key-performance-indicators

What are key performance indicators?

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. 

As a result, KPIs are used when the business needs to evaluate its performance. This usually includes the performance evaluation of projects, plans, people, or departments.

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

Creating a KPI takes some work.

Successful key performance indicators can only be created once a business has a clear and structured understanding of its aspirations.

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.

net-promoter-score
The Net Promoter Score (NPS) is a measure of the ability of a product or service to attract word-of-mouth advertising. NPS is a crucial part of any marketing strategy since attracting and then retaining customers means they are more likely to recommend a business to others.

Operations

Time to market, employee churn rate, order fulfillment time.

Marketing

Monthly website traffic, blog particles published per month, landing page conversion rate.

KPIs vs. Metrics

KPIs are metrics an organization uses to track and measure progress toward business critical objectives.

The operative word here is “key” since the metrics chosen are the most important ones at hand and serve as measurable benchmarks.

Metrics measure organizational performance and health in the context of specific activities and processes. While metrics may be related to organizational objectives, they provide less clarity on whether the company is making suitable progress.

To understand the main difference between each measure, first consider that KPIs are a subset of metrics.

In other words, all KPIs are metrics, but not all metrics are KPIs.

Other differences relate to communication, intention, and focus.

KPIs vs. OKRs

While KPIs are metrics that any business can use to track its short, and long-term progress.

OKRs is a goal-setting method for organizations, which helps them set aggressive yet achievable goals shared across the company to make them visible, clear, and shared.

what-is-okr
Andy Grove, helped Intel become among the most valuable companies by 1997. In his years at Intel, he conceived a management and goal-setting system, called OKR, standing for “objectives and key results.” Venture capitalist and early investor in Google, John Doerr, systematized in the book “Measure What Matters.”

Thus, while KPIs are more generic, OKRs, need to be very specific, addressable, and achievable while also aggressive.

KPIs, on the other hand, can be picked based on the company’s structure, and it often helps to have a North Star, which is a focused KPI that helps steer the business in a given direction in the short term.

north-star-metric
A north star metric (NSM) is any metric a company focuses on to achieve growth. A north star metric is usually a key component of an effective growth hacking strategy, as it simplifies the whole strategy, making it simpler to execute at high speed. Usually, when picking up a North Start Metric, it’s critical to avoid vanity metrics (those who do not really impact the business) and instead find a metric that really matters for the business growth.

Both tools are extremely important for companies, and especially startups, to reach their goals and move fast.

Key takeaways:

  • 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.

Connected Analysis Frameworks

Failure Mode And Effects Analysis

failure-mode-and-effects-analysis
A failure mode and effects analysis (FMEA) is a structured approach to identifying design failures in a product or process. Developed in the 1950s, the failure mode and effects analysis is one the earliest methodologies of its kind. It enables organizations to anticipate a range of potential failures during the design stage.

Agile Business Analysis

agile-business-analysis
Agile Business Analysis (AgileBA) is certification in the form of guidance and training for business analysts seeking to work in agile environments. To support this shift, AgileBA also helps the business analyst relate Agile projects to a wider organizational mission or strategy. To ensure that analysts have the necessary skills and expertise, AgileBA certification was developed.

Business Valuation

valuation
Business valuations involve a formal analysis of the key operational aspects of a business. A business valuation is an analysis used to determine the economic value of a business or company unit. It’s important to note that valuations are one part science and one part art. Analysts use professional judgment to consider the financial performance of a business with respect to local, national, or global economic conditions. They will also consider the total value of assets and liabilities, in addition to patented or proprietary technology.

Paired Comparison Analysis

paired-comparison-analysis
A paired comparison analysis is used to rate or rank options where evaluation criteria are subjective by nature. The analysis is particularly useful when there is a lack of clear priorities or objective data to base decisions on. A paired comparison analysis evaluates a range of options by comparing them against each other.

Monte Carlo Analysis

monte-carlo-analysis
The Monte Carlo analysis is a quantitative risk management technique. The Monte Carlo analysis was developed by nuclear scientist Stanislaw Ulam in 1940 as work progressed on the atom bomb. The analysis first considers the impact of certain risks on project management such as time or budgetary constraints. Then, a computerized mathematical output gives businesses a range of possible outcomes and their probability of occurrence.

Cost-Benefit Analysis

cost-benefit-analysis
A cost-benefit analysis is a process a business can use to analyze decisions according to the costs associated with making that decision. For a cost analysis to be effective it’s important to articulate the project in the simplest terms possible, identify the costs, determine the benefits of project implementation, assess the alternatives.

