Which Type or Form of KPI Is Best?
There are many types of KPI. It is important to keep a balanced perspective by selecting KPIs that cover the breadth and indicate the health of an organization. For example, when a doctor sees a new patient, they will conduct a series of measurements, such as blood pressure, height and weight, and from these, determine the person’s health. KPIs are similar to these medical measurements.
They are extremely effective indicators of the health and maturity of an organization. The above figure shows a range of key maturity indicators. Organizations normally move from left to right on this diagram during their lifetimes. What is meant by this is that organizations will start, in their early years, for example, by focusing on financial KPIs but, as they mature, they recognize they need to broaden out to include non-financial measures, such as employee and customer satisfaction.
For example, “lagging” versus “leading” refers to those organizations on the left (lagging) that focus only on how much profit they’ve made at the end of each financial period. In comparison, more mature companies, on the right of the diagram (leading), are measuring success as they go along, by monitoring aspects such as number of clients lost and the number of projects won.
Another example could be a government that is, initially, keeping a focus on effectiveness, e.g., number of hospitals or schools built. But, as their organizational maturity develops, they begin to change their focus to efficiency measures, such as what is the cost per hospital bed or the cost per student?
In this way, it’s possible for a performance expert to look at a company’s balanced scorecard and assess that organization’s maturity level. If there are lots of KPIs on the left side, this indicates the company is very effective and short-term focused. The effort is in getting things done rather than understanding how much things are going to cost or how they may impact the business. If the scorecard measures are more to the right of Figure 1, then the company is migrating and looking toward the long term.
When setting KPIs, there are six common forms, each of which has its own strengths and weaknesses:
Absolute number, e.g., total profit. This is one dimensional. The advantage is that it’s a very clear target but it doesn’t address a specific context.
Index, e.g., an internationally used index, such as the United Nations’ Human Development Index (HDI). This is multidimensional, but it can mask underlying individual variables.
Percentage, e.g., percentage of satisfied employees or customers. This is a good indicator of relative change but is sometimes misunderstood.
Ranking, e.g., very commonly used to rank institutions such as banks, universities or schools. The advantage is that it’s easy to understand, but definitions are often inconsistent or unclear.
Rating, e.g., customer ratings of a product. This is a useful measure for nominal data, but it can be biased or misused.
Ratio, e.g., revenue versus cost ratio. Ratio measures are much used by finance people. They are good at illustrating critical relationships, but can be difficult to understand.