Timesofummah.com – Management and evaluation are important functions that enable the organization’s work plans to be implemented properly so that the organization’s ultimate goals can be achieved. A good performance management system is required for proper control and evaluation functions. A good performance management system must be able to describe business processes that take place throughout the organization.
This performance management system can also be measured using Key Performance Indicators (KPI), so it can also be a good measure of success. The performance management system contains KPIs or key performance indicators that represent the performance of all parts of the organization and the interrelationships between these parts.
Many companies already have a performance management system in place, but only provide a “list of KPIs” and ignore relationships between metrics.
Over the last few decades, performance management systems such as the Balanced Score Card (BSC) have been developed to explain the interrelationships between indicators. In the BSC, the relationship between indicators is only expressed qualitatively.
If this relationship can be expressed quantitatively, power measurement models can be used for clearer and more specific purposes. For example, more specific repair efforts or predictions of future system operations.
Understanding Key Performance Indicators
Key Performance Indicator (KPI) is a measuring tool that describes the effectiveness of a company in achieving business goals. Simply put, Key Performance Indicator is a term used to describe the key performance indicators that need to be implemented by various organizations.
Companies that use KPIs have a goal to measure their success in achieving their goals. In its application, KPIs have the following characteristics:
- Frequently used measurements (Regular measurements)
- Non-financial Size
- Sizes known to management
- All parties in the organization already understand and understand KPI
- Responsibilities to teams and individuals
- Has a very significant and comprehensive effect
- Have a more positive effect
Key performance indicators are measured over a daily, weekly and monthly period. Good KPIs are important and continue to attract management’s attention. If someone deviates from the KPI, management can take a decision and call the person in charge.
The definition of Key Performance Indicators has been defined by experts, as follows.
1.Iveta (2012): KPIs are quantitative and step-by-step indicators of companies with different perspectives and based on concrete data formulated as starting points for setting goals with organizational strategies.
2.Warren (2011): KPIs are indicators of how an organization implements its strategic vision. The strategic vision in question refers to how the organization’s strategy is interactively integrated with the overall strategy of the organization.
3.Parmenter (2007): defines KPI as the most important thing for the success of the organization in the current and future conditions.
4.Banerjee and Biotik (2012): KPIs are measurable, quantitative indicators used to assess an organization’s performance to achieve its goals. KPIs are also used to identify measurable goals, and refer to support for trends and decisions.
In a broad sense, Key Performance Indicators can be defined as a useful decision-making tool because it helps organizations or companies measure individual performance and assess the performance of the organization itself to achieve its goals with the reach of that strategic vision.
The term KPI is generally used in a business context, so not everyone understands the meaning of the name. Key performance indicators, abbreviated as KPI in English terms, are important (key) indicators to confirm the progress of the desired results. This performance indicator can be measured daily, weekly, monthly so that it can be considered by management.
Types of Key Performance Indicators
Based on the understanding of Key Performance Indicators above, in practice the company has 2 types of KPIs that can be used, as follows.
1. Financial KPIs
Financial KPIs are the most important form of performance indicators related to all things finance. Examples of these financial KPIs are as follows.
- KPI gross profit, KPI that measures the amount of money left over from revenue after deducting the cost of goods sold (HPP).
- KPI Net Profit, KPI which measures the amount of residual income after deducting the cost of goods sold and other operating costs such as interest expense and taxes.
- KPI gross profit margin, KPI which measures the percentage value obtained by dividing gross profit by sales.
- KPI Net Profit Margin, KPI which measures the percentage value obtained by dividing net income by income.
- KPI Current Ratio, KPI that measures the financial performance of cash balances by dividing current assets by current liabilities.
This indicator predicts how well a company will hold out in the event of a sudden recession.
2. Non-Financial Key Performance Indicators
Non-Financial KPI is a type of KPI whose form can not directly affect the finances of a company. Examples of Non-Financial KPIs that usually exist in companies are like this:
- Manpower Turnover on Labor Turnover
- Customer Satisfaction metricsabout Customer Satisfaction Matrix
- Repeat Customer to New Customer Ratio on the Ratio of Repeat Customers to New Customers
- Market Share on Market Share
Reasons Why Key Performance Indicators Are Important For Organizations
KPIs are an important part of measuring performance and failure. KPIs are also called flash or dashboards, and KPIs provide entrepreneurs and administrators with an overview of the actual development of the company (in a given time). KPIs measure actual data business goals and measurable data over a certain period of time.
The following are reasons why companies need to implement KPIs because they have several benefits such as the following:
1. Targets Become More Measurable When Using KPIs
When using KPIs, these elements will serve as tools for measuring ranges that are close to the goal. KPI is not a goal or a target. For example, a KPI could show that the current team can only reach 20 percent of the desired leads (depending on the benchmarks set by the company, of course).
Based on the information displayed by the KPIs, the sales manager can determine the progress of sales and why the reported results are not as expected. This will allow managers to create new strategies in the future.
2. Create a Learning Atmosphere
The data created by KPIs will spark employees to create important conversations between teammates and their administrators. When used as a habit, a learning environment will be created in the company. It is also possible to analyze whether the KPIs are effective, or whether the KPIs are reasonable enough to reach the team.
3. Get important information
KPIs offer a direct description of the company’s overall performance. Real time data shown by KPI allows companies to adjust systematically so that companies do not need to make large changes at the end of each month to achieve targets so that they are more energy efficient.
