KPI – key performance indicators

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KPI – key performance indicators
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Today, every businessman is trying to find new and new ways to improve, develop and control his own business.

If earlier all methods of doing business were focused on the remnants of the Soviet Union, today foreign methods and trends are becoming more and more popular. Therefore, in this article we decided to talk about one of the most popular ways of doing business – KPI – key performance indicators, and what it is, we will consider below.

Getting acquainted with the KPI indicator

Key Performance Indicators is a new business approach in the Russian Federation, although American and European companies have been using it effectively in business for decades. KPI is not a complex economic strategy, it is a new approach for analyzing work performance, as well as for improving the system of motivation and rewards for employees.

According to surveys that were conducted in Russia, more than half of the managers who work in different companies are not satisfied with the system for evaluating the results of their work. For each manager, this is fraught with the fact that the quality of work of each employee will be lower and the company may suffer losses. Therefore, the connection plan-fulfillment-result-motivation-encouragement should be clear for each employee. This is what ensures the use of KPI in business.

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Most often, Russian businessmen perceive KPI as a “key performance indicator” – but this is too vague meaning of the approach. The best name for KPI would be “key performance indicator”, because the word “performance” in English means “result”. Therefore, in order to understand the meaning of KPI, one should determine the differences between the performance indicator and the performance indicator and find out what it is:

Efficiency is the ratio between the final result and the resources spent to achieve this result and the company’s ability to cope with its goals, while effectiveness is the ability of the enterprise to focus on the final result, taking into account all possible costs.
KPI - key performance indicators
Picture: completecontroller.com

It will be difficult to understand the meaning of KPI only by theory. Therefore, it is important to know why it is used in practice. It is best to use the KPI system for large enterprises and companies that belong to medium-sized businesses. Of course, the system is better to use for those who are going to expand their small business, since proper control of efficiency is the key to success. In practice, the manager calculates KPI for each employee separately, after some time the indicators of different employees are correlated: the best ones are encouraged, and the worst ones are punished.

Pros and cons of using KPI in business

The manager is a person who is primarily interested in the efficient operation of his enterprise, he must monitor every process that takes place in production, every employee, giving instructions, motivating the staff.

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In addition, the manager cannot always keep track of how each individual employee is doing their job, especially if there are many of them, and the KPI calculated for each is a great opportunity to get information about the performance of each. Such a system is also beneficial for the employee – he himself sees an objective assessment of his result, can reasonably assess his strengths and develop in his professional activities. In addition, a plan completed on time allows the employee to receive bonuses in the form of a bonus or salary increase, and this is an absolute advantage.

Disadvantages of the KPI system

As for the shortcomings, then they are found in such a system. Among them:

  • In large enterprises, where there are many departments, most often KPIs are calculated not for each individual employee, but for all employees of each specific department, so if one person “pierced”, then the whole department will have a negative result, which will affect on the salaries of all employees of the department. Therefore, when using KPI, it is also necessary to take into account the level of efficiency and teamwork, to carry out additional team-building activities. And it is best to develop KPIs for departments and for each employee separately, then it will be possible to more objectively evaluate the work of employees;
  • The KPI system is developed according to specific characteristics by authorized employees, so the opinion of all employees is very often not taken into account during development;
  • There are cases when the KPI system works on a one-sided principle, often without benefit for the employee: did the job well – well done, get paid, did it poorly – reduced the salary. That is, the reward system works worse than the penalty system;
  • It is also a disadvantage of the system that it is quite difficult to objectively determine KPI for a programmer or engineer, since these specialists often have unique tasks (developments, inventions) for which there is no clearly set time, and employees do not have experience working with similar tasks;
  • KPI development by specialists is additional work, time, effort and money, which also needs to be taken into account. It is important to understand whether this approach is rational in a particular case.
KPI - key performance indicators
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In order for the KPI system to work correctly at the enterprise, it is necessary to approach its development in a comprehensive and responsible manner, to do everything gradually. Then the employees will be satisfied and the manager will be satisfied with the results of work.

How KPIs are used in business

KPIs are used in large companies, small and medium-sized businesses that sell various goods, for example. Here KPI is calculated based on the ratio of the number of incoming calls to the company and the actual sales facts.

For example, a manager of a company selling insurance policies is familiar with the indicators that must be met by him in a certain period of time and already calculates for himself how many policies he needs to sell and in what time frame. For those who are just starting out selling insurance policies, the KPI is 1/10. This means that out of ten meetings, at least one policy must be sold. Most often, the following indicators are used for a sales manager: the number of new customers, sales volume, the size of the average amount received from one client, the number of refusals.

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In order for such KPIs to work effectively, you can’t “hang” them in 10 pieces per employee, it’s better to stop at 3-5. The main thing is not the quantity, but the quality of the wording. It is important to avoid ambiguity in explaining KPIs.

Another example of the effectiveness of using KPIs in business is in the field of logistics, where the work of a manager is the most basic. Here, KPI will allow not only to stimulate the employee, but also to identify weaknesses and try to get rid of them. A problem can be effectively solved only if its causes are known. Maybe the manager makes few calls and does not receive the necessary amount of information, does not meet personally with the customer, does not try to expand the client base, does not solve the problems of dissatisfied customers.

Of course, for each individual type of enterprise, it is important to choose a specific type of KPI, as well as a separate strategy for a particular enterprise, in order to make the work as efficient as possible.
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