What are KPI?

Key Performance Indicators are key measures that gauge the success of the organization in a particular area, usually impacting the bottom line. These KPI(s) are:

• Quantifiable
• Measurable today and over time
• Assessed regularly against preset corporate targets
• Tracked by decision makers throughout the organization
• Tracked across key Dimensions/Variables (time, product/product line, department, geographic location, sales rep, etc.)

There are two types of key performance indicators:

1. Lagging Indicators (typically financial)
   • Tells us how the organization has performed in the past (Revenue, Cost, Margin, EPS, etc.)
2. Leading Indicators (non-financial)
   • Tells us how the organization is performing now
   • Predicts likely future financial performance (Number of returns, on-time delivery, market share, etc.)

Organizations have typically not done a great job tracking these leading indicators, although these leading indicators serve as our crystal ball in determining likely future financial performance.

It is important to track both leading and lagging KPIs because:

• Lagging indicators tell us how well we're doing today, while leading indicators tell us how well we're likely to do down the road
• Financial numbers (lagging indicators) tend to serve as a rear view mirror, quantifying the results of previous business practices
• Companies are measured and valued by more than just financial performance - intangibles (leading indicators) play a large part today in company valuations
• 1/3 of Professional Investors decisions are based on non-financial measures (1998 Ernst & Young survey)
• Leading indicators serve as our headlights; and provide us with an early view of likely future financial performance
• Leading indicators provide management with the early opportunity to intervene (right the ship) and impact future financial performance

Successful companies monitor, invest in, and change internal processes in order to improve these leading indicators in a timely fashion.

How do I track KPI effectively?

Knowing your Organization's Key Success Factors (KPI's) is only half the battle. The other half is to actually monitor them and do something about them when they fall short of expectations.

1. Identify desired targets for each KPI. These targets should be realistic and should be set at every level of the organization, thus distributing the accountability for achieving these targets.
2. Corporate data is then assessed against these targets on a regular basis, communicating to decision makers throughout the organization the current state of these key success factors, and whether there is a need to intervene & deploy certain corrective measures.
3. It is highly recommended that companies implement an executive dashboard that highlights the current state of these KPIs. (On Target, slightly Off Target, or way Off Target) Some executive dashboards will also Email Notify users when a KPI falls short of expectations.
4. Recognizing that most decision makers are too busy to learn overly complex tools, the chosen KPI tracking tool/executive dashboard must be extremely easy to use, allowing even the least-technical user to be fully productive in assessing, analyzing and acting on fluctuations in KPI values.