What is the definition of a KPI?
An extract from the Introduction of The KPI Book (This material is subject to copyright ©)
Key Performance Indicators provide you with meaningful statistics about the direction and travel of your business. In some cases it is possible to state how a particular Key Performance Indicator should behave, or in other words we can state what result should be generated to ensure optimum performance in a given area.
Generally speaking, the term that is used throughout the industry for these optimal levels of best practise is the word Benchmark. In my own experience this term is very useful for keeping performance constrained at a specific level and because of this it brings with it some psychological limitations in the area of dealership profitability.
Because of these implications I have introduced an additional term, which I call a Baseline. My aim in introducing this term is to remove any limitations that may exist when dealing with Profitability. Here are my own definitions of these two main terms:
Benchmark.
This term is used when your performance is to be maintained at a specific level or it is to operate within an upper or lower limit. For example, Utilisation within the Service Department should not be any lower than 85% nor should it be any higher than 95%. These two parameters represent the Benchmark within which Utilisation should be performing.
When used in this context, the term Benchmark is useful for constraining performance because the manager reading this statistic usually thinks that this area has reached its Benchmark and therefore everything is performing as it should be. However, this mindset produces a limiting factor when dealing with issues of profitability. This is because a manager might elevate their performance in an area such as Gross Profit to reach a particular Benchmark and then stop any further development because they have reached the required level, or in other words, they may think that the Benchmark is the only place to be.
Baseline
This term is used when you want to express a starting point for a given area of performance. This is not the place to be, it is a minimum expectation.
A Benchmark suggests that you should reach a given level of performance and maintain it. A Baseline suggests that you should reach a given level of performance as an absolute minimum and you should continue to develop the area.
Baselines are particularly useful when setting objectives in all levels of profitability because they do not have the limiting factor of setting an upper limit at which many people may stop any further development.
Care should be taken when measuring performance against both Benchmarks and Baselines as people have a tendency to aspire to what is expected of them and it is therefore of vital importance that you convey your expectations when constructing budgets and business plans.
Guideline
This term is used when a Benchmark or Baseline cannot be applied to a specific area of performance. For example, Reconditioning Costs on used vehicles vary greatly from franchise to franchise. For some, the figure could be £200 per unit and for others it could be £1200. In this instance the Guideline will read Franchise Specific.
When you have read the main title, mathematical formula, the Benchmark, Baseline or Guideline, you will reach the main body of the text.
The first few lines of this text set out to explain exactly what the Key Performance Indicator is measuring. It will also inform you of any alternative name by which this Key Performance Indicator is known.
For example, Utilisation within the Service Department is also known as Labour Efficiency. To avoid any confusion, both of these terms are listed within the Service Department, both of them refer to each other, and both carry exactly the same explanation.
Also contained within the main text of the page is a working example that explains the Key Performance Indicator at its most basic level to ensure complete understanding.
In some explanations, other Key Performance Indicators are mentioned. Where this is the case, these words are capitalised, which means that the relevant K.P.I. is also listed within the book carrying a detailed explanation.
You know by now that the letters K.P.I represent the words Key Performance Indicators, but what about the letters K.P.S. and K.P.A? Firstly, let’s deal with K.P.A.
K.P.A.
These letters represent the words Key Performance Area. Typically, a K.P.A. refers to a general area of your business as opposed to an isolated piece of information. For example, used vehicles may be a Key Performance Area that you may wish to focus upon and within this area there are many different isolated performance criteria. Generally speaking, a K.P.A. is a grouping of information as opposed to focussing on an individual item.
K.P.S.
These letters represent the words Key Performance Standard. Typically a K.P.S. is much the same as a Benchmark, or in other words they set the standard for a given level of performance. For instance, some people may say that they are hoping to achieve a Used Vehicle Stock Turn of 10 times per annum. This figure represents their target or in other words their Key Performance Standard.
I have chosen to steer away from using the term K.P.S. because in some instances it may carry with it the same limitations as the term Benchmark.
If you applied a Key Performance Standard of 8 times a year for Stock Turn on used vehicles, some people may think that the word standard suggests that this is the place to be rather than just a starting point. Throughout this book the term K.P.S. has been replaced with the terms Benchmark or Baseline.
K.P.I.
This section of the book would not be complete without a description of the term Key Performance Indicator, so here is my own definition.
A Key Performance Indicator breaks down all areas of your business into single bite-sized chunks that are much easier to manage. They help to remove the emotion away from vehicles and get you focussed on the thing that your job is really about, which is making money.
As an industry, we produce Management Accounts and Composite reports that are intricately detailed and extremely comprehensive. It is in fact fair to say that the management information that is produced by the motor industry is, in many cases, far superior to many other industries. This complexity has not happened by accident, their evolution has become critical in measuring dealership performance, purely for means of our survival.
The downside to comprehensive Management Accounts is that you have to take time to read them, and it is often difficult to get away from the emotion of the millions of pounds of turnover and thousands of pounds of profit. Key Performance Indicators on the other hand are much more static and stable and therefore carry more meaning when comparing information.
As with all information, the best way of understanding it is to track or trend its performance. The K.P.I. tells you where performance has been in the past, where it is now, and perhaps more useful, where performance is likely to be in the future.
KPI really are fabulous tools for measuring and comparing your performance with others. However, the downside is that some KPI mean different things to different people and many comparisons are rendered meaningless because different criteria are being used as well as different names. Frankly, it can get confusing!
My aims in writing this book are twofold, the first being to eradicate all confusion surrounding the interpretation and calculations of KPI so that a common dialogue can be established at your business meetings. My second aim is to produce a reference manual that will aid and speed up your development within the motor industry. I hope you find it useful.
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