KPI (Key Performance Indicator)

What is a KPI? (Key Performance Indicator)

If you can't measure it, you can't improve it.

Peter Drucker

If you work on or manage a team, you have probably met with the term KPI. It is an indicator often used in business strategy to monitor business performance and determine activities' effectiveness and efficiency. Key performance indicator refers to specific, measurable, and quantifiable performance indicator used to track progress over time. It can be set up by defining the total number of tasks we want to complete in a given period.

To describe it, let's use an analogy of the dashboard in a car. It displays for drivers only critical information about the car's performance, such as the fuel level, speed, engine's oil temperature, and miles driven. We are not informed what is car's body color or whether we are driving through the village or the city because, from a performance perspective, those factors don't have significant meaning, if any. KPIs are the chosen most important factors that provide essential performance information. The car's dashboard mentioned above allows the driver to make an informed decision about operating a vehicle effectively and efficiently, such as slowing down, shifting the gear, or refueling the engine.

Similarly, an organization establishing its KPIs can make informed decisions about optimizing its operations to achieve its goals and objectives. Running an organization as driving a car without a dashboard is likely possible. However, it is good to remember that only by constantly measuring its results and analyzing it we may improve it, master it, and make it successful.

Why measure progress with KPI?

KPIs alone do not bring any value to a business. However, this data can assist companies in making better-informed judgments about their business operations and overall strategies. Establishing them helps companies and teams track and measure progress, observe how well they are hitting their performance targets, note declines in performance, or conclude the overall improvement of activities in the context of the entire organization and its smaller structures or even individual units. Whether personal or organizational, KPIs are a helpful tool to measure performance directly tied to employee engagement.

KPIs concerning individual targets or set goals are used to track performance and their measurable results in the context of time, to notice opportunities for improving processes and activities, and to make appropriate decisions based on the results. KPIs are never tied to one type of organization or business strategy. What we will use to establish KPIs and the specific objectives we decided to measure will vary from organization to organization.

Key performance indicators are applicable in monitoring and evaluating progress at various levels of strategic implementation. A company could opt for specific KPIs to evaluate its overall business progress. Still, it could also utilize an alternate set of KPIs to appraise the performance of distinct departments within the organization, including Sales, Marketing, Finance, HR, and Operations.

Categories and types of KPIs

KPIs are an effective way to measure and track company performance. We can distinguish four main categories of KPIs and several types related to the department using them.

1. Strategic KPIs. Typically, strategic KPIs are the top-level ones that a company uses to evaluate its performance. While they can give a general sense of the company's performance, they don't provide a detailed analysis. Strategic KPIs are commonly employed by executives to gauge the company's progress, with return on investment, profit margin, and total company revenue being some prominent examples.
2. Operational KPIs. These key performance indicators assess how competent and successful a company is in month-to-month it even day-to-day activities. Their purpose is to assist managers in monitoring progress and pinpointing areas for enhancement. Some operational KPIs include cycle duration, inventory rotation, defect occurrence, and overall productivity of equipment (OPE).
3. Functional KPIs. These KPIs represent their different types and are utilized to evaluate performance in different company sections, such as finance, marketing, or human resources. Such metrics aid managers in monitoring performance and pinpointing potential areas for growth within their respective functional domains. Examples of functional KPIs include turnover rate of accounts receivable, lead cost per unit, employee training hours per training session, and rate of employee turnover.
4. Leading/Lagging KPIs. Key performance indicators (KPIs) can be categorized as either leading or lagging indicators. Leading indicators provide insight into future performance and help identify potential issues before they become problems. On the other hand, lagging indicators measure past performance and can be used to track progress and evaluate the impact of past actions. Examples of leading KPIs include website traffic, social media engagement, and customer satisfaction score, while examples of lagging KPIs include revenue growth, net profit, and customer retention rate.

How to create and measure KPIs?

The basic matter is to set up the right KPIs to bring you results that count in your case. Measuring the performance of numerous different actions and tasks can be tempting. However, if you choose the wrong KPIs, you can measure something that doesn't align with your company goals. Therefore check our step-by-step guide on creating valuable KPIs:

1. Do the research and identify business objectives.

Before you start, you must figure out the performance measures you want to track to drive results. Other KPIs from the same industry can inspire you. However, it is crucial to remember that finally chosen KPIs set should be unique to your business and the goals you aim at. While one measures the cost, the other can focus more on customer satisfaction and simply revenue. Choose those crucial factors and objectives from your point of view and write them down. 

