Key performance indicator (KPI)

Abstract

The performance of an organization or project can be measured using key performance indicators (KPI) and is used to increase performance dramatically .

According to David Parameter, the benefits of Key Performance Indicators are yet to be discovered by the construction industry, they represent a set of measures which focuses on aspects regarding organisational performance, that are extremely vital for the current and future success of the project. If company managers and staff focus on the KPIs together, it can guide a company to improve performance effectively, if it is used precisely.

To measure their success, different business industries have various sets ´of KPIs. Companies in the construction industry use specific indicators such as reviewing the cost of materials in comparison to the predetermined budget, the financial advantage of construction projects and lastly, the frequency of safety incidents. Within project management, there is a wide range of tools that can be used to assess the progress towards a target to be achieved and are usually decided at an early stage of the project. Despite the fact that specific financial indicators can be measured using KPI, the direct financial measurement is converted into result indicators and not a KPI . This article will examine KPI and its value. Moreover, this article will examine the use of KPI and its use. A KPI can also be referred to as Key Success Indicators (KSI) and varies between the different organizations. KPI is commonly a term mixed by different terms, it is, therefore, important to establish the metric beforehand, and also determine the type. Misuse of the term can guide the project in the wrong direction leading to a lack of preparation and unwanted results.

Background

The construction industry, in comparison to other industries, is in general considered to be underperformed, regularly involving postponements and errors throughout the process. When determining the development in a country it is common to measure this by the development of their infrastructure.It is therefore crucial for a country to have an effective and efficient construction process, depending on a high quality of financial, technical, organisational and managerial movements. In order to deliver a successful project, there are many factors to take into consideration. The management is the basis of a project or portfolio, and it is, therefore, significant to distinguish the orientation of the project at an early stage. A KPI is a measurable value that demonstrates how effectively a company is achieving key business objectives, used at multiple levels to measure the performance.

Definition of Project Management

To be able to define project management a definition of project must be identified. According to the Project management institute, a project is a temporary scope of work with a defined beginning and end time. Every project is unique and it is therefore impossible to determine a routine operation but is more specific sets of operations to accomplish a particular goal. A project team are often involved with people they are not used to work with, from different organizations with different expertise. Project management is the application of knowledge, skills, tools and techniques to project activities to meet the project requirements. The ideal plan of a project manager is to identify the critical metrics of the project.KPIs in project management are significant metrics that guide the project in the right direction and makes it easy for the parties involved in the project to track their performance.

Anatomy of KPI

When examining the meaning and anatomy of Key Performance Indicator (KPI) dissection of the term can be used to determine the meaning by its metric:

Key: A metric where only the key can make or break. Contributor to the success or failure of a project.

Performance: To perform its performance, the metric must be controllable, where it can be measured, qualified, adjusted and controlled.

Indicator: A metric that represents the present and future performance.

A KPI is a part of a measurable objective. A KPI should not be confused with a critical success factor (CSF), where KPIs are usually easier to define after determining the CSF. CSF is something that must be established in order to achieve the objective. A KPI can be a guideline to meet the desired CSF. Determining the right amount and type of KPIs can lead to better decision making, improved overall performance on the project, improved time of problem area identification and improved customer- contractor- stakeholder relations. According to David Parameter, there are three categories of metrics :

Result Indicators (RIs): What has the organization achieved?

Performance Indicators (PIs): What must the organization do to increase or meet performance?

Key Performance Indicators (KPIs): What are the critical performance indicators that can drastically increase performance or accomplishment of the objectives?

Organizations commonly use an incorrect combination of these indicators and characterise them as KPIs. Implementation of a large number of KPIs can lead to delays and disorientate the vision on the performance. The desired amount of KPIs varies from project to project. Although, there are different factors that determine the amount of KPIs.

• The number of information systems used by the project manager.
• The reporting requirements from the number of stakeholders.
• The ability in the project to measure information.
• The project process assets available to gather the information.
• The cost of measurement and gathering of information.
• Dashboard reporting limitations.

