insight Encyclopedia

Key Performance Indicators

Key performance indicators or KPIs are exactly what the name suggests. They are visual indicators in the form of color-coded shapes that are tied to a pre-defined, critical threshold. When the threshold is crossed, the KPI’s function is to alert key personnel so that they can take the necessary action.

Here’s an example. A bestselling product needs to be always near optimal inventory level. The inventory manager sets 1,000 units in stock as the critical threshold: if the item drops below 1,000 units in stock, the manager needs to be alerted and the item immediately reordered. By setting up a KPI as a way to ensure this, the inventory manager will see a green dot next to the item if inventory levels are OK; as soon as they drop below 1,000 (the pre-defined threshold), the dot will turn red, and the inventory manager will immediately know he needs to place a reorder.

The same mechanism is used by today’s companies for monitoring lead levels, sales target, revenue, or anything critical that can be quantified and to which a threshold between good and poor, noncritical and critical, etc., can be set.

Advantages of KPIs

The KPI is perhaps the single most intuitive visualization feature available in BI. For example: green=good; red=action needed! The more a critical piece of information jumps out to the relevant personnel, the better the chance to take corrective action before the situation develops into a real problem.

With critical information, users should not have to sift through pages of data, essentially analyzing it every time a decision about something important needs to be made. The BI solution should have a mechanism in place through which the piece of information is served up to the user in a meaningful way–as it is in the color-coded KPI. Green means something, as well as red, that the user will immediately know and recognize without having to ask himself.

Here are two caveats about KPIs:

  1. Do not turn too many items into KPIs. KPIs should be reserved for the truly critical items–for instance, the performance of your main product lines if you are a rep, not the performance of every individual SKU you sell. The risk is to water down the effectiveness of the KPI through visual and mental inflation–if you have too many items “crying wolf” at you, you are less likely to pay attention to the ones that are of high importance.
  2. If you can, make KPIs actionable. For instance, in our example of the inventory manager monitoring in-stock level of the bestselling SKU, when the KPI turns red the interface should offer the option to reorder without leaving the application, thereby saving time and making the process more efficient.