2. Set up the maximum number of KPIs.

Too many KPIs may lead to a diluted focus on the important metrics. Therefore choose ones that genuinely make a difference and bring valuable insights into your business processes. You can also consider creating their hierarchy, from the leading KPI to the less important. After all, in each case, their final number may differ. However, it is always worth reviewing them carefully before starting their measurement.

3. Determine and review your KPIs.

Make sure your KPIs meet the criteria of good indicators. Before you finally define them and determine, ask yourself questions:

• Is it easy to quantify?
• Can we use this KPI to effect change, or is it beyond our control?
• Does this KPI align with our goals and overall strategy?
• Is it easy to define and comprehend?
• Can it be measured reliably and promptly?
• Does it encompass multiple perspectives, including customer, financial, internal processes, learning, and growth?
• Will it remain relevant in the future?

Based on your definition of success and your business goals, determine your KPIs. Remember that you have to choose those that are actionable, quantifiable, and relevant to your business strategy.

4. Set targets and assign responsibility for each KPI.

Once you define your KPIs, you also have to set specific targets that will help to track the progress. Assign as well particular individuals who would be responsible for them. If an individual is responsible for monitoring and reporting progress on KPIs, they will likely put tasks more effectively into action. This person is also likely to invest more in ensuring the measure's success rather than accepting its underperformance.

5. Choose the way to collect those data.

It can be both a simple spreadsheet and a customized dashboard or KPI software. Determine as well how you will collect data - will it be manual data collection, automated tracking tools, or a combination of those two methods?

6. Monitor your KPIs and track progress.

When you establish your goals and targets, you can track KPIs to check if the results hit your targets. Set up the measuring time, but remember to do it regularly. Reviewing the results once a week or even every day is a good approach because it informs us how things are going. Remember not to leave their update for the reporting deadline because you wouldn't have a chance to respond to it and impact the action.

7. Analyze results and create a KPI report.

Analyze the results both individually and through created reports. Through it, you can identify trends and find areas for improvement and opportunities to grow. It is crucial to remember that measuring KPIs is never a single action. A KPI report prepared only once, which was never analyzed, reviewed, or updated, is good for nothing. As it is an iterative approach, you should get insights from it and adjust your following actions and strategy accordingly.

8. Adjust KPIs as needed.

Over time, you can find out that you may need to adjust your KPIs to ensure you stay "on track". After all, they depend on your changing and developing business, established strategy and objectives, market conditions, and many other factors. Starting to work on KPIs equals constantly reviewing and adjusting them to ensure they remain relevant and effective and help you succeed.

What makes a good KPI?

A good KPI should meet the following criteria:

• Relevant: it should be directly related to the objective or goal it is measuring. It should be aligned with the organization's overall strategy.
• Measurable: it should be quantifiable and measurable in a meaningful way so that progress can be tracked over time.
• Attainable: Given the available resources and constraints, it should be achievable and realistic.
• Time-bound: it should have a specific timeframe for measurement, whether it's daily, weekly, monthly, quarterly, or yearly.
• Actionable: it should be actionable, providing insight into what actions must be taken to improve performance.
• Clear and understandable: it should be clearly defined and easy to understand so that everyone involved can understand its meaning and how to measure it.
• Leading or Lagging: Depending on the objective and goal, KPIs can be either leading, meaning that they predict future outcomes, or lagging, meaning that they track past performance.

Define KPIs with SMART framework

While choosing the right KPIs you can also apply S.M.A.R.T. criteria. This mnemonic acronym can guide  company KPIs that always should be:

• Specific – target a specific area for improvement.
• Measurable – quantify or at least suggest an indicator of progress.
• Assignable – specify who will do it.
• Realistic – state what results can realistically be achieved, given available resources.
• Time-related – specify when the result(s) can be achieved.

George T. Doran

KPI examples

Simply put, KPI is an objective you strive to achieve. Let's analyze these examples of a KPI to see which you can establish, depending on your needs and responsibilities.

Executive:

Executive performance metrics measure effectiveness - they are typically high-level and focus on the organization's overall success.

Best KPIs example for Executive:

Net Profit Margin

Debt to Equity Ratio

Lifetime Value to Cost of Acquisition Ratio

CAC Payback Period.

Marketing:

KPI can be used as examples to measure the result and success of the marketing campaign. Its metric can become a customer satisfaction measure with NPS (Net Promoter Score).

