[MUSIC] Hello. In the business world, we often the term KPI thrown around, without it being clear what a KPI actually is. More often than not, the person saying it might not even know that KPI stands for Key Performance Indicator. At first glance, it's easy to define. KPIs are a measure of how well companies, businesses, business units, products, projects or individuals are performing compared to strategic goals and objectives. Well-designed KPIs provide the navigational tools. They give us a clear understanding of the current levels of performance. But what I just gave you was a bare bones definition. Honestly, if I left you with just that, I wouldn't have done justice to challenges of crafting these KPIs. So, for this lesson, we'll discuss the term KPI which is foundational to your learning for the rest of this module. After this lesson, you will be able to list the three must have components of a KPI, and discuss their importance, and what they can do strategically for a business. Okay, let’s get started. The definition of KPI as I gave you was correct but it doesn't tell you about the importance of how knowing the details of the organization's missions and goals are critical to Key Performance Indicators. I must warn you that understanding the strategic purpose of KPIs may seem obvious in retrospect, but I've had a lot of experience in having to navigate the lack of insight into what KPIs are and are not. I want you to be ready when you're asked to prepare a KPIs without much content. So let's explore KPIs in more detail. First off a KPI is a Key Performance Indicator. Let's unpack these three words. K stands for Key. P stands for Performance. I stands for Indicator. A KPI is Key. What are the most important things in your organization? Ideally, that comes from your organization strategic and business plan or some other plan written or unwritten. The reason that it's key is that it must have a primary relevance for your organization. The P in KPI tracks performance. That’s the second word. This is about tracking the actual performance as compared to the goal. Let’s say one of the key goals of this year is to improve profit from last year. You’ll measure the key value of actual performance or profits of this year. Again, it's the last year's profit. It will either be better worse or the same as last year's profit. That leads to the final letter in this abbreviation. The I in KPI is the Indicator. You will need to have some way to indicate how the performance is keeping up with the goals or not keeping up with the goals. That is why you create an indicator. The indicator will flag any key performance that falls outside the bounds you have set and notify you quickly. The indicator should use pre-attentive attributes that will allow the user to access their iconic memory space, or more likely their short-term memory space. You may recall, I talked a lot about pre-attentive attitudes in course 2. So there you have KPIs. This KPI must have three components. First, it must be crucial or key. Second, it must be measurable so that performance can be measured and compared to the goals. Third, it must have some calculation that allows in a very quick way for someone to indicate how crucial a measurement is doing. That all adds up to the three components needed for any key performance indicator. So let's consider a couple of examples. These are from a variety of sources which I'm providing and they're not ones that I created in any way nor were they created in tabular. We'll do that in the next couple of lessons Example one. The first example shows a nice snapshot of profit in some detail. The KPI quickly shows some topline numbers that might be worth exploring further and delving into. The second example is an example of a net promoter score. This is a very interesting measure. It's a measure of loyalty to brand or a product. It's the difference between a product's promoter and a product's detractor. As you're viewing this KPI, you might want to ensure that the Net Promoter scores are within the range that you set in your strategic plan or performance goal. A designer of that, which is you as the analyst, we'll also be setting it up, so that there's a range and the color changes depending on where you are in the net promoter score. The final example is on employee retention. In other words, how well is your organization doing at retaining employees based on a certain benchmark? And here it is. With that, why are KPIs important? KPIs may seem like a lot of work for summarizing just one thing. And it is a lot of work for just one thing. But is it worth it? I would say yes. It's worth it because you have to measure your performance against the goals to ensure that you're measuring up. If you have a KPI, you can monitor you're performance and perhaps make some adjustments made stream and reassess, but if you have goals and you can't measure them how do you know if you're succeeding in them or falling short. So just to tie up, I want you to think about a few important things when you're designing KPIs. First, make sure you're designing them based on some strategic need. Next, make sure that the KPIs are well defined, measurable, and quantifiable. Finally, make sure that the KPIs are actually crucial for the goals that your organization wants to achieve. Otherwise, the KPIs are pointless. So this wraps up our introduction to KPIs. After this lesson, you should now be able to define what a KPI abbreviates, list three must-have components of a KPI and discuss the strategic business importance of KPIs. Thank you for your attention.
