KPI (Key Performance Indicator): Meaning, Function, and How to Create
Key Performance indicators, or KPI, are values that are often used to measure how effectively a company can achieve its main business goals. Because it is directly related to goals, determining KPIs requires a lot of data and caution. So how do you create KPIs?
In this discussion, you will find out what KPI is, its benefits, functions, types, how to make it, and what KPI examples there are for various positions or job positions.
Definition of Key Performance Indicators
A key performance indicator (KPI) is a scaled and quantitative measure used to evaluate organizational performance in order to achieve organizational targets. KPIs are also used to determine measurable objectives, see trends, and support decision-making. To get an accurate assessment, you need a system that can record all the activities of your employees. Therefore, to answer this problem, you can use an omnichannel CRM for KPI assessment.
In addition, the presence of KPIs is also useful to help companies formulate what steps are needed to achieve these goals.
Because the KPI design process is not easy, usually only certain people within the company are required to design it.
A good KPI is one that can serve as a direction for a business to measure performance while the company is running based on the data that has been collected.
Examples of the data in question can be sales figures, engagement, reach, leads, growth, and so on.
With KPIs, stakeholders can see the role of each individual in advancing the company. From an HR perspective, KPIs can facilitate the disbursement of rewards or career paths if they are achieved.
The seven main KPI characteristics are as follows:
- Non-financial size
- Frequently used sizes
- Measures known to management
- All members of the organization or company already understand KPI.
- Responsibility to individuals and teams
- Has a very significant effect
- Has a positive effect
If all of the above characteristics are met, KPIs will make it easier for HRD to track the level of success of the company's vision and mission, as well as predict when business goals will be achieved.
Types of KPI (Key Performance Indicator)
Basically, Key Performance indicators, or KPIs, can be divided into two types, namely Financial and Non-Financial KPIs.
1. Key Performance Indicator Financials
This Financial KPI is the main work indicator related to finance. Examples of these Financial KPIs include the following:
- KPI Net Profit (Net Profit), which is a KPI that measures the amount of money left over from revenue after deducting the cost of Goods Sold and other business costs such as interest and taxes,
- KPI Gross Profit (Gross Profit Margin), which is a KPI that measures the percentage value obtained by dividing gross profit by income,
- KPI Gross Profit Margin (Gross Profit Margin), which is a KPI that measures the percentage value obtained by dividing gross profit by income,
- KPI Net Profit Margin (Net Profit Margin), namely KPI, will measure the percentage value obtained by dividing net profit based on income.
- KPI Current Ratio (Current Ratio), which is a KPI that measures the financial performance of the liquidity balance by dividing current assets with current liabilities,
2. Non-Financial Key Performance Indicators
These are KPIs that will not directly affect a company's finances. Some examples of the non-Financial KPI in question are:
- Ratio of Repeat Customers to New Customers (repeat customer to new customer ratio)
- Customer Satisfaction Matrix (customer satisfaction metrics)
- Labor Turnover (manpower turnover)
- Market Share
Benefits of Implementing KPIs in the Company
There are many benefits to be gained when implementing KPIs. These benefits are not only felt by the company or business owner, but can also be felt by the employees themselves.
KPI Benefits for Employees
KPIs can provide a reference for a company to achieve its goals because there are guidelines for both each employee and the company itself.
It is easier to measure or evaluate employee performance and can reduce the element of subjectivity because employee performance appraisal is measured more objectively.
Employees become more aware of what management expects of them. This can also be a motivation for employees to work more optimally to achieve the targets that have been set.
Performance results that become more measurable can be used as a reference for giving awards or rewards to employees with better performance, and vice versa.
KPI Benefits for Companies
After discussing the benefits of KPIs for employees, now is the time to discuss what the benefits are for the company itself.
- Facilitate HRD to measure and evaluate employee performance and its impact on company performance.
- It becomes a valuable parameter for companies to create a more objective reward and punishment system.
- Making employees more aware of management or company expectations
How to Implement a Key Performance Indicator (KPI)
There are at least four criteria that must be met by a company to state that its employees have implemented KPIs into their activities or work. Here are the criteria:
- Decentralization from the management level to the operational level
- Collaboration between employees, teams, and customers
- Integration or linkage between measures, reports, and actions
- To implement the KPI itself, an interrelated process and system are needed from employees and each division or department.
