“If you can’t measure it, you can’t manage it,” as Peter Drucker once put it. With technology making data gathering and analysis more accessible than ever before, many organisations try to make data-driven decisions. As a result, if you sit at an executive meeting, conversations are likely to revolve around data and Key Performance Indicators, also known as KPIs.
However, if you were to ask a room full of managers for a KPI definition, you wouldn’t get a single answer. While many professionals know that KPIs are used to measure performance, only a few know how to apply related business best practices. With this in mind, here is everything you need to know about KPIs.
What is a KPI?
A KPI is a type of measure used to evaluate the performance of a business, department, or individual against their objectives. By focusing on the most important metrics, KPIs can be an effective and efficient way to track performance. However, KPIs are only valuable when they are aligned with your goals. With this in mind, understanding how to design, use, evaluate relevant KPIs is key.
Why are KPIs important?
KPIs have gained popularity due to the benefits that can come with their implementation. Here are some of the reasons that you may want to introduce or refine your existing KPIs.
Focusing on important work
Many businesses have a solid vision, mission, and objectives, however, they fail to fulfil them. The problem? A disconnect between planning and implementation. KPIs can bridge this gap by aligning your goals with business needs.
Providing clarity through simplicity
Too many, complex, or vague goals and metrics are common business issues that can have catastrophic consequences. If you feel there is a lack of understanding in your business, KPIs maybe your best solution. Well-designed KPIs can provide clear, simple, and easy to understand direction.
Maintaining accountability
Clear RACIs are key to business success. On the other hand, lack of ownership is a disaster waiting to happen. The solution? Use KPIs to assign clear accountability for each objective at an individual, departmental, and organisational level.
Evaluating performance
If you evaluate business performance based on your intuition, you should probably keep reading. You see, setting clear and relevant goals doesn’t mean much unless it comes with the required data-based evaluation. KPIs can help you do just that, providing a straightforward way for measuring success.
Enabling informed decision making
Good business decisions are the cornerstone of success. However, even the best decision-maker will fail if they don’t have the right information in their hands. With this in mind, KPIs are crucial, as they can provide invaluable insights to enable informed decisions.
What are the different KPI types?
Before defining your KPIs, it may be helpful to understand the different categories of indicators out there. This way, you can focus on the ones that suit your needs best. Here are the main different types to keep in mind.
Lagging vs Leading KPIs
Lagging KPIs are associated with the past. You can use them to evaluate past performance, such as the production levels of a manufacturing plant. They are easy to measure and can be useful to evaluate processes and projects.
On the other hand, leading KPIs focus on the future. They are typically used to predict and determine future performance. As such, they may be trickier to design and measure due to their reliance on external factors.
Strategic vs Operational KPIs
Strategic KPIs are built to reflect an organisation’s strategy. In this sense, they are high-level and long-term-focused. These KPIs may not be fit for purpose to measure day-to-day performance.
In contrast, operational KPIs can be a great tool to evaluate your performance against tactical goals, as they focus on the short term and are more detailed. However, they aren’t the best indicators to link your daily work with your business strategy.
Organisational vs departmental vs individual
You can implement KPIs at different levels based on your needs. Typically, the highest level of KPIs are ones that apply to the whole organisation. However, you may need more detailed KPIs, too. In this case, these may be created at a departmental level. Lastly, linking individual goals to your KPIs can be an excellent way to boost accountability and responsibility throughout your workforce.
How to design your KPIs
While each business has its own unique needs to meet, you will be happy to know that there is a best practice process to design or improve your KPIs. Following the below steps will help you cover all the relevant bases.
- Establish your objectives
Successful KPIs are linked to business objectives. So, before you deep-dive into the specifics, make sure your high-level business strategy is crystal clear. For example, if you’re looking to increase your market share, you know your KPIs may have to do with selling more products or introducing new ones.
- Define your Key Performance Questions
Once the business goals are clear, it’s time to think about your Key Performance Questions. These questions should be linked to each objective. For example, here are some questions you may ask if you need to increase your market share:
- How can we own a bigger part of the market?
- What would success look like?
- What are our timelines for this goal?
- Collect the required data
Considering that KPIs are metrics, data is key. However, not any data. You need relevant, accurate, and accessible data. So, it’s time to consider how to meet these needs based on your key performance questions. Here is a process you can follow:
- Firstly, understand the data you currently have access to.
- Then, define your data needs and identify gaps.
- Once you do this, think of the best way to bridge this gap.
- Build your KPI formulas
Time to get specific. At this stage, we suggest defining the formula you will use for each KPI. We recommend adopting a holistic approach including specific decisions around the measurement methodology and frequency. Aim for a solution that provides the required information without being overly complex and time-consuming.
- Assign ownership for your KPIs
Designing KPIs doesn’t mean much unless there is a team accountable and responsible for their implementation. Clear ownership is key for your KPI-related processes. Apart from someone having overall accountability for each KPI, make sure to define responsible individuals for all parts of the process, including data collection, analysis, and presentation.
- Communicate your KPIs
Communication is key. On this basis, we suggest sharing your KPIs with relevant internal stakeholders. Making data available and accessible can make your workforce feel more invested in your goals and increase buy-in. For maximum impact, we recommend minimising jargon and complexity and opting for a simple presentation based on visual elements.
KPI best practices
Want to protect your KPIs from turning to vanity metrics? Keep in mind the SMARTER framework to ensure your performance indicators are fit for purpose.
Specific
Vague KPIs are bad KPIs. Instead, create specific ones that are laser-focused on your goals. £, %, and dates can be great tools for specificity.
Measurable
A metric that isn’t easily measurable is fundamentally flawed. This is why we suggest adopting KPIs using accessible and accurate data, increasing their efficiency and effectiveness.
Achievable
KPIs that are too easy to hit may not challenge your organisation enough. On the other hand, unrealistic goals don’t help either. In fact, they can harm morale and make your people feel alienated. We recommend setting ambitious but realistic KPIs that will boost your team’s productivity.
Relevant
When it comes to data, relevancy is key. And yet, there are many organisations that use redundant metrics. To avoid drawing in a sea of data, we suggest focusing on a few KPIs that are aligned with your goals.
Time-bound
In business, timing is everything. If you’re looking to maximise the value of your KPIs, make sure you include relevant deadlines. Also, set frequent milestones to ensure you stay on track.
Evaluate
Your business evolves and its needs are ever-changing. In the same sense, your best KPIs today may not serve you tomorrow. Keep on top of the game by evaluating them on an event or time-driven basis.
Readjust
When your KPIs become outdated, update them. Small changes can take place as part of a continuous improvement process. On the other hand, if your KPIs need major changes, pulling together a team to redesign them may make more sense.
Related:
KPI examples
Sales
- Net profit
- Gross profit
- Average sale size
- Repeat sales revenue
- Projected vs actual revenue
Marketing
- Website traffic
- Social media followers
- SEO ranking
- Click-through rate
- Cost per lead
HR
- Cost per hire
- Employee turnover
- Absenteeism
- Employee satisfaction
- Employee performance