The meaning of KPI (Key Performance Indicator) and its benefits in the company – In a management, the role of control and evaluation has a very important function in ensuring that an organization’s work plan can be implemented optimally. A good organizational work plan will certainly eventually become the ultimate goal of the organization to be realized well. Therefore, a management that performs control and evaluation is commonly referred to as KPI or Key Performance Indicator.
A performance management system that can run well is usually capable of being a representation of a comprehensive business process in the organization. Key Performance Indicators have a role to measure the performance management system, whether it is running successfully or not even being able to run according to plan.
In addition, the Key Performance Indicator has several measures to describe the performance of a management system related to the organization as a whole to its relationship with its various parts. Currently, many companies that already have a performance management system, only contain a “list of KPIs” so they may not pay too much attention to the relationship between the indicators.
In the span of the last ten years alone, performance management systems such as the Balanced Scorecard or commonly referred to as the BSC began to appear to try to provide accommodation for each indicator that has a relationship and connection. In the balanced scorecard itself, the relevance of each existing indicator is only qualitatively described.
If the relationship between these indicators can be described quantitatively, it may be that the performance measurement model can be applied for a more definitive and specific purpose. One example of a more definitive and specific performance measurement model is to carry out improvement programs or programs to make predictions about system behavior in the future.
A. Meaning of KPI (Key Performance Indicator)
KPI or Key Performance Indicator can be understood as a measuring tool that is used to create an overview of the company’s effectiveness in achieving its business goals. Companies themselves usually apply Key Performance Indicators to measure the success of their targets.
From the explanation, the characteristics of the Key Performance Indicator can be determined based on non-financial measures, including:
a. Measurements that are often used (Regular measurements)
b. Measures known by management
c. Everyone in an organization has understood and understood KPI
d. Responsible for individuals and teams
e. Has a very significant effect
f. Has a positive effect
In its application, Key Performance Indicator can be measured in daily, weekly to monthly periods. A good Key Performance Indicator is basically something that has an important role and consistently gets attention from management. When there is a member of management who deviates from the Key Performance Indicator, then the management can decide on an action by summoning the person responsible.
B. Definition of KPI According to Members
1. Iveta (2012)
According to Iveta (2012), Key Performance Indicator or KPI can be defined as a measure that has a quantitative and gradual nature for companies. Which measures contain various perspectives and are based on concrete data analysis, as well as being the starting point for determining the purpose as well as the organization of the organization’s strategy.
2. Warren (2011)
According to Warren (2011), Key Performance Indicator or KPI has the meaning as a measurement used to assess how an organization implements the strategic vision that has been determined. The strategic vision itself can be meant as a purpose that refers to how the organization’s strategy can be interactively integrated into the organization’s overall strategy.
3. Parmenter (2007)
According to Parmenter (2007), Key Performance Indicator or KPI has a definition as something that is most critical to creating a successful organization in the present and in the future.
4. Banerjee and Buoti (2012)
According to Banerjee and Buoti (2012), Key Performance Indicator or KPI is something that is used to measure on a scale and quantitatively to evaluate the performance of the organization when it wants to realize the goals and targets of the organization that have been determined. KPI itself can be applied to make measurable objective policies, analyze trends, and support decision-making.
C. Benefits of KPIs
KPI or key performance indicator can also be something that has the most effective critical in creating an organization or company to be successful, both for now and for the future. Well, here are some of the benefits of KPI for employees, including:
1. Provide references for companies to get quality employees.
2. It becomes much easier for employees to measure and evaluate employee performance and reduce certain elements of subjectivity.
3. Employees become more aware of what management expects of them
4. Employee performance results are much more measurable and good
D. Types of KPIs
Broadly speaking, Key Performance Indicators or KPIs can be divided into two types, namely Financial KPIs and Non-Financial KPIs. The following is an explanation of the two types of KPI, including:
1. Financial Key Performance Indicators
The first type of Key Performance Indicator is Financial KPI. Financial KPI itself can be said to be a key performance indicator that has a connection with finance. Some examples of Financial KPIs that need to be considered are as follows:
a. Gross Profit KPI
Financial KPI of the gross profit type is a KPI that can be used to measure the amount of money left over from income. With a note, the amount of residual money has been deducted from the Selling Price or often referred to as HPP.
b. Net Profit KPI
KPI Financial is a type of net profit, which is a KPI that is usually applied to measure the amount of money left over from income and has been reduced by the Selling Price as well as several other business costs, ranging from interest costs to taxes.
c. KPI Gross Profit Margin (Gross Profit Margin)
Financial KPI of the gross profit margin type can be meant as a KPI that can be used to measure the percentage value obtained by dividing Gross Profit and Income.
d. KPI Net Profit Margin (Net Profit Margin)
Financial KPI of the net profit margin type has the purpose of being a KPI that is used to measure the percentage value obtained with the provision of having divided the net profit according to income.
e. KPI Current Ratio (Current Ratio)
Financial KPI of the current ratio type can be said to be a KPI that can be applied to measure the financial performance of the liquidity balance by dividing current assets by current liabilities.
