key performance indicator

DEFINITION: The phrase “key performance indicator” refers to a group of metrics which may be used to gauge the success and ongoing progress of the company.

These indicators encompass evaluations of a company’s strategy, its financial status, and its operational achievements, among other things, particularly in relation to its competitors and other businesses in the same industry.

ETYMOLOGY: The origins of the use of key indicators to evaluate performance may be traced back at least to 1494, the year of publication of the Summa de arithmetica, geometrica, proportioni et proportionalita [Summary of arithmetic, geometry, proportions and proportionality] by the Italian Franciscan friar and mathematician, Luca Pacioli.

Some would trace the idea back still farther, to around the fourth century AD, when a Chinese dynasty is reported to have instituted a rating system for evaluating the performance of members of the imperial family!

The origin of the English phrase itself is uncertain, but it probably dates to the 1970s, give or take a few years.

The English word “key” derives, via Middle English, from Old English cǣg, “key,” akin to Middle Low German keige, “spear.”

The English noun “performance” is attested from the fifteenth century. It derives from the verb “to perform,” which itself derives from Middle English performen, which, in turn, derives from Anglo-French performer and Old French perfournir. The latter form is constructed from the Latin preposition per-, meaning “through” or “throughout,” and the French verb fournir, meaning “to complete” or “to equip.”

The English word “indicator” is attested from the seventeenth century. It derives from the verb “indicate,” which, in turn, derives from the Latin past participle indicatus of the verb indico, indicare, “to make known,” “to show,” “to indicate.”

USAGE: Key performance indicators—often referred to by the acronym “KPI”—are sometimes also referred to as “key success indicators.”

KPIs exhibit diversity across companies and industries, contingent upon performance benchmarks.

For instance, a technology-sector company that aspires to swift expansion might prioritize year-over-year revenue growth as its principal performance gauge. (Year-over-year revenue growth is the annual percentage increase in revenue.)

By way of contrast, a retail enterprise might assign greater significance to same-store sales as the best metric for assessing its growth. (Same-store sales figure measure the amount of sales growth that is attributable to new store openings.)

The collection, storage, refinement, and consolidation of data is central to the successful implementation of KPIs. This data, which may pertain to any department within the organization, can encompass either financial or nonfinancial information.

The purpose of KPIs is to facilitate the provision of concise results to management so it may undertake better-informed strategic deliberations.

The majority of KPIs belong to one of four distinct categories, each possessing its unique user base, attributes, and timeframe.

  1. Strategic KPIs offer a glimpse into a company’s performance at a broad level, albeit without delving deeply into specifics. Strategic KPIs are primarily employed by executives, with illustrative examples, such as overall company revenue, profit margin, and return-on-investment.
  2. Operational KPIs focus on a more compressed time span. These indicators gauge the company’s performance on a month-to-month, or even day-to-day, basis. They scrutinize various processes, segments, or geographic regions. Operational KPIs are especially useful to managerial personnel, serving to address queries stemming from the analysis of strategic KPIs.
  3. Functional KPIs home in on specific departments or functions within an organization. For instance, the finance department might monitor on a monthly basis newly registered vendors in their accounting system, while the marketing team might assess the click-through rate of their email campaign. The primary worth of functional KPIs lies in catering to a specific user groups.
  4. Leading/lagging KPIs characterize the essence of the analyzed data, indicating whether it relates to forthcoming events or to events that have already happened. For example, take two distinct KPIs: the tally of overtime hours clocked and the profit margin associated with a flagship product. The number of overtime hours worked might act as a leading indicator if the company discerns a decline in manufacturing quality on the horizon, while profit margins by definition stem from operational outcomes and therefore qualify as a lagging indicator.