Need for KPIs

According to Eckerson, a KPI is a metric measuring how well the organization performs an operational, tactical or strategic activity that is critical for the current and future success of the organization. Even though this refers to a more business-oriented metric it can still be referred to the project-oriented environment, as the projects are still progressing toward predefined targets. KPIs can be used as indicators, but not leading indicators and how they are interpreted should be considerately be examined. The term, what gets measured gets done, can simply be referred to KPIs. Cost variance, schedule variance, schedule performance index, cost performance index and time/cost at completion are terms that can be used as KPIs if they are handled correctly. The KPI must reflect and collaborate on a desired goal in the project and also be targetted toward the activities that enable changes. Examples of typical KPIs a project manager can use are:

• Percent of work packages adhering to the schedule.
• Percent of work packages adhering to the budget.
• Number of assigned resources versus planned resources.
• Number of cost revisions
• The Project complexity factor

It is important to include every party involved and establish an understanding of the difference between metrics and KPIs and the importance of measurement reporting.

Implementation of KPI

To implement a well-functioning strategy into a company highly depends on the delivery of new information. Moreover, some aspects of an organization's performance are not measurable, in terms of its effectiveness of the relevant KPIs. Making any business or goal in an organization specific, measurable, achievable, reachable, and timely (S.M.A.R.T) will enhance the chances of a successful accomplishment of KPIs. The S.M.A.R.T concept will make it possible to use KPIs in the long run as they will be suitable for the involved parties. According to Price Waterhouse Coopers (PWC) it is difficult to determine the amount of KPIs to implement. By giving the user a large amount of KPIs without specifying why and how they will improve the performance, it can lead to a lack of transparency. Moreover, PWC suggests an organization to have between four and ten measures. The success of implementation of KPI is presented in the following figure, representing four milestones.

Figure 1:The four milestones of implementing KPI

Partnership with staff, unions, key suppliers and key costumers

Partnership with staff, unions, key suppliers and key costumers encompasses the early phase of establishment, involving the relevant people into forming a motivated partnership across the management, staff, unions, key suppliers and key customers. The involvement at the very beginning from all parts is crucial, as the teams across the project have different roles and tasks to complete and will, therefore, support KPI in different ways. A commitment to the establishment of effective consultative arrangements with the parties is important to maintain the desired performance.

Power transfer to the front line

Power transfer to the front line incorporates the agreement of all employees, particularly the managers. Meaning that those individuals require access to all strategic project information. An urgent action to amend negatively impactable situations from employees affecting KPIs. At this milestone, it is also desired to develop responsibility for the relevant associated team. Support and training for the employees with learning difficulties of the establishment of the new strategy.

Integration of measurement, reporting, and improvement of performance

Integration of measurement, reporting, and improvement of performance is related to the framework, allowing the projects to measure the performance, by reporting the results in the desired direction to take action if required. The different projects or organizations should make reports on the required basis, usually daily or weekly. The reports should include critical success factors (CSF), where human resources (HR) team should ensure a positive workforce leading the performance measurements in the right direction. The performance measures gained from the reports shall be developed on a team based level.

Correlation of performance strategy

Correlation of performance strategy involves the link between performance measures and strategy, as the performance measures are not valuable without and linkage to CFS and organizations strategic objectives. Definitions of an organization's visions, missions and values are crucial in order to be successful. The definitions should be defined in a way to ensure that everyone in the organization understands the meaning, to guarantee involvement on a daily basis.

Using KPIs

Figure 2: The role of KPIs in strategic planning

Most companies or organizations are operating with KPIs, with a wide range of results and achievement. Some organizations do not see any improvements in their indicators origins in lack of fundamental communication or understanding of KPI. In many cases, they develop a KPI system without any knowledge or preparation, resulting in KPIs that are not suited for the specific project. In similarity to other industries, preparation is often the key to success, also corresponding to the construction industry. Some fundamental principles of using KPI includes:

• KPIs are determined and agreed upon with all parties involved, before using them in practice.
• The KPIs reflects on the CSFs in the project.
• KPIs indicate how much progress has been made towards the project's achievement in relation to its targets, goal and objectives.
• KPI is not performance targets.
• The main purpose of KPI is related to the measurement of performance and factors for decisionmaking leading in a positive outcome.
• KPIs do not prescribe a course of action, but drives change indicating distance from the target.
• KPIs assist the establishment of the objectives.

