A performance indicator is something that can be measured where higher values correspond to improved performance. This may be in terms of quantifying desired outcomes or quantifying some aspect of a process that is believed to correlate to improved outcomes.
There are many kinds of measurements that organisations make (See axes of goodness and you can only manage what you can measure?)
One useful more precise and specific concept is the “well-behaved KPI”. This is a term that can be applied to a KPI that has the following essential features:
Stakeholder impact
- The stakeholders are interested in this measure
- They would be likely to take action as a result
- The KPI obviously corresponds to an existing characteristic of value recognised by the organisation (or can be persuaded to recognise)
Measurement Integrity
- Different measurements would give consistent results (done by different people or at different times).
- The KPI is (meaningfully) trackable over time (eg, not dependent on exchange rates)
- There is a consistent direction of “better” (KPI is a monotonic function of value)[1]
Practicality
- The measurement does not require a lot of effort
- The metric does not promote undesirable behaviours (see you get what you measure but perhaps not what you intend)
In addition to these essential characteristics of all well-behaved KPIs, there are some desirable characteristics.
Comparability
It is desirable to have at least some KPIs that allow direct comparison with other organisations.
If there is a well-established vision (which has received informed consent from relevant stakeholders), then manifest alignment to achieving the vision is sufficient.
But external comparison helps ensure that the organisation is not indulging in fanciful ideas. And external stakeholders – investors – will generally insist on familiar comparable measures. These might be industry neutral (for example Sales, General and Administration costs as a percentage of revenue) or more industry specific (for example, stock turns in retail, average revenue per user in telecoms, time from concept to market for car manufacturers).
Heritage: Many years of working with organisations to identify useful KPIs
[1] Monotonic function – see https://en.wikipedia.org/wiki/Monotonic_function. This is in contrast to measures like “IT spend as a percentage of revenue” where both 0% and 100% represent bad values.