CATWOE Analysis

catwoe-analysis
The CATWOE analysis is a problem-solving strategy that asks businesses to look at an issue from six different perspectives. The CATWOE analysis is an in-depth and holistic approach to problem-solving because it enables businesses to consider all perspectives. This often forces management out of habitual ways of thinking that would otherwise hinder growth and profitability. Most importantly, the CATWOE analysis allows businesses to combine multiple perspectives into a single, unifying solution.

VTDF Framework

competitor-analysis
It’s possible to identify the key players that overlap with a company’s business model with a competitor analysis. This overlapping can be analyzed in terms of key customers, technologies, distribution, and financial models. When all those elements are analyzed, it is possible to map all the facets of competition for a tech business model to understand better where a business stands in the marketplace and its possible future developments.

Pareto Analysis

pareto-principle-pareto-analysis
The Pareto Analysis is a statistical analysis used in business decision making that identifies a certain number of input factors that have the greatest impact on income. It is based on the similarly named Pareto Principle, which states that 80% of the effect of something can be attributed to just 20% of the drivers.

Comparable Analysis

comparable-company-analysis
A comparable company analysis is a process that enables the identification of similar organizations to be used as a comparison to understand the business and financial performance of the target company. To find comparables you can look at two key profiles: the business and financial profile. From the comparable company analysis it is possible to understand the competitive landscape of the target organization.

SWOT Analysis

swot-analysis
A SWOT Analysis is a framework used for evaluating the business’s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.

PESTEL Analysis

pestel-analysis
The PESTEL analysis is a framework that can help marketers assess whether macro-economic factors are affecting an organization. This is a critical step that helps organizations identify potential threats and weaknesses that can be used in other frameworks such as SWOT or to gain a broader and better understanding of the overall marketing environment.

Business Analysis

business-analysis
Business analysis is a research discipline that helps driving change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.

Financial Structure

financial-structure
In corporate finance, the financial structure is how corporations finance their assets (usually either through debt or equity). For the sake of reverse engineering businesses, we want to look at three critical elements to determine the model used to sustain its assets: cost structure, profitability, and cash flow generation.

Financial Modeling

financial-modeling
Financial modeling involves the analysis of accounting, finance, and business data to predict future financial performance. Financial modeling is often used in valuation, which consists of estimating the value in dollar terms of a company based on several parameters. Some of the most common financial models comprise discounted cash flows, the M&A model, and the CCA model.

Value Investing

value-investing
Value investing is an investment philosophy that looks at companies’ fundamentals, to discover those companies whose intrinsic value is higher than what the market is currently pricing, in short value investing tries to evaluate a business by starting by its fundamentals.

Buffet Indicator

buffet-indicator
The Buffet Indicator is a measure of the total value of all publicly-traded stocks in a country divided by that country’s GDP. It’s a measure and ratio to evaluate whether a market is undervalued or overvalued. It’s one of Warren Buffet’s favorite measures as a warning that financial markets might be overvalued and riskier.

Financial Analysis

financial-accounting
Financial accounting is a subdiscipline within accounting that helps organizations provide reporting related to three critical areas of a business: its assets and liabilities (balance sheet), its revenues and expenses (income statement), and its cash flows (cash flow statement). Together those areas can be used for internal and external purposes.

Post-Mortem Analysis

post-mortem-analysis
Post-mortem analyses review projects from start to finish to determine process improvements and ensure that inefficiencies are not repeated in the future. In the Project Management Book of Knowledge (PMBOK), this process is referred to as “lessons learned”.

Retrospective Analysis

retrospective-analysis
Retrospective analyses are held after a project to determine what worked well and what did not. They are also conducted at the end of an iteration in Agile project management. Agile practitioners call these meetings retrospectives or retros. They are an effective way to check the pulse of a project team, reflect on the work performed to date, and reach a consensus on how to tackle the next sprint cycle.

Root Cause Analysis

root-cause-analysis
In essence, a root cause analysis involves the identification of problem root causes to devise the most effective solutions. Note that the root cause is an underlying factor that sets the problem in motion or causes a particular situation such as non-conformance.

Blindspot Analysis

blindspot-analysis

Break-even Analysis

break-even-analysis
A break-even analysis is commonly used to determine the point at which a new product or service will become profitable. The analysis is a financial calculation that tells the business how many products it must sell to cover its production costs.  A break-even analysis is a small business accounting process that tells the business what it needs to do to break even or recoup its initial investment. 

