Key performance indicators (KPIs) are measurable values that determine whether an organization is achieving key objectives. KPIs will depend upon a business-specific context, as each company and industry will have its own core metrics to track. Indeed, the choice of the right KPIs that can positively affect the business’s long-term perspective is critical.
Understanding key performance indicators
Key performance indicators are critical indicators of progress toward the desired result.
They also provide a focus for strategic development and create an analytical foundation for decision-making. Perhaps most importantly, KPIs help a business focus its resources on actions that matter most.
Key performance indicators are quantifiable, outcome-based statements. They are used to simplify the often complex process of performance tracking by reducing a large number of measures into a few select “key” indicators.
The anatomy of a key performance indicator
Each key performance indicator must contain the following elements:
- A measure – what is being measured? Measures can be strategic or operational. They can also be associated with risk and project or employee performance.
- A target – what is the business seeking to achieve? Targets are usually numerical values that are sensitive to time or other constraints.
- A data source – the data that underpins the target must be robust. There must be no room for interpretation in how each KPI is tracked and measured.
- Reporting frequency – to some extent, reporting frequency will depend on the particular needs of the organization. But it is good practice to report at least once a month.
Creating a key performance indicator
After this has been determined, it is a matter of following these steps:
- Establish a clear objective. For example, a business that wants to become a market leader must clearly define what it will take to get there. It might involve a 5% increase in revenue each financial year or the expansion of a product range by 15 products.
- Define the criteria for success. In other words, what will the target be? Is it attainable in the desired timeframe? How will progress be monitored? Early-stage KPI monitoring is most effective when decision-makers focus on long-term targets with midterm monitoring.
- Collect data. Where is the data located? Are there previous KPIs that might hold relevant information? Here, the business needs to collect and collate data into a central location.
- Build the KPI formula. While some KPIs measure one metric, most will rely on a combination of metrics incorporated into a single calculation. In any case, it is important to build and then test formulas to make sure the results are what the business expects.
- Present KPIs. At some point, KPI data will need to be synthesized into a form that is easily understood by others. A host of KPI software and applications can help the business create presentable graphs and charts from its results.
Some common examples of key performance indicators
Here are some common examples of KPIs grouped according to department:
- Sales – number of new contracts signed per period, average conversion time, number of qualified leads in a sales funnel.
- Finance – revenue growth, gross profit margin, operational cash flow, current accounts receivables.
- Customer service – Net Promoter Score (NPS), average ticket resolution time, percentage of market share, average refund or return rate.
- Operations– time to market, employee churn rate, order fulfillment time.
- Marketing – monthly website traffic, blog particles published per month, landing page conversion rate.
- Key performance indicators are measurable values that help an organization determine whether it is meeting stated objectives.
- Key performance indicators are comprised of four elements: a measure, a target, a data source, and a defined reporting frequency.
- Key performance indicators can be used to track performance across a range of departments, including sales, finance, customer service, operations, and marketing.
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