Key Metrics: What is a good Key Performance Indicator (KPI)?
By Gudrun Gustafsdottir
A Key Performance Indicator (KPI) is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs to evaluate their success at reaching targets. But how can we know when a KPI is "good"? This article is intended to inform you about what constitutes a good KPI.
A popular acronym that has been used in the management literature dating back to 1981 is SMART. The SMART acronym represents five conditions of what is considered a good KPI:
Specific - It has to be clear what the KPI exactly measures. There has to be one widely-accepted definition of the KPI to make sure the different users interpret it the same way and, as a result, come to the same and right conclusions which they can act on.
Measurable - It should be possible to measure (mostly in quantifiable measures) whether you are meeting the objectives or not.
Achievable - The objectives should have aims that are achievable and attainable.
Realistic - The objectives identified should be attainable within the resources (material, financial and staff) available. Sometimes the R in SMART stands for "resourced" or "relevant".
Timed - It is important to express the value of the KPI in time. Every KPI only has a meaning if one knows the time dimension in which it is realized. This can range in days, months, quarters or years. The realization and standardization of the KPI therefore has to be time phased.
Fulfilling the five conditions will make up for a good KPI, but the process of managing a well grounded KPI requires consistent evaluation and modification where necessary.