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Key Performance Indicators (KPIs)

1 June 2006
A tablet with a blue circle with text above it

Every organization strives to realize the vision and strategy it has set for itself. To achieve these goals, there is a need for synchronization and synergy of all the entities and resources at its disposal. Each entity contributes its part to a complete puzzle whose value is greater than the sum of its parts. The challenge facing decision-makers in the organization is how to break down the organization's activities into sub-goals and objectives, with the aspiration that all of these will come together on the way to realizing the overall goal. One of the common ways for managers to define metrics and objectives for each of the organization's units is to use KPIs (Key Performance Indicators). These metrics help assess and estimate the organization's core performance levels and monitor its progress toward its strategic goals. In addition, they can help align and clarify for all employees and partners in the endeavor where the organization is headed and what the order of priorities is according to which decision-makers operate. So, how do we properly define our organization's performance indicators?

So, how do we go about defining our KPIs? The first step is to identify the metrics that are most critical to achieving our organization's goals. Many variables can be quantified, but not all of them will drive us toward success and profitability. For instance, a company in its early stages might focus on measuring operating profit, as it's a key indicator of operational efficiency. On the other hand, measuring net profit might not be a relevant KPI for a young company that's still in the process of establishing itself.

Second, it is essential to understand the core work processes of each department and its contribution to the organization's chain of action. This is to define metrics that best reflect its current state and directly impact the entire organization's goals. Let's examine a critical KPI for service organizations: increased customer satisfaction levels. In the production department, the KPI that aligns with the organization's goal of increasing customer satisfaction levels is the number of defective products on the production line detected by the quality control department. In the customer service department, the KPI that aligns with this goal is the number of repeat calls to the call center or the number of parties that handled a particular customer, an indicator of inefficient handling. In the sales department, the sales call's length and the process's simplicity could indicate the customer's purchasing experience.

When it comes to KPIs, precision is key. If we want to measure, for instance, the increase in sales volume for a specific segment in a particular month, we need to be clear about our measurement criteria. Should we measure the increase in percentages, shekels, or items sold? Should returned items be included in the calculation? These are the questions we need to answer to ensure our KPIs are focused and clear. It's also crucial that all parties in the organization interpret the measurement result in the same way. For example, the operations department may set one target for the turnaround time for a defective product, while the customer service department may set a different, more stringent target for the turnaround time for handling a customer complaint about the defective product. In a nutshell, the power of KPIs lies in their precise definition. The more we invest in defining, processing, and managing them, the more effectively they can serve as indicators, measure what is required, and enable more focused management along their lines.

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