In many domains of human activity, the usage of tools is essential for achieving the desired results. Measurement and evaluation make no exception, being equipped with both conceptual and physical tools. Of the first category, at the core of any performance measurement and management system are the Key Performance Indicators (KPIs) used. They provide the important data that is monitored and reported within an organization, by using scorecards or dashboards.
In practice, the terminology used to express them is diverse. The most common expressions are: performance indicators, metrics, key performance indicators or key result areas. Both academic and practitioner literature use these terms interchangeably, oftentimes even within the same organization. This can cause confusion among stakeholders, and it can also affect the way these tools are used in practice. Establishing a common terminology at organizational level brings everyone on the same page and facilitates a consistent approach to KPIs. To bring more clarity in working with KPIs, The KPI Institute recommends the following approach:
Metric – It has its roots in the word “metron,” used in ancient Greece to reflect measurement. Metrics refer to something we can measure, a value, or a quantity. Examples of metrics are: # Air temperature, # Air quality, # Water depth, # Height, # Weight or # Employees. When metrics reflect the achievement of a desired state, they become Key Performance Indicators. Oftentimes, metrics represent the subordinated measures used for calculating a KPI.
Key Performance Indicator (KPI) – A measurable expression for the achievement of a desired level of results, in an area relevant to the evaluated entity’s activity. KPIs make objectives quantifiable, providing visibility into the performance of individuals, teams, departments and organizations and enabling decision makers to take action in achieving the desired outcomes. Typically, KPIs are monitored and communicated through dashboards, scorecards and other forms of performance reports.
Key Risk Indicator (KRI) – A metric that provides an early warning regarding an increased risk exposure in a certain area of operations. For example, a high level of % Clients experiencing financial difficulties can indicate the risk of not being able to collect all debts and will negatively impact $ Write-off accounts. By monitoring KRIs, managers are able to take a proactive approach in risk management by preventing incidents or diminishing their impact, when they occur.