In 100 words...
A Key Performance Indicator (KPI) is a measurable value linked to a target that is used to evaluate the performance of an activity and can be applied to individuals or organisational units. What differentiates a KPI from a report of a simple measure + target is the association by the defining organisation with some wider importance - typically KPIs are linked to overall corporate priorities, such as financial performance, customer satisfaction, operational safety, quality, or staff satisfaction.
Focusing on overall organisational goals is one weakness of KPIs, as such goals are often poorly connected to the outputs of individual or team endeavours.
Performance measurement has been around a very long time. Some of the earliest artifacts of civilisation concern mechanisms for counting things - evidence of formal record keeping has been found as far back as 44,000 years ago. By 3000 BC formal counting systems for non-financial items were well established. However formal non-financial performance measurement as we know it today is much more recent - with its roots thought primarily to be in the administration of military campaigns, major organisational activities where the primary concern was operational readiness rather than cost control. A widely held view is that modern performance measurement began to emerge in the 19th century due in part to the increasing separation of owners and managers - a consequence of the growing capital intensity of industry during the second industrial revolution: owners needed more effective management information than could be obtained from financial reports, and also often had strong views about how their investments should be managed that needed to be communicated.
KPIs came of age with the rise of Scientific Management at the start of the 20th century: a generation of management thinkers became obsessed with the percieved inefficiency of primarily US based industry, and developed a series of methods to identify more productive ways of working across a broad range of industries. Linked to these more productive ways of working were a raft of 'standard' expectations regarding the activities and outputs of work.
Towards the end of the 20th century the rise in available low-cost computing made it easier to track a greater number of standard measures of labour activity, and this in turn lead to a significant increase in the volume of performance measures that could be collected and tracked by an organsiation. To 'make sense' of this increasing volume of information, management thinkers began to suggest that some measures should be given greater emphasis in communications with the organisation - these prioritiesed measures were called a variety of things, including "Critical Success Factors", "Key Results Areas" and most famously "Key Performance Indicators".
Although many books and websites exist that relate to Key Performance Indicators, they remain a very simple concept - simply a set of prioritised measures and targets. They form a useful component within a performance measurement framework, but are of little value on their own.
Links to other frameworks
OKRs fit into a standard progression of performance management tools:
- Measures - simply collecting information on an activity or outcome within an organisation
- Measures and Targets - adding information about what level of activity or outcome is required / expected, and usually a time when the required performance should be delivered by
- KPIs - a small number of Measures and Targets that are communicated widely within an organisation as 'priority' performance goals to be considered
- OKRs - KPIs linked to a clear outcome that is the reason why the KPI has been selected
- Balanced Scorecard - a collection of KPIs / OKRs that are linked thematically or causally to provide a more complete picture of the outcomes required for an organisation
- Strategy Execution framework - advanced Balanced Scorecard style measurement systems linked to a clear longer term view of the future state required for an organisation and a set of management behaviours that focuses upon the communication and monitoring of a programme of strategic change - examples include 3rd Generation Balanced Scorecard and Results Based Management systems.
KPIs give priority to a sub-set of performance measures within an organisation, and by definition must include a target value for each measure. Their inclusion in broadcast communications within an organisation limits their utility - as the generic numbers that can have meaning in a broadcast communication are usually poorly linked to the controllable activities undertaken by a specific group or individual.
To dig deeper
There is a wikipedia entry on KPIs, several books that discuss the topic and many websites too. However the concept is really not that complicated, and the value of reading more deeply on this topic is not great.