Key Performance Indicators
In the digital age, where most of the organization and teams are driven by data, KPIs plays an important role to manage the team, projects and deliverable by setting targets and measuring the results against those targets. KPIs (Key Performance Indicators) are the vital navigation instruments that help decision-makers see how well an organisation, business unit, project or individual is performing in relation to their strategic goals and objectives.
If properly applied, KPIs can motivate and bring in the intrapreneurship culture making employees more autonomous and directing them towards the common goals.
But being human, we (employees) do not like being reduced to numbers, and beyond this psychological barrier are the metrics really working? OR is it like lots of time, resources and efforts are spent on gathering and collating of the data and either the numbers are not understood or are simply ignored. The flip side could be KPIs are understood by some and allows them to ‘tame’ and ‘game’ their KPIs.
One of the study shows, while "only 26% have a clue as to what the heck the KPIs are supposed to be telling them", on the other hand “30% of business leaders don't even bother to use KPIs to drive change in their organisations rather they think KPIs are important and its the bonus dependency that makes them interested in KPIs”. This results in something called “KPI paralysis” and as per Jeanette Kalthof-Drost, HR and strategy consultant at Synthetron, many businesses are suffering from it.
Irrespective of the challenges, I don’t think we are doing away with the KPIs anytime soon, as without hard and fast metrics to judge, a lot of performance review would be based on the individual’s (manager or board) discretion.
It's not enough just to tell people that KPIs exist or are important. Unless they are followed up by action, it's all a bit pointless.
In my last 15 years of work experience, supporting across various departments, performing roles at various levels, I have tried to create this library with some of the most useful KPIs that meets the team and key business objectives. Please remember that this library should be a great starting point but you will need to customize some of the KPIs to make them relevant to your needs. The key is to start with YOUR information needs and not to rely too heavily on generic KPIs.
KPI Management
As a manager, you have the responsibility of achieving performance targets, reaching higher performance levels and ensuring that people’s work supports and furthers the organization’s goals. In order to fulfill these expectations, managers must create a cohesive and motivated team by knowing how to define your organization's KPIs and using this information to it's full potential.
When you manage your team with KPIs, data is always the forefront of every decision you make. What this means is that you are able to adjust your work based on real time data that clearly visualizes your team’s impact on the organization.
Also, a lot of people overlook one of the most important aspects of KPIs which is that they are a form of communication. Therefore, they abide by the same rules and best-practices as any other form of communication. When information is succinct, clear and relevant, it is much more likely to be absorbed and acted upon.
Be SMART About Your Objectives and KPIs
The first thing to do is evaluate the relevance of a KPI you want to use to measure progress toward a particular objective. This objective should be :
SMART: Specific, Measurable, Attainable, Relevant, and Time-bound.
Your objectives are SMART if you can answer "yes" to the following questions:
- Is the objective specific enough?
- Can I measure the progress to the objective?
- Am I realistic while setting goals?
- Is the objective relevant to our organization?
- Is there a well defined time frame for the goal accomplishment?
Defining KPIs
If your objectives are SMART, it is time to define the KPI by answering a different set of questions.
- What is your desired outcome? Eg. We want to improve our team efficiency by 20%.
- Why does this outcome matter? Eg. It will enable us to take on an additional project each year.
- How are you going to measure progress? Eg. We will measure progress by determining how much time is required for each project.
- How can you influence the outcome? Eg. We can optimize the processes our team uses and provide them with better equipment.
- Who is responsible for the business outcome? Eg. The team leader will take on the responsibility.
- How will you know you’ve achieved your outcome? Eg. Four major projects will be completed between January and October.
- How often will you review progress towards the outcome? Eg. We will review our progress monthly.
What Makes a KPI Effective?
- It must be agreed on by everyone and be meaningful to its intended audience, whether stakeholder or end-user.
- The KPI metric must be quantifiable and able to be analyzed.
- It has to be measured regularly to have any value.
- Data points should be readily available with zero edit policy
- Once the KPIs are determined, evaluate them, and continuously keep reevaluating them throughout the process.
