Definition of KPI and Types, Factors and How to Apply It

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Definition of KPI

KPI or Key Performance Indicators are often used to assess the level of progress that has been achieved by an organization or company in order to achieve company goals. So, what exactly is the meaning of KPI?

Well, on this occasion we will discuss in full all things related to the meaning of KPI or Key Performance Indicators or in Indonesian better known as KPIs or Key Performance Indicators.

Contents

1 Definition of KPI (Key Performance Indicator)
2 Definition of KPIs Based on Experts
2.1 Gabčanova Iveta
2.2 Jacques Warren
2.3 David Parmenter
2.4 Jyoti Banerjee and Cristina Bueti
3 2 Types of Main Indicators in KPI
3.1 Financial Key Performance Indicators (KPI)
3.2 Non-Financial Key Performance Indicators (KPI)
4 Factors to Consider in Making KPIs
5 Implementation of Key Performance Indicators (KPI)

Understanding KPIs ( Key Performance Indicators )

Understanding KPI or Key Performance Indicator in the field of management science is an indicator tool that plays an important role in a company to assess the level of effectiveness of the company’s performance in achieving its goals.

So, the definition of KPI in simple terms is a tool used to measure how well a company, work unit, work project, department, or individual performs in terms of achieving strategically predetermined goals.

The presence of KPI will help the company management and company founders to see the development of the company or work units in it, whether all activities carried out are in line with expectations or not optimal.

Some of the characteristics of Key Performance Indicators or KPIs are non-financial measures, measures that are often used ( regular measurements ), measures that are known by management, all parties in the organization know and understand key performance indicators, responsibility for individuals and teams, there are significant effects. significant, resulting in a positive effect.

Generally, every company has different KPIs from one another based on the company’s strategies, priorities, and performance criteria. However, if viewed in essence, the KPI can be used as a benchmark in assessing the development of a company, work unit, individual, or department on a previously determined target.

Understanding KPIs Based on Experts

Gabčanova Iveta

Gabčanová Iveta in the Journal of Competitiveness argues that the notion of KPI or Key Performance Indicator is a quantitative and gradual measure for a company and has various assessments based on concrete data, and is used as a starting point in determining goals and formulating company strategies.

Jacques Warren

Jacques Warren said that the definition of KPI is an assessment to measure a company in carrying out its strategic vision. The strategic vision refers to how a company’s strategy can be integrated interactively and comprehensively.

David Parmenter

David Parmenter explained that KPI or Key Performance Indicator is the most important measuring tool for the success of a company now and in the future.

Jyoti Banerjee and Cristina Bueti

Banerjee and Bueti in their book say that the definition of KPI or Key Performance Indicator is a scaled and quantitative assessment that is used to evaluate the company’s performance in terms of achieving company goals. KPIs can also be used to determine a measurable objective, monitor trends, and make policies for the company.

2 Types of Main Indicators in KPI

In general, they are further divided into main types, namely Financial KPIs and non-financial KPIs.

Financial Key Performance Indicator (KPI)

The definition of financial KPI is a type of KPI related to the financial sector. The following are some examples of Financial KPIs:

  • KPI Gross Profit or Gross Profit is an indicator used to measure the amount of money remaining from income or profit after deducting HPP or Cost of Goods Sold.
  • KPI Net Profit or Net Profit is an indicator used to assess the remaining amount of the company’s income after deducting HPP and other costs such as interest and taxes.
  • KPI Gross Profit Margin or Gross Profit Margin is an indicator to assess the percentage that can be achieved by dividing the company’s gross profit by the company’s revenue.
  • KPI Net Profit Margin or Net Profit Margin is an indicator used to assess the percentage obtained by the company by dividing the net profit based on the company’s income.
  • KPI Current Ratio or Current Ratio is an indicator used to assess the financial balance of liquidity by dividing the company’s current assets with the company’s current liabilities.

Non-Financial Key Performance Indicator (KPI)

The definition of a non-financial KPI is an indicator tool that is not directly able to affect finances or the organization but can still affect the company’s organizational performance. Some of the things that are classified as non-financial KPIs are labor turnover rate, customer satisfaction matrix, the ratio of repeat customers to new customers, and market share.

Factors to Consider in Making KPIs

KPIs or Key Performance Indicators will not be useful if they are not accompanied by follow-up on these KPIs. In the process, a company is able to create KPIs that have been adjusted to the company. But in general, KPIs should be made based on several points that are often applied in various industries, these points are SMART ( Specific, Measurable, Attainable, Realistic, Timely ).

These five points are very important to determine a certain goal. The following is a complete explanation of the SMART points above:

  • Specific. The company must define its company goals specifically and easily understood by other members.
  • Companies must be able to measure the achievement of these goals.
  • The company must ensure that its objectives can be achieved in a reasonable manner.
  • The company must ensure that the objectives are appropriate or relevant to the company.
  • Timeframes. The company must also determine the timeframe for achieving these goals.

Implementation of Key Performance Indicators (KPI)

Before a company implements KPI into its operational activities, there are 4 basic criteria that the company must meet. First, there is a collaboration between employees, teams, suppliers and customers. Second, there is decentralization from management to operations. Third, the existence of integration or linkage between reports, measures, and activities. Fourth, there is a relationship between KPIs and company strategy.

It takes a system process that is interconnected in implementing KPIs, both from the company environment such as managers, investors, and employees, to outside parties such as suppliers and customers.

It’s the same with reports. KPI reports must be produced in a timely, efficient manner and must focus on improving decision-making. The most important thing in implementing KPIs is to explain the results or objectives of each KPI.

There is an important method to be able to apply KPIs appropriately in order to achieve company goals. This method combines the SMART criteria that we described above. Here is the method.

  • Specific: Goals or results must be made clear and specific so that the goals do not spread to other things that are not in line with expectations. When you are able to achieve a specific goal or result, it will be easier to know when to achieve that goal.
  • Measurable: the goal must be measurable in quality and quantity. This can be conditioned on the standard performance or expectations of a company.
  • Achievable: Goals must be achievable formulated as one of the challenges so that it will inspire the company to achieve its goals.
  • Realistic: in addition to being achievable, company goals must also be realistic and result-oriented.
  • Time Sensitive: every goal or result must have a time limit for when to achieve that goal or result. The fact that the goal is something that requires a time limit will make it easier to assess an improvement in the next goal or outcome.

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