What Is a Key Performance Index? Importance, Types and Samples

By Indeed Editorial Team

Updated 29 October 2022

Published 27 September 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Most organisations create goals to attain their desired results and meet the demands of their stakeholders. Those objectives begin at the top and cascade down to each team inside the firm, each performing a specific duty to progress the business. A key performance index is one common approach you can use to assess and measure your organisation's progress toward goal attainment by establishing a benchmark of success for a given business purpose.

In this article, we answer the question 'What is a key performance index?' and discuss why they're important, what makes them effective and the different types of key performance indexes with examples of each.

Related: The Primary Differences Between Goal vs. Objective

What is a key performance index?

A key performance index entails a measurable benchmark that assesses the effectiveness of an individual, group or organisation in attaining their respective objective. In a business setting, organisations employ key performance indexes to ensure all employees focus their tasks toward attaining the same shared goals. Key performance indexes allows organisations to comprehend and evaluate whether they're investing in the right talent and resources to achieve their goals. As a professional, you can also establish a personal key performance index to assess your accomplishments, direct your decision-making processes and enhance your performance over time.

A key performance index is useful in determining an organisation's operational, financial and strategic accomplishments. Many companies use key performance indexes to compare their results to others in the same industry or business sector. This index can take the form of a financial indication, such as a company's earnings or liquidity. Alternatively, it can take the form of an industry-specific indicator, also known as a key success indicator (KSI).

Why are key performance indexes important?

Key performance indexes play a significant role in assisting organisations in identifying goals, measuring progress in many areas and keeping goals at the forefront of decision-making. A key performance index has to be communicated and spread throughout the organisation to ensure that all employees understand the significance of these indicators as well as how to measure goals and monitor progress. A key performance index can also assist the workforce by allowing managers to compare employee performance to wider corporate goals.

When organisational objectives are properly communicated across the company, employees may carry out their duties knowing that everything they do contributes to the company's ultimate success. In this sense, employees understand and are accountable for their personal performance indexes. Your company may use a key performance index to encourage company-wide personal growth and to build an environment that's conducive to learning and continuous progression.

Related: Examples of Short-Term Goals To Improve Your Career

What renders a key performance index effective?

An effective key performance index is useful when you can use it to create beneficial adjustments in an organisation or convey essential concepts to individuals inside the organisation. When developing a performance index strategy, it's critical to first define and establish the overarching organisational objectives, describe the steps to accomplish those objectives and list out those who may make changes based on the performance index data. Department heads, business executives, managers, management committees and analysts may be involved in identifying the objectives and determining the procedures to be measured using the key performance index.

All that said, an organisation's ability to monitor performance and overall progress toward a goal are highly dependent on the quality of its key performance index. You may consider using the SMARTER structure to ensure that your performance index is effective, measurable and achievable. A key performance index adopting the SMARTER framework boasts the following characteristics:

  1. Specific: An effective key performance index entails a comprehensive, concise and unambiguous statement of what you aim to achieve. For instance, your key performance index may be to reduce employee turnover by 15% by the end of the year.

  2. Measurable: A key performance index should be measurable in order to provide an accurate definition of success. You can use fixed monetary amounts, raw statistics or percentages when deciding how to measure.

  3. Achievable: It's preferable if your key performance index is ambitious yet still reachable within reason. This guarantees that those working on them are challenged, motivated and not burned out, and it also aids in the establishment of realistic expectations among stakeholders and corporate leadership.

  4. Relevant: A single key performance index has to contribute to the achievement of the more significant and important business objectives of the team above you. For instance, if you work with a team that reports to your organisation's finance department, your performance index has to be aligned with both the financial goals as well as the overarching organisational goals.

  5. Time-bound: Choose a time frame that is both ambitious and practical for measuring your progress and accomplishment toward your performance index. For instance, you may want to reach a certain target by the end of a month, business quarter or financial year.

  6. Evaluate: Examining your key performance index on a regular basis is an excellent way to verify that you're still working toward the appropriate goals. In your review, you may contemplate whether your performance index is still relevant, assess the major obstacles to success and determine what additional resources, funds, tools or skills you need to enhance your performance.

  7. Readjust: You may reevaluate your key performance indexes at regular intervals, such as halfway through your intended duration and one more time at the conclusion. You can take this opportunity to decide whether to update your performance indexes to ensure that they're current, attainable, relevant and in line with the organisational goals.

Read more: SMART Goals: Definition, Template and Examples

What are the different types of key performance indexes?

Key performance indexes can differ greatly amongst company sectors and industries. Some are more concerned with financial objectives and goals, while others are interested in notions and concepts that might help a firm expand. Here are some of the most popular performance index categories to consider, with examples of each:

Financial key performance index

Outlined below are some examples of financial key performance indexes:

  • Net profit: Net profit is one of the most popular indexes for profit-based measures, reflecting the amount of income a company keeps after deducting its costs for a certain time.

  • Current ratio: This liquidity-focused financial index is derived by dividing total current assets by total current liabilities. This index shows the company's ability to meet its short-term debt obligations.

  • Cost: This financial index evaluates cost-effectiveness and aids in the identification of methods to manage and minimise business expenditures.

  • Cost of goods sold: Cost of goods sold, often known as COGS, can assist you in determining a product's true profit margin and the appropriate markup amount or percentage for a product.

  • Sales by area: Evaluating sales by region allows a company to target specific areas and offer feedback to sales agents in underperforming locations.

Customer-based key performance index

Outlined below are some examples of customer-based key performance indexes:

  • Customer acquisition cost: You can calculate this index by dividing the total costs of gaining new customers by the number of consumers gained in a certain time period. It can assist you in determining the cost-effectiveness of marketing initiatives in acquiring new customers.

  • Net promoter score: NPS, short for net promoter score, is the chance of your present consumers suggesting your brand or company to others.

  • Customer count: The number of clients you've gained and lost over time might be a helpful index. This can help you assess the current initiatives and identify room for improvement.

  • Customer satisfaction and retention: You can use various performance indexes, such as survey scores and repeat purchases, to measure customer satisfaction and retention rates.

Related: What Is Good Customer Service? Definition and Guideline

People-based key performance index

Outlined below are some examples of key performance indexes based on the people within an organisation:

  • Employee turnover rate: You can use this index to analyse your workplace environment and culture as well as your pay and remuneration package, depending on current market conditions and industry standards.

  • Employee satisfaction: Evaluating employee contentment generally entails distributing questionnaires and seeking feedback, which is critical because happy employees tend to be more productive in their work.

  • Response to open positions: When an organisation publishes vacant roles, one key performance index used in the recruiting process is measuring the proportion of responses to those job vacancies, which shows job seeker exposure.

Process-based key performance index

Outlined below are some examples of process-based key performance indexes:

  • Defects in goods: To calculate the proportion of defective products, you can divide the number of defective products by the total quantity of units produced. You can use this index to identify improvement strategies to minimise defects.

  • Efficiency: Ways of assessing efficiency vary by industry, but examining the process and operational efficiency may help you determine which areas to work on or update in your organisation.

  • Customer support requests: To assist your organisation in evaluating its response procedures, you may evaluate the number of customer support requests, the number of resolved requests and the time it took to handle them. Evaluating such measures helps your customer service representatives improve their processes to serve customers.

Read more: What Are Key Performance Indicators? Types and Samples

Explore more articles