How to define a performance indicator
By the definition of the Foundation for the National Quality Award (FPNQ, 2003), an indicator is a numeric variable to which is assigned a goal and that is brought periodically to the attention of managers of an organization. The basic levels of hierarchy for indicators of an organization are: Strategy, Management and Operational. Also, called performance indicators, they understand the data that quantify the inputs, resources, processes, products, the performance of suppliers and the satisfaction of stakeholders. Therefore, any data that is not regularly analyzed cannot be called an indicator because it is not indicating anything to anyone.
The choice of a performance indicator is not simple. According to Sink and Tuttle (1989) it involves the need for measuring seven parameters that must interact to denote the performance of an organization: The efficiency and effectiveness of the company's processes, the quality of their products, the productivity and quality of life at work of its collaborators, the degree of innovation that the company has in its products, its processes and its style of management, besides the company's profitability. It also involves the knowledge of the processes where data collections will be made; and also the detailed definition of this indicator, thus avoiding common mistakes such as not knowing the meaning of the indicator, the lack of alignment between indicators and the company's strategic objectives, and the use of a low relevance indicator.
An indicator should have a kind of ID card so that anyone can identify it, understand its uses, and use it as a basis for decision-making on actions to improve the company planning, improve the performance of operational and corporate processes, increase the degree of motivation and qualification of people, and grow the level of utilization of the available resources in their projects. This ID card serves both the quantitative indicators and quality indicators, and must contain the following information:
Definition of the indicator - containing a kind of macro description of the indicator;
The Objective of the Indicator - to inform the purpose of the indicator and what it aims;
Acronym of the indicator name - pointing the name by which the indicator is known in IT systems;
Unit of measure - explaining the unit in which the indicator is measured (kilogram, meter, good, satisfied);
Periodicity - informing how often the indicator is available;
Data Collection - clarifying how often the data required to mediate are obtained;
Calculation formula - elucidating how the collected data are combined to generate the indicator;
Goal - generating an expectation of what would be the value of this indicator or ideal situation
Parameter - clarifying, to readers of the indicator, if a great result for him would be above or below the current measured value;
Source - clarifying for those who will collect the data for calculating the indicator, the source of each data collected;
Indicator Automation - explaining if there is an IT system that calculates the indicator or if its generation is manual;
Lower Control Limit - setting, if applicable, the minimum tolerable value as a result of its measurement
Upper Control Limit - establishing, if applicable, the maximum tolerable value as a result of its measurement
Measurement Methodology - commenting on how the measurement is made, in which process (es) it is made, who performs, for whom is sent the measurement and the processed result of the indicator
Indicator Analysis - Instructing how the analysis of the indicator is made and the purpose of that analysis;
Target Audience - stating who is responsible to do the analysis of the indicator
Responsible - determining who is responsible for raising the data, and generate the indicator. This agent is also known as Control Owner, the head that controls the process;
Observations - creating a free field for relevant notes on the indicator.
These eighteen items form an integrated set of detailed information that define in a unique and sufficiently way any performance indicator of a business process, and a strategic goal of an operational activity or an enterprise project. A final recommendation that can ensure a good definition of a performance indicator is to be careful to avoid a set of indicators that can be good for a unit, but that go against the company's interests. To prevent this from occurring, is important to understand the strategic dimension of the measure, looking for strategies or strategic objectives of the company to find out which one will benefit from the improvement in the indicator that is being set. If this relationship of cause and effect is not found, the indicator should be reviewed, perhaps because another variable should be considered to quantify or qualify the greatness that you want to track.
FPNQ, Foundation for the National Quality Award. Planning System of Performance Measurement 2ª Edition São Paulo: FPNQ, 2003.
SINK, Scott and TUTTLE, Thomas C. Planning and Measurement in Your Organization of the Future. Norcross, Georgia: Industrial Engineering and Management Press, 1989.