What are Key Performance Indicators (KPI)?
Key performance indicators (KPI) are a set of quantifiable, adjustable, and controllable elements used to gauge the performance of a project. They indicate how a business is performing with respect to its objectives. They are a major contributor in defining the success or failure of a project. KPIs are the scorecards for any company or projects, and they monitor the health of the project and measure what has to drive the energy for being successful. They also measure the progress of projects and indicators like gross revenue, gross margin, the number of employees etc. leads the project towards its goals. These leading indicators let you know whether the project is on/off track and allows you to make adjustments in the project when the project is off track. The use of different KPIs in the dashboard helps a project in having the right information to solve problems.
Examples of KPI are number of reworks, cost variance (CV), schedule variance (SV), number of customer complaints, cost performance index (CPI), schedule performance index (SPI) etc.
- Measure progress of projects
- Encourages accountability
- Measure targets in a project
- Monitor health of the project
- Make adjustments and keep the project on track
- Solve problems related to the project and tackle opportunities.
The project strategy that needs to be followed for generating KPIs are as follows;
Critical success factors (CSF)
Critical Success Factors (CSF) are the cause of success. They set out what you need to do to be successful. KPIs are the effects of your actions. They measure whether you are successful or not. For example, for equipment; smooth functioning of the equipment is a CSF whereas a number of breakdowns per day and reworks are the KPIs.
KPIs reduce the complex nature of performance measurement into a more digestible form. A typical KPI should be SMART.
Multiple performance measures create confusion and difficulties in tracking and monitoring projects. On average 8 to 10 KPIs is a good number for an organization to manage. Anything more than this will create a workstream and managers must spend more time managing these KPIs. It is always important to understand why this KPI is required for a specific task. KPIs should focus on areas that you can control and needs improvement. Always understand your goals, understand the leading and lagging indicators, and then decide on what KPI to implement.
Avoid KPIs that are,
- Too difficult to measure or to report.
- Time-consuming and costly
- Not important with respect to business objectives or project strategy.
Categories of KPIs
The different categories of KPIs are as follows,
- Quantitative Indicators (Eg: CPI, SPI, Profits)
- Qualitative Indicators (Eg: Quality, Customer satisfaction)
- Leading indicators (Eg: Cost budget, projected sales/sales target)
- Lagging indicators (Eg: Productivity, Inflation, unemployment)
- Input indicators (Eg: Productivity, reconciliation, utilization)
- Process indicators – Used to measure efficiency. (Eg: cost variance, schedule variance)
- Output indicators – Used to demonstrate outcome. (Eg: cost savings, Variance at completion VAC)
- Practical indicators – Measures company process (Eg: escalation, inflation, ROCE)
- Directional indicators – It checks if the project/product is improving or not. (Eg: cost variance CV, schedule variance SV)
- Actionable indicators – It tries to look at the start and the end of the activity.
- Financial indicators (Eg: ROCE)