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KPI (Key Performance Indicator) is an indicator that is used to grasp the status of business process and critically impacts achievements of companies' strategic goals. In Japanese, it is called Important Achievement Indicator or Primary Achievement Indicator.

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Overview

KPI Image
KPI Image

KPI is an indicator telling whether a company is moving in the right direction towards its goal or not. If the company is advancing appropriately to the goal, the company can continue moving in that way. Otherwise, the direction must be adjusted. KPI is an indicator enabling us to understand the company's direction on the way to see whether the company is going to the right direction or not.

As an example, let's assume a case in which a company, whose market share is decreasing, aims to "increase its share by 10%" by means of "an advertisement" and "a clearance sale." In this case, indicators used to see whether the strategies are steadily executed towards the achievement of its goal, such as "the number of advertisements" and "the number of clearance sales," are KPIs. In case the situation is worse than expected, for example "the number of advertisements is not enough," it is demanded that the company changes its direction accordingly.

KGI and CSF are the relative terms to KPI, and understanding the relation among them helps understand KPI more deeply.

What is KGI?
An acronym of Key Goal Indicator. In Japanese, it is translated into "Important Goal Achievement Indicator." KGI is an indicator to define a strategic goal and achievement of it. Companies act to achieve this goal.

In general, a company defines its strategic goals and acts in order to achieve them. In such a company activity, KGI is the strategic goal to be achieved, and CSF is the important factor (measure) to achieve the goal. KPI is an indicator to grasp how business process related to CSF is executed.

Although both of KGI and KPI are effective tools to grasp the status of administration, the latter is an indicator to grasp the status on the way while the former is an indicator to decide whether the ultimate goal is achieved or not. The significance of KPI in a business administration area is to enable managers to adjust the company's direction. By using KPI, managers can understand the status of business process on the way and thereby can make a better decision for risk management and problem solving. KPI is a business evaluation indicator often used in a business administration technique called BSC, and multiple KPIs are defined based on strategies plotted out from multiple points of view in BSC.


What is CSF?
An acronym of Critical Success Factor. In Japanese, it is translated into "Primary Success Factor." CSF is a factor that significantly impacts the achievement of goals and is to be managed intensively.

What is to be defined as KPI varies depending on the characteristics of industries and companies, but one should consider the following points.

  • Clarity: Indicators must be clearly comprehensible for all employees and also be directly connected to the business
  • Quantitativeness: Indicators must base on the business as well as be quantitative and measurable
  • Actuality: Indicators must be realistic so that they can be agreed on by employees.
  • Relevance: Indicators must be relevant to strategic goals (KGI) and success factors (CSF).
  • Timeliness: Indicators must tell the status of achievement in a timely fashion while a task is being done or within a short period of time after a task is done.

Example

As an example, KGI, CSF, and KPI are here defined in a hypothetical case of a railroad company.

KGICSFKPI
10% increase in sales Net sales per customerthe customers of accessories of more than $10 >30%
10% reduction in cost inventory control cost up to a week's investory

KGIs are defined, as concrete goals, based on abstract objectives such as increasing sales, improving customer satisfaction, raising availability, and raising employees' skill level.

Clarify goals, which are indicators to define success.

CSFs, which are the key factors to achieve KGI, are extracted. By extracting CSFs, factors that must be focused on the most are clarified.

Consider what the most influential factors are.

KPIs to grasp the status of achievement of business process related to CSFs are defined.

Consider what indicators are useful to grasp the status. Once KPIs are defined, proceed to the definition of desired targets, decision about concrete actions, and so on.

Relation between BPM and KPI

BPM is defined as continuous improvements and should be done by following PDCA Cycle, and KPI is largely relevant to Check phase in PDCA Cycle.

Managers monitor (CHECK) the status of achievement of business process by using KPI. As a result of the monitoring, if there is any problem with the status of business process, improvement measures should be taken. Improvements here include both of meta-level improvements, such as re-design of business process, and improvements within designed business process. The causes of the problem can be identified by using KPI, so such improvements significantly contribute to the optimization of business process.

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