What is a KPI?

The term KPI is a commonly used acronym that stands for Key Performance Indicator. Not everyone may be familiar with the term’s meaning.

A Key Performance Indicator (KPI) is a metric that shows how certain pre-specified factors directly influence the realization of organizational strategy.

For a KPI to have meaning, it needs to be measured against a specific dimension. For instance, the KPI “turnover” is only significant when measured over a certain period, such as a year. Additionally, the dimension of the product group or department that generated the turnover is also important to consider. For example, you could measure the turnover of the product group bread or the bakery.

Key Performance Indicators (KPIs) are often described as purely financial measures, but this is an outdated approach. In order to respond more quickly to changes in their environment, organizations need to identify KPIs that measure factors that directly impact their financial figures. Nowadays, organizations are not only focused on financial dimensions, but also on dimensions such as customers and internal processes. By monitoring these KPIs and comparing them to established standards or targets, organizations can predict potential deviations from their financial goals.

A well known method that combines different dimensions to make the organization more proactive, is the Balanced Scorecard of Kaplan & Norton (1987).