Types of KPIs
There are two different types of KPIs: quantitative and qualitative. A quantitative KPI is measurable by numbers and a qualitative KPI is more descriptive, such as measuring through a survey to get an understanding of your end-user.
Let's try to understand KPIs from various business perspective:
Finance Perspective
Revenue
Revenue (also referred to as turnover or sales) is simply the income that a company / team receives from its normal business activities, usually the sale of goods and or services.
In accounting terms revenue represents the "top line," to denote how it is reported on an income statement (at the very top). The "bottom line," denotes net profit (what is left from the revenues once all expenses are deducted).
Many a times based on company policy, not all of us have insight to the cost (per hour or unit), and on team or individual level a benchmark or average figure, purely to be used for calculation, would definitely help. Going only by the hours put in the task can be misleading as skillset and cost of all the activities or value addition varies.
Revenue = Price of goods or services x Quantity sold
Revenue Growth Rate
Revenue Growth Rate is an indicator of how well a company / team is able to grow its revenue over a given time period. While the revenue is an actual number, the revenue growth rates simply compares the current revenue figures with a previous period (typically quarter to quarter or year to year).
This provides an indicator and provides a measure of the extent to which a company / team is able to grow YoY.
Revenue Growth Rate = Revenue this period / revenue previous period
EBIT
This is good to know KPI. While this is not mostly calculated or shared on individual or team level, but awareness and self working would definitely help to understand where the team or the individuals contribution.
EBIT stands for Earnings Before Interest and Taxes. By taking interest payments and income taxes away from the profit figure it basically eliminates the effects of the different capital structures and tax rates used by different companies.
EBIT provides a profitability figure that is better comparable across companies. A further evolution is also taking out depreciation and amortisation (see EBITDA).
Again, as Reveune, not all would have preview to the operating cost and an average would help for calculation. Again, few of the OEs would be shared and many others would be individual and a deep study would help getting a grip.
EBIT = Revenue - Operating Expenses
Operating Expense Ratio
Operating Expense Ratio is an indicator of how well a team is managing the ongoing costs of operating the business. It takes the operating expenditure (OPEX) and divides them by sales in a given period.
Operating Expense Ratio = (OPEX in period t / Sales Revenue in period t) x 100
Customer Profitability
This is again something which is good to know KPI. While this might not have direct impact on individual or team but helps in taking informed decision when it comes to prioritizing.
It is an indicator of how much profit a business is generating from individual customers.
Customer Profitability = sales per customer / total sales for each customer's contribution to revenue growth.
Return on Innovation Investment
This measures the returns generated from investments in innovation. Returns can be as big as starting a new service line or a product or can be considerable saving in terms of manpower involved to get the task done or improved speed to market
Any innovation or automation that adds to the efficiency and efficacy of the service or process needs an investment, in terms of manpower and infrastructure but that contribution is seldom measured , until and unless it results in a new service line all together(if the company is in service industry)
Return on Innovation Investment = [(Net Profit from new products and services) - (innovation costs for these products and services)] / (innovation costs for these products and services)
Revenue per Employee
This is an indicator of how much revenue is generated per employee - and therefore an important productivity ratio.
Revenue per Employee = Revenue / Number of (full time equivalent) Employees
Customer Perspective
NPS
The Net Promoter Score is a measure of customer satisfaction and customer loyalty. It is based on a single question: How likely is it that you would recommend [programmer / executive] to a friend or colleague?
This question is then scored against a 10 point scale (0=Not at all likely, 10 Extremely likely).
- Advocates (9-10): Loyal, enthusiastic who will gladly promote the company;
- Passives (7-8): Satisfied but unenthusiastic - hardly the promoters for the company, and more likely to leave the business;
- Detractors (0-6): Unhappy who can potentially damage your brand by badmouthing it.
Once you get raw results, you can get staff advocacy score by using the formula:
Net Promoter Score = % of Promoters - % of Detractors
Customer Retention Rate
Is an indicator of customer loyalty (or the extent to which a company/team is able to keep acquired customers).
Customer Retention Rate (CRR) = Number of customers at the beginning of a period / number of those customers that remained customers at the end of a period
Customer Turnover Rate
Measures customer loyalty through the rate at which acquired customers are leaving or not renewing.
