices for defining a good KPIs are as follows:
A KPI should be easy to calculate, explain and communicate
A KPI should have one and only one calculation logic across entire organization
A KPI should be time-bound and frequency of measuring KPI should be defined like daily, weekly, monthly and annual
A KPI should be aligned with the overall strategy and tactics of an organization
A few set of KPIs together should show a whole picture of story, and not just a single side of it
Keeping two opposing KPIs together reduces the risk of improving one KPI at cost of other by managers
A KPI should be defined in such a way that it does not fluctuate a lot from a central value
More than one KPI might be needed to measure single aspect like: profit value, and profit % of revenue
KPIs should be as per industry standard and acceptable by market analysts, like ROTA for a finance company
Frequency of measuring KPI should be standard, like daily, weekly, monthly and annual
For KPIs which are measured at a point of time like inventory, the clock time of measuring should be defined, usually it is mid-night after day closing
It should be made clear what will be included and what will be excluded while calculating a KPI
There should not be any manual changes made after a KPI is calculated and reported
If a KPI needs to be updated, the underlying data in system should be changed, not the KPI in the presentation
Types of KPIs
Strategic KPI
Measures the strategy of an organization and is reviewed during monthly and quarterly meetings. It is aligned with the overall strategy of the organization.
Return on Total Assets
Profit Margin
Average Working Capital
Additive KPI
These KPIs are calculated by adding some value. These are easy to calculate and communicate.
Sales Quantity
Absolute Profit Value
Revenue
Point of Time KPIs
These KPIs are a snapshot of anything taken at a particular point of time.
Warehouse Inventory
Account Balance
Total Outstanding Amount
Change over Time KPIs
These KPIs are derived by measuring change in another KPI at two different periods and are shown as growth rate or delta over time.
Sales Growth for the Month
Change in Inventory over a day
Increase in Customer Service Level
Operational KPI
These KPIs are used to measure efficiency of a process or operation and measure a very specific area of business. These are reviewed on a daily basis
Product Rejection % (Quality)
Average Fly-ash Mix in Cement (Production)
Average Duration of Call (Customer Service)
Ratio KPIs
These KPIs are calculated by Dividing one number by another number.
Price per Unit (Value/Volume)
Profit Margin (Profit/Revenue)
Inventory in Days (Inventory/Average Sales)
Period of Time KPIs
These KPIs are calculated by taking values over a long period of time.
Sales Quantity in A Month
Monthly Average Account Balance
Net Promoter Score
Index Numbers
These KPIs are calculated by bringing many other KPIs and giving them different weights. These are hard to calculate and harder to communicate.
Human Development Index or HDI
Quality Index
Production Efficiency Index
I hope you enjoyed reading the first article in the series. Read part II of the series Comparing KPIs. Any questions? Hit below in comments. Cheers.
If you are a project manager and want to hire me to build a KPI Dashboard for your department, contact me to schedule a discussion.
Follow me on Instagram to hear about next updates on this series in the coming week.