KPI requires interrelated system processes from both the organizational environment itself, such as employees, managers, and shareholders, as well as external parties such as customers and suppliers. Likewise, reports should be timely, efficient, and focused on improving decision-making.
When implementing KPIs, it is important to define the outcome or objective of each KPI. When implementing KPIs, there is a way to plan goals that combines several criteria called SMART (concrete, measurable, achievable, realistic, and time-sensitive).
The following is an explanation of the SMART acronym.
- Specific, namely, goals or results, must be clear and specific, without general goals or expected results. When a goal or result is clear and specific, it's easy to tell when that goal or outcome was achieved.
- Measurable is interpreted as a goal or result that must be measured both in quality and quantity. This can be set in terms of standard performance or performance expectations.
- Achievable means that it can be achieved but needs to be stated as a challenge, thereby encouraging the organization to achieve its results or goals.
- Realistic means creating ideas that must be realistic, result-oriented, and achieve results or goals.
- Time-sensitive means that each result or goal has a time limit for how long it can be achieved. The fact that a goal or outcome requires a deadline makes it easier to measure subsequent improvements to the goal or outcome.
Developing KPIs takes time and resources for a company. The main performance indicators that are measured are indicators that meet the company's needs, taking into account the company's strategy and short-term goals.
Examples of Key Performance Indicators (KPI) in the Company in General
The following are some Key Performance Indicators examples that are commonly used in various companies:
- Revenue: The total revenue generated by the company in a given period of time.
- Net Profit: Profit obtained after deducting all costs and expenses of the company.
- Revenue Growth: The percentage increase in revenue compared to the previous period
- Market share is the percentage of the market controlled by a company in a particular industry or segment.
- Customer Satisfaction Level: Evaluate customer satisfaction through surveys or feedback.
- Customer Retention: The percentage of customers who return or continue to use a company's products or services
- Sales Conversion Rate: The percentage of leads that convert into successful sales
- Delivery Delay Rate: The percentage of product or service delivery delays
- Production Error Rate: The number of errors or defects in the production process
- Operational efficiency is the ratio between the results achieved and the resources used.
- Delivery Accuracy Rate: The percentage of orders delivered on time
- Product Return Rate: The percentage of products returned by customers due to quality issues or defects
- Employee Productivity: Output or results produced by each employee within a certain period of time
- Attendance Rate: The percentage of employee attendance in a given time period.
- Project Success Rate: The percentage of projects that were successfully completed according to the set time, budget, and specifications
Companies can choose KPIs that are most relevant to their business goals and strategies and adapt them according to the needs and characteristics of the industry or sector in which the company operates.
Examples of Individual Key Performance Indicators (KPI) in General
The following are some examples of Key Performance Indicators (KPIs) that are commonly used to evaluate individual performance:
- Productivity is the number of jobs or tasks completed in a given period of time.
- Quality of Work: The level of customer satisfaction with the quality of work produced
- Punctuality: the ability to complete tasks or projects according to a set schedule.
- Initiative and Creativity: Contribution of new ideas or solutions that help improve work efficiency or effectiveness
- Compliance with Procedures: The level of compliance with the rules, policies, and procedures established in the work
- Collaboration and Teamwork: the ability to work together in a team and contribute positively to achieving common goals
- Effective Communication: The ability to convey information clearly and effectively to colleagues or related parties
- Self-development: Participation in training and self-development programs to improve competency and work skills
- Responsibility and Accountability: Awareness of personal responsibility for tasks and decisions taken
- Result Orientation: The ability to achieve the expected target or results in work.
Individual KPIs must be relevant to the roles and responsibilities of each individual as well as related to the overall goals of the organization.
It is important to set KPIs that can be measured objectively and provide a clear picture of an individual's contribution to the success of the company.
From the examples above, you can see that there is a final assessment in the Key Performance Indicator (KPI), which is the "Total Value" produced.
This value can then be used as a benchmark for development within a company.
Developing KPIs takes time and company resources.
The Key Performance Indicators that are measured are indicators that are in accordance with the company's needs by considering the company's strategy and short-term goals.