Customer Turnover = Lost customers over period t / total number of customers at the end of period t
Customer Engagement
Measures the level to which customers are engaged with the brand of a business. It is a survey based measure of the strength of a customer's relationship with an organisation.
At it’s core, customer engagement score is a single metric that is used to measure how engaged your customers are. The metric is represented by a number based on customer activity and usage of your product or service — the higher the number the happier and more engaged the customer.
Together with customer satisfaction, customer engagement is one of the best churn predictors you can have. Actually there are three main reasons why you should care about customer engagement en behavior. Customer engagement score can help you:
- Identify customers in trials that are ready to purchase;
- Identify customers that need help or are about to churn;
- Identify customers that are appropriate for an upsell or cross sell.
Customer Engagement Score = (w1*n1) + (w2 * n2) + … + (w# + n#)
Where w is the weight given to a random event and n is the number of times the event occurred.
SERVQUAL
A multidimensional research instrument, designed to measure service quality by capturing respondents’ expectations and perceptions along the five dimensions of service quality.
Based on a multi-item survey that takes into account both service expectations and service perceptions it provides an insight into the gap between the service level customers expect and their actual view of the service.
SQ = P- E
- SQ is service quality
- P is the individual's perceptions of given service delivery
- E is the individual's expectations of a given service delivery
When customer expectations are greater than their perceptions of received delivery, service quality is deemed low. When perceptions exceed expectations then service quality is high.
Customer Complaints
Are indicators of customer dissatisfaction with the goods or services a company provides.
Customer Complaints = Number of complaints/number of transactions x 100
Conversion Rate
A measure of the success rate of turning customer leads or pilots or potential customers into actual customers or repeat accounts.
Conversion Rate = (Number of Goal Achievements / Visitors) x 100
Delivery In Full, On Time (DIFOT) Rate
A measure of delivery reliability. It measures the percentage of deliveries that have been completed in full and on time.
Delivery in-full and on-time (DIFOT) = units or orders delivered in full on time / total units or orders shipped
First Contact Resolution (FCR)
Is a measure of the effectiveness with which a company is resolving customer queries. It basically measures the rate at which customer queries are resolved at first contact.
FCR Call Statistics (A) = (Total number of queries) / (Total number of calls) x 100
Operations KPI
OPEX
Operating Expense Ratio is an indicator of how well a company is managing the ongoing costs of operating the business / team. It takes the operating expenditure (OPEX) and divides them by sales in a given period.
Operating Expense Ratio = (OPEX in period t / Sales Revenue in period t) x 100
Six Sigma Level
Measures the extent to which a company's operational processes are error-free. The Six Sigma goal is that process defect or error rates will be no more 3.4 per one million opportunities or 99.9997% defect-free.
Defects per million opportunities (DPMO) of a process is the total no. of defects divided by total defect opportunities, multiplied by one million. Synonymous with PPM.
Defects : It is the failure of the process as per specification. It can be in a form of wrong information, wrong opening of call , no closing …. Etc . Denoted by d
Unit (U) –The number of parts, sub-assemblies, assemblies, or systems inspected or tested.
Opportunity (O) –A characteristic you inspect or test. It is the maximum nos. of defects possible in one unit.
Defect (D) –Anything that results in customer dissatisfaction. Anything that results in a non-conformance.
Defects per opportunity – DPO: (D/(U * O))
Defects per million opportunity – DPMO : ( DPO * 1000,000)
- Number of Units processed
- Number of Opportunities for error per Unit
- Total number of Defects
- Solve for Defects Per Opportunity : DPO = ( D )/ ( U *O )
- Convert DPO to DPMO : DPMO = DPO * 1,000,000
- Look up Process Sigma in conversion table
Capacity Utilisation
Measures the extent to which a company/team is leveraging its full production or work potential. It puts the actual capacity in relation to the possible capacity.
Capacity Utilisation Rate = (Actual Capacity in time period t / Possible Capacity in time period t ) x 100
Process Waste Level
An indicator of the extent to which a company's processes are lean and effective.