Decision Analysis

decision-analysis
Stanford University Professor Ronald A. Howard first defined decision analysis as a profession in 1964. Over the ensuing decades, Howard has supervised many doctoral theses on the subject across topics including nuclear waste disposal, investment planning, hurricane seeding, and research strategy. Decision analysis (DA) is a systematic, visual, and quantitative decision-making approach where all aspects of a decision are evaluated before making an optimal choice.

DESTEP Analysis

destep-analysis
A DESTEP analysis is a framework used by businesses to understand their external environment and the issues which may impact them. The DESTEP analysis is an extension of the popular PEST analysis created by Harvard Business School professor Francis J. Aguilar. The DESTEP analysis groups external factors into six categories: demographic, economic, socio-cultural, technological, ecological, and political.

STEEP Analysis

steep-analysis
The STEEP analysis is a tool used to map the external factors that impact an organization. STEEP stands for the five key areas on which the analysis focuses: socio-cultural, technological, economic, environmental/ecological, and political. Usually, the STEEP analysis is complementary or alternative to other methods such as SWOT or PESTEL analyses.

STEEPLE Analysis

steeple-analysis
The STEEPLE analysis is a variation of the STEEP analysis. Where the step analysis comprises socio-cultural, technological, economic, environmental/ecological, and political factors as the base of the analysis. The STEEPLE analysis adds other two factors such as Legal and Ethical.

Activity-Based Management

activity-based-management-abm
Activity-based management (ABM) is a framework for determining the profitability of every aspect of a business. The end goal is to maximize organizational strengths while minimizing or eliminating weaknesses. Activity-based management can be described in the following steps: identification and analysis, evaluation and identification of areas of improvement.

PMESII-PT Analysis

pmesii-pt
PMESII-PT is a tool that helps users organize large amounts of operations information. PMESII-PT is an environmental scanning and monitoring technique, like the SWOT, PESTLE, and QUEST analysis. Developed by the United States Army, used as a way to execute a more complex strategy in foreign countries with a complex and uncertain context to map.

SPACE Analysis

space-analysis
The SPACE (Strategic Position and Action Evaluation) analysis was developed by strategy academics Alan Rowe, Richard Mason, Karl Dickel, Richard Mann, and Robert Mockler. The particular focus of this framework is strategy formation as it relates to the competitive position of an organization. The SPACE analysis is a technique used in strategic management and planning. 

Lotus Diagram

lotus-diagram
A lotus diagram is a creative tool for ideation and brainstorming. The diagram identifies the key concepts from a broad topic for simple analysis or prioritization.

Functional Decomposition

functional-decomposition
Functional decomposition is an analysis method where complex processes are examined by dividing them into their constituent parts. According to the Business Analysis Body of Knowledge (BABOK), functional decomposition “helps manage complexity and reduce uncertainty by breaking down processes, systems, functional areas, or deliverables into their simpler constituent parts and allowing each part to be analyzed independently.”

Multi-Criteria Analysis

multi-criteria-analysis
The multi-criteria analysis provides a systematic approach for ranking adaptation options against multiple decision criteria. These criteria are weighted to reflect their importance relative to other criteria. A multi-criteria analysis (MCA) is a decision-making framework suited to solving problems with many alternative courses of action.

Stakeholder Analysis

stakeholder-analysis
A stakeholder analysis is a process where the participation, interest, and influence level of key project stakeholders is identified. A stakeholder analysis is used to leverage the support of key personnel and purposefully align project teams with wider organizational goals. The analysis can also be used to resolve potential sources of conflict before project commencement.

Strategic Analysis

strategic-analysis
Strategic analysis is a process to understand the organization’s environment and competitive landscape to formulate informed business decisions, to plan for the organizational structure and long-term direction. Strategic planning is also useful to experiment with business model design and assess the fit with the long-term vision of the business.

Related Strategy Concepts: Go-To-Market StrategyMarketing StrategyBusiness ModelsTech Business ModelsJobs-To-Be DoneDesign ThinkingLean Startup CanvasValue ChainValue Proposition CanvasBalanced ScorecardBusiness Model CanvasSWOT AnalysisGrowth HackingBundlingUnbundlingBootstrappingVenture CapitalPorter’s Five ForcesPorter’s Generic StrategiesPorter’s Five ForcesPESTEL AnalysisSWOTPorter’s Diamond ModelAnsoffTechnology Adoption CurveTOWSSOARBalanced ScorecardOKRAgile MethodologyValue PropositionVTDF FrameworkBCG MatrixGE McKinsey MatrixKotter’s 8-Step Change Model.

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