Three types of KPIs
Key performance indicators come in three types:
- Process KPIs measure the efficiency or productivity of a business process. Examples include "Product-repair cycle time," "Days to deliver an order," "Number of rings before a customer phone call is answered," "Number of employees graduating from training programs," and "Weeks required to fill vacant positions."
- Input KPIs measure assets and resources invested in or used to generate business results. Examples include "Dollars spent on research and development," "Funding for employee training," "New hires' knowledge and skills," and "Quality of raw materials."
- Output KPIs measure the financial and nonfinancial results of business activities. Examples include "Revenues," "Number of new customers acquired," and "Percentage increase in full-time employees." Three particularly common output KPIs that are used by managers include:
- Return on investment (ROI): Return on investment represents the benefits generated from the use of assets in a company, unit, or group—or on a project. ROI is helpful to top executives, finance managers, board members, and shareholders. A possible way to express return on investment is to divide net income (revenues less expenses less any liabilities, such as taxes) by total assets. ROI measures how effectively managers have used resources, and can be figured as follows:
ROI = Net Income/Total Assets
- Economic value added (EVA)™: EVA, popularized in the 1990s by U.S. management consultancy Stern Stewart & Co., is defined as the value of a business activity that is left over after you subtract from it the cost of executing that activity and the cost of the physical and financial capital deployed to generate the profits. In the field of corporate finance, EVA is a way to determine the value created, above the required return, for a company's shareholders. It's therefore useful to senior management, boards, and shareholders and other investors. EVA is calculated as follows:
EVA = Net operating profit after taxes minus (net operating assets multiplied by the weighted average cost of capital)
Shareholders of a company receive a positive EVA when the return from the equity employed in the business's operations is greater than the (risk-adjusted) cost of that capital.
- Market share: The percentage of sales in a given industry segment or sub-segment captured by your company.
- Return on investment (ROI): Return on investment represents the benefits generated from the use of assets in a company, unit, or group—or on a project. ROI is helpful to top executives, finance managers, board members, and shareholders. A possible way to express return on investment is to divide net income (revenues less expenses less any liabilities, such as taxes) by total assets. ROI measures how effectively managers have used resources, and can be figured as follows:
All three types of KPIs—process, input, and output—generate valuable performance information. A mix of the three types ensures a comprehensive picture of your unit's or organization's performance.