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.
Net Promoter Score (NPS), average ticket resolution time, percentage of market share, average refund or return rate.
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 marketingstrategy 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.
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.
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 hackingstrategy, 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.
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Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