Best KPIs examples for marketing:

Customer Acquisition Cost (CAC)

Website Traffic

Lead Conversion Rate

Marketing Qualified Lead (MQL)

Return on Marketing Investment (ROMI)

Blog articles published monthly

HR:

The KPIs can also be used for tracking HR-related performance metrics. The HR team can follow KPIs to measure employee satisfaction, how employees work, and get their responses about satisfaction from work, their position, and development opportunities.

Best HR KPIs examples:

Turnover rate

Average Time for Recruitment

Cost Per Hire

Dismissal Rate

Employee satisfaction

Sales:

Financial KPIs are often used to measure revenue, but sales KPIs provide a more detailed understanding of the sales process by leveraging non-financial data. In defining its KPIs, the Sales team may consider, for example, the number of receiving valid leads or leads finalized.

Best Sales KPIs include:

Leads

Lead To Win Rate

MMR Growth Rate

Average Selling Price (ASP)

Finance:

Organizational finance KPIs collect financial metrics and provide insight into how an organization manages finances, ensures profitability, and identifies areas for improvement.

Best Financial KPIs include:

Gross Margin

Net Burn

Net Profit

Revenue growth

IT:

If a company desires operational excellence, it will want to evaluate the performance of its internal technology department.

Best IT KPIs example:

Total System Downtime

Number of Tickets/Resolutions

Number of Developed Features

Count of Critical Bugs

Back-up Frequency

What are KPIs reports?

The goal is to turn data into information, and information into insight.

Carly Fiorini

KPI results but also to transform them into analyzed and valuable insights that can inform the next steps we should take to improve and optimize business operations. That's what reports are for.

KPIs are tied up with a kind of KPI dashboard or reporting tools where your established KPIs are measured by frequently checking the current state with set targets. A KPIs report refers to a document or presentation highlighting a business or organization's key performance indicators (KPIs). It collects and reports performance data and metrics used to measure the success or progress of specific goals or objectives. A KPIs report is used to analyze the effectiveness of business operations, identify areas for improvement, make informed decisions, and track a business's overall performance. It helps companies to stay on track toward achieving their targets and make data-driven decisions to improve performance.

You may have a dedicated analyst responsible for collecting the data from KPIs. It can also be an engaged business leader responsible for "reporting" the measures. The business leader should be able to analyze the results, place the data in context, and explain how and why performance is good or bad. Finally, the prepared KPIs report aims to recommend actionable steps toward achieving business goals.

The benefits of using KPIs

KPI, as a part of the Business Intelligence process, can bring several benefits to the company that asses and analyze well-researched good measures:

• Measuring progress. The key performance indicators are used to assess your progress toward achieving your strategic goals and business objectives.
• Aligning efforts toward goals. Setting KPIs can help in encouraging your team to think about and achieve organizational goals.
• Employees engagement. KPIs can encourage employees to engage more in their work, duties, and collaboration. When employees understand the relationships between performance and its outcome, they become more focused on actions that deliver strategic results.
• Identifying strengths and weaknesses. They are used to evaluate how successful is an organization or a person in achieving a target or if measured results suggest we should make adjustments. 
• Improving accountability. KPIs are also used to make employees accountable for their performance. That means it helps measure their impact and how their work and its results play a role from the broader perspective. KPIs make people aware they are essential contributors to the company's success.
• Encouraging improvement. KPIs can also be used to measure business problems that can be defined. With its identification, businesses might constantly consider areas for improvement and foster an "always do better" attitude in their business culture. 
• Enhancing communication. KPIs are usually connected with the company mission. Therefore they can be used to encourage employees about the purpose of their work and its direct connection to the company mission. It helps communicate with them and establish the sense of the work on a deeper level. 

Conclusion

If you torture the data long enough, it will confess to anything.

Ronald Coase, "Essays on Economics and Economists"

Beyond question, it is worthwhile to note as KPI is one of the most important performance indicators. KPIs can be used successfully by sales and marketing teams, whether part of broader digital marketing campaigns or sales process metrics such as Customer Lifetime Value (CLV). In many other cases, KPIs provide valuable insights to help teams make data-driven decisions and improve their overall performance. Ultimately, every KPI should improve the bottom line, no matter whether it's tracking expenses or online activity.

KPIs, as business units, represent a data-driven approach that provides goals for the teams, milestones for measuring progress, and help focus on what matters most. With its deep analysis, the organization can collect valuable insights for decision-making, change its strategy and process accordingly, optimize operations, and, in this way, achieve success.