Key Performance Indicators, better known as KPIs are measurements made at certain intervals(weekly, monthly, quarterly, yearly and so on) which provides the business owners an indication of the relative health of the business. Even though it is imperative to consistently measure KPIs in any flourishing business, most small scale business owners ignore it citing the practical difficulty in measuring the same.
Parallels can be drawn between KPIs in business to KPIs in the health sector. It is not just a single instance(in most cases) that triggers concern and treatment from a doctor, but a series of suspicious/abnormal results. Similarly, KPIs in business takes more meaning when the measurements are taken repeatedly and over a period of time.
In business, KPIs are of two categories – Leading and lagging. As the name suggests, leading indicators provide the owners with a glance into the future while lagging indicators are all about the results of previous actions/policies. Leading indicators are useful in predicting the general direction of the business and as such, can be used to alter/continue the course of action depending on the predicted outcome. On the other hand, lagging indicators provide an assessment of the direction in which the business moved in the given period of time.
While useful in its own right, the true potential of KPIs is unlocked when the best of both worlds are combined. For example, a businessman can keep a target revenue for the end of the month and work on achieving it. Leading KPIs can be utilized to assess the progress and depending on the situation, changes can be made if required to achieve the target.
While measuring KPIs, one needs to be prudent in selecting the necessary indicators. Great care must be exerted in the selection of the variables since an increase in number or a seemingly important, but inutile variable could potentially confound the measurements. Research by Drs. Kaplan and Norton came up with a solution for this in the form of their Balance Scorecard, which emphasizes focus on four key areas – Financial, Customer, Internal Business Process, and Innovation and Learning. This framework is meant to align the goals of a business with the strategy and long-term vision.