Let’s start with a little, admittedly somewhat odd
example: think of metrics and KPI's as being like a utility app for your smartphone - The app
lets you solve a specific problem. Let’s say a step counter for example. It
informs you of how many steps you have walked within a specific period of time.
You may use this app ‘for fun’ which would imply that it tells you something
about yourself, something that is measured, but not much more.
Hence, this information is arbitrary if there is no specific context for it. In
this case the metric is just a metric that tells me something, but I can
interpret the result in any way I like. I can say for instance that I have
covered a lot of ground, or I can deduce (falsely) that I must have spent a lot
of time walking.
However, if the app in the example is
employed by an athlete who aims at reaching a specific number of steps in order
to get fit, the information becomes a lot more relevant. The metric becomes an
indicator for the progress which the athlete has made towards reaching his
goal. Hence, the ‘simple metric’ has become a Key Performance Indicator’.
To be more precise, we can define a metric
as a standard measure for a something specific. For example, a metric may measure
the speed of a process. Now, if this metric measures an instance that is
essential to a business’ overall performance, it become a Key Performance
Indicator. Hence, it no longer only tells something about a part of the
business that may be arbitrary but with its specific context, the metric
becomes so important that is serves as a proxy for the performance of the
entire business.
Per definition, there are no universal KPI’s. What serves as a KPI for one business may only be a metric for another. When a metric becomes a KPI is strongly related to the type of business and, more importantly, the goal of its business operation. For example, a company that focusses on retaining customers for a long period of time will choose a KPI such as customer retention or customer loyalty as KPI and not something like profit per unit sold or cost per unit sold. However, another company that aims at increasing profitability might well do so.
Similarly, a boat company that ferries individuals across a lake may employ the number of customers per trip as KPI, since a high number of customers implies lower unit costs per trip. On the other hand, a luxury brand will rather utilize the revenue per customer as a KPI due to the fact that loyal customers tend to add more value to the bottom line than one-timers.
Per definition, there are no universal KPI’s. What serves as a KPI for one business may only be a metric for another. When a metric becomes a KPI is strongly related to the type of business and, more importantly, the goal of its business operation. For example, a company that focusses on retaining customers for a long period of time will choose a KPI such as customer retention or customer loyalty as KPI and not something like profit per unit sold or cost per unit sold. However, another company that aims at increasing profitability might well do so.
Similarly, a boat company that ferries individuals across a lake may employ the number of customers per trip as KPI, since a high number of customers implies lower unit costs per trip. On the other hand, a luxury brand will rather utilize the revenue per customer as a KPI due to the fact that loyal customers tend to add more value to the bottom line than one-timers.
In conclusion, metrics and KPI’s may be
understood as related, but not as exchangeable terms. Furthermore, metrics are
measures for a specific part of a business operation, while KPI’s are measures
for the part of a business that represent the overall performance of that
business.
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