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Understanding The Key Productivity Indicators (KPIs)

Nov 7, 2007
For any organization to succeed it is important to first understand what factors define its success. Organization's goals and objectives, factors that contribute towards its success, everything needs to be clearly outlined before a measure of its success is defined. An organization's success is identified by how fast it grows, in other words, its productivity. An organization's productivity in turn depends on the productivity of its employees. Hence, it is vital to measure employee productivity to understand the direction of growth of an organization.

How to implement it? Numerous methods have been devised to measure employee productivity depending on its parent industry or domain. Methods to measure employee productivity are called Productivity Metrics. To be able to measure productivity using productivity metrics, you need to answer why you want to measure, how you plan to measure and after measuring what will be your action areas. Why you want to measure answers the goals and objectives that your organization wants to achieve. How you plan to measure will be your productivity metrics. And, course of action suggests the actions you will take to realize defined goals and objectives. A number of factors contribute towards realization of your goals and objective. Factors that are critical to the growth of an organization in the desired direction are called Critical Success Factors (CSFs). There are four types of CSFs - industry, strategy, environmental and temporal. There should not be too many CSFs as it would only result in confusion and focus being lost. These factors will also have some quantifiable elements that would be measured against a threshold that would exactly specify the current status of a factor. This quantifiable element is what we call Key Performance Indicator (KPI). Hence each objective that is stated by an organization will have a critical success factor, a KPI and a target.

The measurement tool. In the process of measuring productivity using the CSFs and KPIs the following steps would be involved: Establishing the vision; determining strategic goals; analysis of each goal to understand what factors influence them; assigning one measure per factor KPI; assigning a target value.

KPIs are measurement tools in the effort for improved performance, but organizations fail to implement them. Only 52 percent of organizations are using KPIs in their daily operations according to a survey. Among the list of indicators that are measured are throughput and productivity, inventory levels, raw material costs, and labor costs.

Business performance management is all about drawing out the productivity measurement pyramid with the following levels: vision, strategies, objectives, critical factors and finally key performance indicators. A technique called the fishbone diagram helps identify the metrics for KPIs. Following steps are involved in the creation of an effective fishbone diagram: Selecting the critical factors, Categorizing individual causal factors, identifying causal driving factors, analyzing the fishbone diagram. The fishbone diagram provides framework for identifying the impact of all potential drivers on productivity and identifying individual metrics for increasing to the KPIs.

Selecting incorrect metrics for KPIs can severely harm any performance management effort. Its tough to decide which metric qualifies as a KPI metric. We could consider using KPI groups such as productivity, timeliness, process efficiency, cycle-time and resource utilization. The candidate KPI metrics could include: Response-Time Metric , Visibility Metric, Productivity Metric, Shrinkage Metric. Although innumerable additional metrics can be developed, these are enough to depict the vital attributes of KPI metrics. All we need to understand is that the KPIs have to be measurable, understandable, relevant, and based on valid data. From an organizational point of view, the KPIs should be cascadable and allow the users to take positive actions.
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