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    09 / 24 / 2014

    The 7 Characteristics of a KPI

    Key Performance Indicators (KPI): Developing, Implementing, and Using Winning KPIsWe've started a series of posts about KPIs (here and here) in an effort to shed more light on the subject. In the process, we've gotten some great feedback via comments and done some more digging to discover that there is a broad range of information on KPIs, as well as some disagreement about how they should be approached.

    In this post we'd like to talk about David Parmenter's take. The self-proclaimed "King of the KPIs", Parmenter has written fairly extensively on the subject. His book, Key Performance Indicators (KPI): Developing, Implementing, and Using Winning KPIs, focuses on three different types of metrics that businesses use to measure performance, and tells us that many of us use the term "KPI" as a catch-all to include metrics that aren't in fact Key Performance Indicators.

    Parmenter splits business metrics into three categories:
    • Key Results Indicators (KRIs): how have you performed?
    • Performance Indicators (PIs): what should you do?
    • Key Performance Indicators (KPIs): what should you do that will have a dramatic impact on performance?

    Parmenter writes that KRIs are good metrics to present to the board or to investors. They tell us that we're on the right track, but don't tell us what we can do to increase our performance. Another way to look at it according to Parmenter is the analogy of driving a car. The board might want to know the car's speed, a KRI - a result of various factors that have been put into play such as horse power, fuel, aerodynamics, etc. This tells the board how things are going. KRIs are generally longer-term measurements than KPIs and should be presented annually or semi-annually.

    Easily see SaaS Metrics with the AcctTwo Advanced SaaS KPI DashboardBut the management team will be interested in other metrics: What gear is the car in? What are revolutions per minute of the motor? How efficient is the car measured in miles per gallon? These are metrics that can increase or decrease performance, or Performance Indicators (PIs).

    The question then, of course, is how do you determine what Performance Indicators are in fact Key Performance Indicators? Parmenter gives KPIs seven specific characteristics.

    The 7 Characteristics of KPIs

    1. They are NOT financial metrics and cannot be expressed in currency.
    2. They are measured very frequently, usually daily.
    3. They spur the action of very senior management.
    4. Their impact and the process for improving them must be understood by team members across the organization.
    5. They involve individual or smaller team responsibilities.
    6. Their impact is significant and crosses multiple perspectives.
    7. They affect all other Performance Indicators positively.

    Parmenter's book goes into detail for each of these characteristics and shares some wonderful stories and examples of real life KPIs and their impact on companies. The process for determining the Performance Indicators and which ones are key is also outlined in Parmenter's book, as is how they fit into an organizations Balanced Scorecard (BSC).

    We'll touch on the Balanced Scorecard, what it is, where it came from, and how your organization might benefit from using it in our next post.

    If you would like to talk about your organization's results and performance indicators, and what tools are available to measure, track, and display that information to investors and management, please fill out the form below and we'll get in touch with you. Or click the button on the right to receive a complimentary assessment of your organization's finance function and where you can make improvements.


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