Taiichi Ohno, one of Toyota’s Production System leaders identifies a total of seven different types of unnecessary waste.
- Transportation – parts and materials that move in between processes.
- Motion – movement of parts and personnel.
- Inventory – any excess of materials, work-in-progress, or finished products that do not add value.
- Waiting – this refers to people, parts, or products that must wait for a process to be complete.
- Over-production – when you produce more products faster than customers demand.
- Over-processing – all work that is being performed outside of customer requirements.
- Defects – products that are being manufactured that customers would reject.
Measuring the waste depends on the metrics used for each waste type, but usually consists of simple counting or measuring.
Order Fulfillment Cycle Time
Measures the time it takes from customer order to the receipt of the product or service by the customers. It therefore provides an insight into the internal efficiency and supply chain effectiveness.
Order Fulfillment Cycle Time = Source Cycle Time + Make Cycle Time + Delivery Cycle Time
Project Schedule Variance (PSV)
A measure of the extent to which projects are delivered on schedule.
Project Schedule Variance (PSV) = SCT - ACT
- ACT is the Actual Completion Time
- SCT is the Scheduled Completion Time
Earned Value (EV)
Measures the extent to which projects are making the desired progress. It allows companies/team/individual to understand how much work has been completed as well as the costs of the work, both in relation to the project expectations.
EV = % complete x BCWP
- BCWP is the Budgeted Cost of Work Performed = the total budgeted costs for labour and resources for the project.
Performance Level = (ACWC / EV) x 100
- ACWC is the Actual Cost of Work Scheduled or the total amount in labour and resources that has been spent on the project to date.
First Contact Resolution (FCR)
A measure of the effectiveness with which a company is resolving customer queries. It basically measures the rate at which customer queries are resolved at first contact.
FCR Call Statistics (A) = (Total number of queries) / (Total number of calls) x 100
Innovation Pipeline Strength (IPS)
An indicator of how strong the innovation pipeline of a team/company is. It measures the potential future revenue potential of the innovation projects in progress.
IPS = Sum (Innovation project x Future Revenue Potential)
Time to Market
Measures how long it takes to get new products or services to a point where they are sold to customers.
First Pass Yield (FPY)
A measure of the operational efficiency. It basically measures the percentage of items that are moving through a process without any problems.
First Pass Yield (process q)= FPY (process step a) x FPY (process step a) x FPY (process step a) x … x FPY (process step 'n')
Rework Level
Measures the amount of rework that has to take place in a process and is therefore an indicator of internal operational efficiency. It simply measures the number or percentage of items that require rework.
To ensure design, calibration, production and in process checks deliver a product/service which meets the intended specification first time, every time.
The quantity of product/service which fails to meet with the required specification but is capable of receiving an amendment to meet compliance is termed the “Rework level”. The Rework level may be considered as a measure of the organizations’/team/individual effectiveness of meeting customer expectations first time without the requirement for correction or alteration.
Calculation:
Usually expressed as a percentage relating to a production “run” or period of service and based on a frequency appropriate for the business. Identification of the number of products from a production run/service period which require rework (and are subsequently passed as compliant with the original specification).
Example:
1000 gear shafts are inspected to identify any which fall outside tolerance; 2 of the shafts are identified as oversize. 2 of the shaft are reworked and subsequently passed as within specified tolerance. 2 divided by 1000 = 0.002 0.002 x 100 = 0.2% Rework level.
Quality Index
Usually a multi-item measure that assesses key dimensions of operational and service quality. It might include metrics such as First Pass Yield, Defect rates, Delivery Performance, etc.
The word “Quality” requires qualification in terms of its context and to what extent it is considered to be poor or good; in business the objective is usually to ensure that the goods/service are fit for purpose and meet with the customer’s expectations while still affording a commercial organisation the opportunity to make a profit. The Quality index is intended to allow evaluation of key factors which contribute to the makeup of “appropriate quality” and may including the following; fit for purpose, customer expectation, cost of quality, component percentage error, components identified as outside specified tolerance etc.
