Many companies are working with the wrong measures, many of which are incorrectly termed key performance indicators (KPIs). Very few organizations really monitor their true KPIs. The reason is that very few organizations, business leaders, writers, accountants, and consultants have explored what a KPI actually is. There are three types of performance measures (see Exhibit 1.1):
Key result indicators (KRIs) tell you how you have done in a perspective.
Performance indicators (PIs) tell you what to do.
KPIs tell you what to do to increase performance dramatically.
Figure 1.1. Three Types of Performance Measures
Many performance measures used by organizations are thus an inappropriate mix of these three types.
An onion analogy can be used to describe the relationship of these three measures. The outside skin describes the overall condition of the onion, the amount of sun, water, and nutrients it has received; how it has been handled from harvest to supermarket shelf. However, as we peel the layers off the onion, we find more information. The layers represent the various performance indicators, and the core, the key performance indicators.
What are KRIs? KRIs are measures that have often been mistaken for KPIs, including:
Net profit before tax
Profitability of customers
Return on capital employed
The common characteristic ...