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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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:

  1. Sales – number of new contracts signed per period, average conversion time, number of qualified leads in a sales funnel.
  2. Financerevenue growth, gross profit margin, operational cash flow, current accounts receivables.
  3. Customer service – Net Promoter Score (NPS), average ticket resolution time, percentage of market share, average refund or return rate.
  4. Operations– time to market, employee churn rate, order fulfillment time.
  5. Marketing – monthly website traffic, blog particles published per month, landing page conversion rate.

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 Business Frameworks

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.”
First proposed by accounting academic Robert Kaplan, the balanced scorecard is a management system that allows an organization to focus on big-picture strategic goals. The four perspectives of the balanced scorecard include financial, customer, business process, and organizational capacity. From there, according to the balanced scorecard, it’s possible to have a holistic view of the business.
The theory was developed by psychologist Edwin Locke who also has a background in motivation and leadership research. Locke’s goal-setting theory of motivation provides a framework for setting effective and motivating goals. Locke was able to demonstrate that goal setting was linked to performance.
A SMART goal is any goal with a carefully planned, concise, and trackable objective. To be such a goal needs to be specific, measurable, achievable, relevant, and time-based. Bringing structure and trackability to goal setting increases the chances goals will be achieved, and it helps align the organization around those goals.
Businesses use backcasting to plan for a desired future by determining the steps required to achieve that future. Backcasting is the opposite of forecasting, where a business sets future goals and works toward them by maintaining the status quo.
Moonshot thinking is an approach to innovation, and it can be applied to business or any other discipline where you target at least 10X goals. That shifts the mindset, and it empowers a team of people to look for unconventional solutions, thus starting from first principles, by leveraging on fast-paced experimentation.

Read Next: Eisenhower Matrix, BCG Matrix, Kepner-Tregoe Matrix, Decision Matrix,RACI Matrix, SWOT Analysis, Personal SWOT Analysis, TOWS Matrix, PESTEL Analysis, Porter’s Five Forces.

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