Calculation:
Select appropriate key factors (5 – 10) for evaluation, each is then scored and where necessary weighted to highlight the importance to the organisation. The final figure is usually expressed as a percentage.
Overall Equipment Effectiveness (OEE)
Measures the extent to which existing machines and equipment is producing the desired output. Overall Equipment Effectiveness (OEE) is a composite KPI that measures output based on capacity taking into account process availability, efficiency and quality.
OEE = Availability x Performance x Quality
Employee Perspective
Revenue per Employee
An indicator of how much revenue is generated per employee - and therefore an important productivity ratio.
Revenue per Employee = Revenue / Number of (full time equivalent) Employees
Employee Satisfaction Index
A multi-item measure of how satisfied employees are. Depending on the organisational priorities, it can include measures such as leadership, career progression, training, company culture, conditions and pay.
Employee Engagement Level
A multi-item measure of how engaged employees are in their job. Depending on the organisational priorities measures could include recognition, goal clarity, contribution, learning, etc.
Employee Advocacy Score
Employee Advocacy Score (EAS) answers the question: “Would our employees want to be our public representatives?”
Very similar to NPS, EAS is a KPI closely linked to staff satisfaction and loyalty.
Measuring it is straightforward and comes down to answering one question: “Would you recommend this company as an employer to a friend?” Answers should vary from 0 (not at all) to 10 (most definitely) and will divide all respondents into three categories:
Advocates (9-10): Loyal, enthusiastic employees who will gladly promote the company;
Passives (7-8): Satisfied but unenthusiastic - hardly the promoters for the company, and more likely to leave the business;
Detractors (0-6): Unhappy employees who can potentially damage your brand by badmouthing it.
Once you get raw results, you can get staff advocacy score by using the formula:
Employee advocacy score = % of advocates - % of detractors
Employee Churn Rate
A measure of the level of staff retention in a business.
Employee Churn Rate = Total number of leavers over period / Average total number employed over period
Average Employee Tenure
A measure of the time employees tend to stay with a particular company. Employee tenure can provide insights into employee loyalty, employee satisfaction as well as the freshness level of the workforce.
Average Employee Tenure = Sum of all tenures / number of full-time employees
Absenteeism Bradford Factor
A measure of the level of unauthorised employee absence from work.
Bradford Factor = Dt x Et x Et
- Dt = Total number of days of unplanned absence
- Et = Total number of individual spells or episodes of absense
First Pass Yield (FPY)
A measure of the operational efficiency. It basically measures the percentage of items that are moving through a process without any problems.
First Pass Yield (process q)= FPY (process step a) x FPY (process step a) x FPY (process step a) x … x FPY (process step 'n')
360-Degree Feedback Score
A measure of people performance through the eyes of other employees (both bosses and subordinates). It is a multi-item measure that could include measures of skill and capability, leadership, etc
Employee Core Competency Profile
An indicator that helps companies understand the extent to which they have the appropriate skills and competencies.
Overall Equipment Effectiveness (OEE)
Measures the extent to which existing machines and equipment is producing the desired output. Overall Equipment Effectiveness (OEE) is a composite KPI that measures output based on capacity taking into account process availability, efficiency and quality.
OEE = Availability x Performance x Quality
Process Downtime Level
Measures the extent to which an operational process is available and running.
Process Downtime Level = (TA t / PPT t) x 100
- PPT t is the Planned Productive Time that a process should be available in a given time period t.
- TA t is the actual productive time that a process has been available in a given time period t.
Conclusion
Determining the KPIs of effective team management will not only allow you to figure out how close you are to achieving desired objectives, but it will also help you clearly define the steps you need to take to increase your employees’ satisfaction and engagement as a manager and as a team member understanding KPI and following it to the core would keep you ahead of the game.
Even though your team may not be producing desired results at the moment, investing in them will give you a strong foundation for future successes.
Just keep in mind that humans are ever-changing and ever-evolving, and you may need to make some adaptations. Be patient and persistent, and your team will repay your trust tenfold.
And the thought and effort should be to cut down the paper work to maximum possible, bringing down the effort to trap and track the data and reports should be available across stakeholders on click of button.