First Let us understand what is a KPI?
A KPI (Key Performance Indicator) is simply a metric that is tied to a target. Most often, a KPI represents how far a metric is above or below a pre-determined target. KPIâ€™s usually are shown as a ratio of actual to target and are designed to instantly let a business user know if they are on or off their plan without the end user having to consciously focus on the metrics being represented.
SMART is an abbreviation for the five conditions of good KPI’s:
* Specific – It has to be clear what the KPI exactly measures. There has to be one widely-accepted definition of the KPI to make sure the different users interpret it the same way and, as a result, come to the same and right conclusions which they can act on.
* Measurable – The KPI has to be measurable to define a standard, budget or norm, to make it possible to measure the actual value and to make the actual value comparable to the budgeted value.
* Achievable – Every KPI has to be measurable to define a standard value for it. It is really important for the acceptance of KPI’s and Peformance Management in general within the organization that this norm is achievable. Nothing is more discouraging than striving for a goal that you will never obtain.
* Relevant – The KPI must give more insight in the performance of the organization in obtaining its strategy. If a KPI is not measuring a part of the strategy, acting on it doesn’t affect the organizations’ performance. Therefore an irrelevant KPI is useless.
* Time phased – It is important to express the value of the KPI in time. Every KPI only has a meaning if one knows the time dimension in which it is realized. The realization and standardization of the KPI therefore has to be time phased.