Common financial or financial indicators are used to predict the effectiveness of a business that will survive when experiencing a sudden decline.
2. Non-Financial Key Performance Indicators
Basically, Non-Financial KPIs are KPIs that can indirectly influence the financial situation of a company. The following are some examples of Non-Financial KPIs that need to be considered, including:
a. Manpower Turnover
b. Customer Satisfaction metrics
c. Repeat Customer to New Customer Ratio
d. Market Share
E. Factors That Influence KPI Effectiveness
KPIs have a very important influence when there is a follow-up from KPIs that have been determined previously. In some cases it was found that companies usually adopt the most popular KPI used in an industry. It’s just that, once the KPI is implemented in the company, it will raise many questions about why the KPI does not reflect or describe the company’s performance.
In carrying out the development of the Key Performance Indicator compilation strategy, you are required to have team members who are able to see various things about the company. Some of these things include questions about what the organization’s goals are, how the plan is to achieve them and who has the right to take action based on the information that has been obtained.
The determination of Key Performance Indicators should be a continuous and repeated process involving input from analysts, department heads and of course managers. After that, you and the team can get a better and effective understanding while answering two questions, namely, how the Key Performance Indicator measures a company’s business process and who has the right to follow up on the company’s business process.
One of the ways to create relevant Key Performance Indicators is to use SMART criteria. SMART itself is an abbreviation of several words, namely specific, measurable, attainable, relevant, time-bound. Well, the following is an explanation of the five things that are KPI factors based on SMART, including:
1. What is the purpose of the specific enterprise.
2. Can you measure the achievement of the goal.
3. Can the purpose be achieved?
4. What is the purpose related to the company.
5. How long will it take to achieve the goal.
F. Application of KPI in the Enterprise
In applying Key Performance Indicators to a business organization, there are 4 basic criteria that need to be met first before an organization can state that they have successfully applied KPIs in the company’s operational activities. An explanation of the four criteria is as follows:
1. Collaboration between employees, teams, suppliers and customers
2. Decentralization from the management level to the operational level
3. Integration or linkage between measurements, reports and actions
4. Relationship of KPI and strategy
In order to be able to apply Key Performance Indicators properly and optimally, there needs to be an interconnected system process, both from the organizational environment in building a comfortable atmosphere such as employees, managers, and shareholders as well as various other external stakeholders, such as customers and suppliers. It also needs to be applied at the time of the report, where the report should be disciplined, efficient, and focused on improving decision-making.
When implementing and applying Key Performance Indicators, one of the things that need to be noted is about defining the results or goals of each KPI or key performance indicator. Not only that, in applying the Key Performance Indicator there is a method that is commonly used in determining planning goals. The method is a method that uses SMART criteria (Specific, Measurable, Achievable, Realistic and Time Sensitive).
Well, the following is a SMART explanation that needs to be observed, including:
1. Specific
The purpose or results when applying Key Performance Indicators should be clear and specific. This is because the existence of a general or broad purpose or result can result in the application not being optimal and tending to not be able to be expected. When the goal or result has been determined clearly and specifically, it will be easier to know when the goal or result can be achieved.
2. Measurable
Measurable or can be interpreted as a measure has a definition as a goal or result that can be measured. In determining the purpose or results, it is very important to measure, both qualitatively and quantitatively. The right measure can be placed in determining the relationship with standard performance or expectations of a performance.
3. Achievable
Achievable or means the fastest has a very important role when applying the Key Performance Indicator. The application of KPI should be created based on the challenges that organizations and companies have. This will be very influential because it can inspire the organization to create the best results or goals.
4. Realistic
Applying Key Performance Indicators should be based on realistic thinking. In creating an idea in the form of a result or a goal that must be achieved, then the steps that need to be taken are realistic and result-oriented thinking.
5. Time Sensitive
In applying Key Performance Indicators, each result or goal has a time limit that will be agreed upon by the organization as a whole. This is done so that all parties can be motivated to achieve goals or results according to the deadline and compact. The fact that a goal or result is basically something that requires a time limit can create an ease in measuring an improvement of a certain goal or the next result.
G. Examples of KPI Analysis of a Company
Developing Key Performance Indicators requires time and company resources. The Key Performance Indicator that is measured is usually an indicator that has been adapted to the needs of the company. In addition, the measurement has also considered the company’s short-term strategy and goals.
An example of the development of a Key Performance Indicator, for example, when a company obtains a satisfactory increase in sales, but the profit obtained by the company is not enough to provide the allocation of funds for the benefit of business growth, then the Key Performance Indicator that is almost certain for the company is the Profit Margin KPI Net and Gross Profit Margin.
The example can be seen based on what is found in the financial report or accounting of the trading company recorded in the company. On the one hand, when profits are in line with expectations and the company’s growth is not as fast as targeted. So, what needs to be done is to consider some non-financial KPIs, be it workforce turnover KPIs, customer satisfaction KPIs, or the ratio of repeat customers to new customers.
That is the discussion about KPI or Key Performance Indicator. Hopefully you can understand the meaning of KPI in depth so that it can be applied to your company.