A performance indicator or key performance indicator (KPI) is a type of performance measurement. KPIs evaluate the success of an organization or of a particular activity (such as projects, programs, products and other initiatives) in which it engages.
Often success is simply the repeated, periodic achievement of some levels of operational goal (e.g. zero defects, 10/10 customer satisfaction), and sometimes success is defined in terms of making progress toward strategic goals. Accordingly, choosing the right KPIs relies upon a good understanding of what is important to the organization. What is deemed important often depends on the department measuring the performance – e.g. the KPIs useful to finance will differ from the KPIs assigned to sales.
Since there is a need to understand well what is important, various techniques to assess the present state of the business, and its key activities, are associated with the selection of performance indicators. These assessments often lead to the identification of potential improvements, so performance indicators are routinely associated with ‘performance improvement’ initiatives. A very common way to choose KPIs is to apply a management framework such as the balanced scorecard.
Key performance indicators define a set of values against which to measure. These raw sets of values, which can be fed to systems that aggregate the data, are called indicators. There are two categories of measurements for KPIs.
- Quantitative facts without distortion from personal feelings, prejudices, or interpretations presented with a specific value – objective- preferably numeric measured against a standard.
- Qualitative values based on or influenced by personal feelings, tastes, or opinions and presented as any numeric or textual value that represents an interpretation of these elements.
An ‘indicator’ can only measure what ‘has’ happened, in the past tense, so the only type of measurement is descriptive or lagging. Any KPI that attempts to measure something in a future state as predictive, diagnostic or prescriptive is no longer an ‘indicator’, it is a ‘prognosticator’ – at this point, it is analytics (possibly based on a KPI) but leading KPIs are also used to indicate the amount of front end loading activities.