Primary navigation:

QFINANCE Quick Links
QFINANCE Topics
QFINANCE Reference

Home > Performance Management Best Practice > Enhance Competitive Performance via Critical Key Performance Indicators (KPIs)

Performance Management Best Practice

Enhance Competitive Performance via Critical Key Performance Indicators (KPIs)

by Zahirul Hoque

Executive Summary

  • Measuring performance is a fundamental part of every organization, whether it is run by a private sector or a government sector.

  • Performance measures are used to evaluate organizational as well as managerial performance.

  • A key performance indicator (KPI) is a quantitative value that can be scaled and used for performance evaluation.

  • Organizations should use both financial and nonfinancial KPIs when measuring employee as well as firm performance.

  • KPIs should be aligned with business strategy, work environment, and employee incentives.

  • Too many KPIs should be avoided, to maximize their usage by employees in their day-to-day operations.

  • “It is much more difficult to measure nonperformance than performance.”

Introduction

Measuring performance is a fundamental part of every organization, whether it is run by a private sector or a government sector. A performance measurement system (PMS) highlights whether the organization is on track to achieve its desired goals. Performance measures are primarily used to evaluate organizational, as well as employee performance. A PMS develops key performance indicators (KPIs), or metrics, depending on the nature and activities of the organization. KPIs can serve as the cornerstone of an organization’s employee incentive schemes. KPIs are used as guidelines and incentives to facilitate the coordination of managers and business unit goals, with those of the overall corporation goals, that is, they encourage goal congruency. Through these metrics, the organization communicates how it wishes the employees to behave, and how this behavior will be judged and evaluated. Effective organizational managers rely on KPIs to set direction, make strategic decisions, and achieved desired goals.1

It has been suggested that, in today’s competitive and global financial crisis environments, organizations need to be masters at anticipating customers’ needs, devising radical new product and service offerings, and rapidly deploying new production technologies into operating and service delivery processes.2 For several decades, performance measurement has been used as an internal informational tool to evaluate business units’ operations, and make program and budgetary decisions.

PMS and KPIs: Definitions

A PMS typically comprises systematic methods of setting business goals, together with periodic feedback reports that indicate progress against those goals.3 Within a PMS, an organization develops some key performance metrics or indicators. A KPI can be defined as “a quantitative value that can be scaled and used for purposes of comparison.”4 There is also the view that KPIs are quantifiable performance measurements used to define success factors, and measure progress toward the achievement of business goals.”5 The PMS literature classifies performance measures into two major groups: financial and non-financial. Financial measures may include return on investment (ROI), earnings per share (EPS), revenue (sales) growth, profit margin, etc. Non-financial measures may include customer satisfaction, employee satisfaction, production efficiency, quality, customer services, etc.

Back to Table of contents

Further reading

Books:

  • Hoque, Z. Handbook of Cost and Management Accounting. London: Spiramus, 2005.
  • Hoque, Z. Strategic Management Accounting: Concepts, Processes and Issues. 2nd ed. Sydney, Audtralia: Pearson Education, 2003.
  • Johnson, H. T., and R. S. Kaplan. Relevance Lost, the Rise and Fall of Management Accounting. Boston, MA: Harvard Business School Press, 1987.
  • Kaplan, R. S., and D. P. Norton. The Balanced Scorecard: Translating Strategy into Action. Boston, MA: Harvard Business School Press, 1996.
  • Lynch, R. L., and K. F. Cross. Measure Up! Cambridge, MA: Blackwell Publishers, 1991.
  • Niven, P. R. Balanced Scorecard Step by Step: Maximizing Performance and Maintaining Results. New York: Wiley, 2000.
  • Simon, R. Performance Measurement & Control Systems for Implementing Strategy. Upper Saddle River, NJ: Prentice Hall, 2000.

Articles:

  • Ittner, C. D., D. F. Larcker, and M. V. Rajan. “The choice of performance measures in annual bonus contracts.” The Accounting Review 72:2 (1997): 231–255.
  • Kaplan, R. S., and D. P. Norton. “The balanced scorecard—Measures that drive performance.” Harvard Business Review (January–February 1992): 71–79.
  • Kaplan, R. S., and D. P. Norton. “Putting the balanced scorecard to work.” Harvard Business Review (September–October 1993): 134–147.
  • Nanni, A. J. Jr, J. R. Dixon, and T. E. Vollmann. “Integrated performance measurement: Management accounting to support the new manufacturing realities.” Journal of Management Accounting Research 4 (1992): 1–19.

Websites:

Back to top

Share this page

  • Facebook
  • Twitter
  • LinkedIn
  • Bookmark and Share