The presentation of KPIs varies from project to project. The representation can vary from having the information on whiteboards in the canteen, on a common shared file, in meeting rooms, in newsletters etc. The overall goal is to motivate and engage everyone who is involved in the project.

An example of how KPIs are used is shown in figure 2, where it can be an essential factor of success for strategy implementation. Meaning that KPIs can take place at the very beginning of the project, enabling the project manager to prepare and achieve success during the planning period. As shown in Figure 2, KPIs can be directly linked to the achievement of strategic objectives. As the operational objectives need to be monitored on a regular basis, KPIs are very useful. It is useful in a way where they can provide and monitor the operational objectives and works as an early warning system if the objectives are not met.]]

Advantages, limitations and challenges

Advantages of KPI

The advantages of KPI is the overall performance of the project, by identifying errors regularly. Good information and well-functioning warning systems in an organization are crucial to achieving success. The organizations without any type of performance systems and an overall evaluation of their weaknesses and strengths can be hard to make improvements to their performance, as there are not any numbers or data analyzing the problems. KPIs provides clear data, making it possible to make improvements and an efficient move toward the overall goal, on the basis of the organization's mission, vision and CSFs. Another advantage of using KPIs are the quantifiable results achieved, as it provides actionable information. After the implementation and fully understanding of KPI, it can break down complex information into understandable metrics with constant feedback on the organization's performance and progress, ensuring that everyone is moving forward in the right direction. Regarding specific projects and its improved performance by implementing KPIs are related to improved progress throughout the project period, but also the gained information for future projects. Mistakes made in previous projects can be measured to the specific number, making it easier to not repeat the mistake in new projects or further on in the current project period. Moreover, to lead to an overall improvement of the organization, where the different departments can gain knowledge of previous mistakes made by other departments.

Limitations and challenges

The development of KPIs in organization or projects are important, but it may occur challenges when implementing them. Limitations and challenges connected to KPIs are related to its use and overall performance. Lack of involvement of every employee in the project occurs, origins from a lack of communication between the managers and employees. The KPIs are usually determined by the managers, that might be unfavourable for the employees and the KPI will not be carried out at its desired level of detail. A common challenge related to KPIs are problems with the data collection. KPIs usually require a wide range of data collection retrieved from multiple systems and teams in the organization. Involvement if IT's might be required to achieve the desired level of collection and can, therefore, lead to a higher cost. In the establishment of KPIs, the process of implementing a well-functioning system to an organization while making it user-friendly can take time. Alongside, the testing period after the KPI is created. This process has to be fully developed and monitored, to avoid further challenges after the testing period. KPIs are specified to each organization or project and it is, therefore, crucial to ensure a fully developed model. Another challenge related to KPIs is the consistently use of the metrics. KPIs requires a high amount of data collection and it is crucial that the users make frequent updates.

Annotated figures

The figures in this article are inspired by a range of books and article. This chapter refers to each figure and the origin of inspiration.

[Figure 1] Inspiration from "Project management 2.0: leveraging tools, distributed collaboration" and created by the author of this article.

[Figure 2] Inspiration from "Strategic thinking" and created by the author of this article.

Annotated Bibliography

David Parameter| 2015 |"Key Performance Indicators Developing, Implementing, and Using Winning KPIs" Wiley pp. 11-42 The book is used to gain more basic knowledge of key performance indicators. The book is a guideline for using KPIs, as it is commonly misunderstood or the term is misused. The book is written for all parties involved in a project including project team members, management and staff.

Harald R. Kenzer| 2014 | "Project management 2.0: leveraging tools, distributed collaboration, and metrics for project success" pp. 49-93 The book is about project management and is used in this article as a guideline for using KPIs in project management. The book is relevant for gaining a deeper knowledge of project management and the understanding of challenges in project management.