In addition to getting an idea of the level of performance in the work environment, some companies that use KPIs can measure how well they are achieving certain standards that may not be directly related to business or company profits precisely.
4. Supporting Corporate Accountability
If there is no precise and measurable data source as provided by KPIs, the company will have difficulty when providing employee performance assessments. Companies may assume that their employees are underperforming because of involvement problems.
However, they have no evidence that they can measure. Even if a company could measure the performance of other statistics, KPIs might be the most important tool. Basically, KPIs promote employee accountability (accountability) (if they are lacking in their performance) and company (if it is difficult for KPIs to achieve).
5. Can Increase Morale
KPIs are very useful, and employees can get employees positive feedback because employees meet certain KPIs. The results are often quick and this creates a feeling that you “have a purpose” and can achieve this goal.
Factors Affecting Key Performance Indicators
KPIs are only useful if the company has its own KPI footprint. Companies often adopt KPIs that are commonly used in industry. But then he wonders why the KPIs don’t reflect the company’s performance.
When developing a strategy for setting KPIs, the team should start by ascertaining the company’s goals, plans to achieve them, and who can take action based on that information.
This should be an iterative process that includes input from analysts, department heads, and managers. The company will then gain a better understanding of how KPIs can measure the company’s business processes and who can track them.
One way to create relevant KPIs is to use SMART criteria. This term means concrete, measurable, achievable, relevant, and time-bound.
The explanation of these KPI factors can be summarized in the following questions.
- What are the company’s specific goals?
- Can the company measure the achievement of this goal?
- Can this goal be achieved?
- Will this goal relate to the company?
- How long will it take to achieve this goal?
How to Set Key Performance Indicators
There are four basic criteria that must be met before an organization declares that it has implemented KPIs in its operational activities. The criteria are as follows.
- Collaboration between employees, teams, suppliers and customers
- Decentralization from management level to operations level
- Integration or relationship between actions, reports and actions
- KPI Relationship and Implementation Strategy
KPI requires interrelated system processes both from the organizational environment itself, such as employees, managers and shareholders, as well as external parties such as customers and suppliers. Similarly, reports should be timely and efficient and focused on improving decision-making.
When implementing KPIs, it is important to define the results or objectives of each KPI. When implementing KPIs, there is a way to plan goals that incorporate multiple criteria called SMART (concrete, measurable, achievable, realistic, time-sensitive).
The following is an explanation of the SMART acronym.
- Specific is goals or results must be clear and specific, without general goals or expected results. When a goal or outcome is clear and specific, it is very easy to know when the goal/result was achieved.
- Measurable is defined as a goal or result that must be measured both in quality and quantity. These can be set in terms of performance standards or performance expectations.
- Achievable means that it can be achieved, but needs to be expressed as a challenge, thus encouraging the organization to achieve its results or goals.
- Realistic is creating ideas that must be realistic and result-oriented, and achieve results or goals.
- Time Sensitive is every result or goal has a time limit for how long it can be achieved. The fact that a goal or outcome requires a time limit makes it easy to measure the subsequent improvement of the goal or outcome.
Developing KPIs takes time and resources for the company. The main performance indicators measured are indicators that meet the company’s needs, taking into account the company’s short-term strategy and objectives.
Tips for Implementing Key Performance Indicators
Here are some tips for implementing Key Performance Indicators.
1. Have a Clear Goal
Key performance indicators have clear guidelines that anyone reading or calculating should be able to interpret the data correctly. If the business goal of your organization or company is to become a “market leader”, then the KPI goal is “to increase sales by 10%” or “marketing products in the Southeast Asia region”.
You can set how to “broaden the scope”. The goals of the KPIs should be clear and strategic. Strategic relationship is how to evaluate how the organization carries out the strategies and measurements that must be achieved, how the organization can evaluate the vision and mission that they have.
2. Create goals that reach the outline
What is your purpose? Can you achieve it? When do you need to reach that goal? How can you measure the progress of the strategies implemented? Does the strategy used affect the finances of the organization or company?
Goals must be realistic and business process changes take time to implement. In the early stages of KPI monitoring, it is best to focus on long-term goals and medium-term monitoring.
3. Data Collection
KPI is a quantitative measurement. Therefore, specific and valid data are needed to determine the main performance indicators. It helps to measure indicators accurately and accurately.
4. Review Changes To Date
Why KPI reviews are helpful. Let’s say the company exceeds the targeted results, for example the target of 120 percent, and still has good productivity, then it is not wrong to try to be the next goal to increase results.
Instead, if you don’t achieve it, don’t force the next goal to increase the next goal to affect team motivation and productivity. In other words, companies need to be aware of whether there is a shutdown for team performance.
5. Formulate KPIs
Some KPIs contain only one metric or measure. However, in most cases it depends on the combination summarized in the formula.
For example, a KPI that measures revenue productivity from product sales is the total revenue divided by the total number of products. Create the appropriate expression and keep testing the expression to see if the results the company gets match your realization.
6. KPI presentation
To convey key performance indicators efficiently, data must be converted into easy-to-understand visual representations such as graphs and charts. Provide direction to all employees regarding the KPI calculation process to achieve an effective and goal-oriented work pattern.
Well, that’s an explanation of the Key Performance Indicators (KPI) or the main performance indicators that companies need to implement.
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