This article will cover an introduction to KPI (Key Performance Indicators) if OKR (Objective Key Results) is all about defining goals and tracking actual progress towards achievement at any given time. Key Performance Indicators (KPI) measure the contributing factors through which achievements are attained. In other words, KPI includes the key; leading factors deemed necessary to achieve a specific goal. Although the scope of KPI is not as broad as OKR as far as measuring success is concerned, the KPI gives more detailed information about each specific factor measured.
For example, if the objective is to increase product output by 20% and one of the key results is an improvement of resource utilization (efficiency). Then KPI may include labor costs incurred in the manufacturing process, energy usage, production time quality, rejection rate, equipment downtime, maintenance cost, and all variables that relate to achieving the desired objective. KPI creates a rational basis to help the company shift focus strategically while avoiding operational disruption. The results of the analysis will be used in the decision-making process.
There are two types of KPIs:
Lagging Indicators: the inductors that measure results of any particular company activity, such as revenue growth and quarterly profit. They are called “lagging indicators” because they track results that have already occurred.
Leading Indicators: the indicators or variables to predict and influence future results. These are often more difficult to set up due to changes in external factors (that the company cannot control), such as consumer trends, investments, and competitors. However, unexpected changes do not always bring negative impacts; for example, additional investment in manufacturing equipment can increase output.
Although each industry has different KPIs to measure, the indicators or variables have the same purpose of providing practical guides to adapt and change under internal and exter\nal circumstances. Also, in most companies, proper business strategies are often based on creating the right balance between lagging and leading indicators.
Why use KPI?
Once the goals are defined, the company also needs to determine all variables that contribute to achievements. Without key performance indicators, it would be challenging for a company to evaluate performance in a meaningful way and make operational changes to address issues. KPI also helps employees stay focused on the most critical tasks leading to the competition of the objective.
KPI gives a comprehensive understanding of the company’s performance at any moment and identifies possible changes in operations. Without knowing which parts of a strategy are not working, there is no way to design a good action plan to overcome the problem. By examining the analytical data of the KPI, managers can tell whether company performance is improving or declining. Then determine a practical approach to either to sustain improvements or deal with the decline in performance.
Benefits of using KPI
A company with well-thought-out KPIs has the advantage of performance visibility across business operations. The data-driven information acquired from analysis allows for a practical management approach to keep the company moving forward despite difficult challenges. More benefits of using KPIs are as follows:
Proactive business management: armed with fact-based information with KPIs, a company becomes more active in managing operations and discovering opportunities in the market.
Efficiency: KPI provides a tool for the company to identify any inefficiency within the business operation. Addressing the problem will eliminate the waste of resources.
Accountability: KPIs will show whether specific processes, individuals, or teams in charge of the operations are under or over performing. Allocating more resources or reinforcing the workforce may help improve the indicator and, therefore, overall performance.
Motivational values: even if the company is struggling, one positive metric shown in KPI can be a great motivation for everyone to keep improving and overcome difficulties.
In general, KPIs tell whether your company is moving forward, backward, or not moving toward progress at all. Proper implementation of KPIs is important in every decision-making process because they help identify issues and set the foundations to plan for sustainable growth in a more efficient way.
