A key performance indicator is a measurable value that demonstrates how effectively a company is achieving its key business objectives. Organizations use multi-level KPIs to measure their success in achieving their goals/tasks. High-level KPIs can focus on overall business performance, while low-level KPIs can focus on processes in departments such as sales, marketing, human resources, support, and others.
So what is the definition of KPI? What do KPIs actually mean? What are KPIs? Here are some definitions that might help:
- The Oxford Dictionary defines the KPI indicator, as: A quantifiable measure used to evaluate the success of an organization, employee, etc. in meeting performance objectives
- Definition of KPI provided by Investopedia: A set of quantifiable measures that a company uses to gauge its performance over time.
Thus, KPI stands for Key Performance Indicator, an indicator as precious as the action it inspires. Too often, organizations blindly adopt industry-recognized KPIs and then wonder why that KPI doesn't reflect their own business and fail to bring about positive change. One of the most important, but often overlooked, aspects of KPIs is that they are a form of communication. As such, they follow the same rules and best practices as any other form of communication. Concise, clear and relevant information is much more likely to be absorbed and acted upon.
When it comes to developing a strategy for formulating KPIs, your team should start with the basics and understand what your organizational goals are, how you plan to achieve them, and who can act on that information. This should be an iterative process involving feedback from analysts, department heads and managers. As this fact-finding mission unfolds, you will gain a better understanding of the business processes that need to be measured with a KPI dashboard and with whom this information should be shared.
How can we define a KPI indicator?
K - competitive advantage related to the strategic objectives, the way the business works
P (Performance) – performance directly, through precisely measured, quantifiable values, with predictable influencing causes;
I (Indicator) – comparability against various references, with orientation towards future progress
Defining key performance indicators can be difficult. The operative word in KPI is "key" because each KPI should relate to a specific business outcome achieved with a performance measure. KPIs are often confused with business indicators. Although they are often used for the same purpose, performance indicators must be defined in terms of critical or core business objectives. Follow these steps when defining a KPI:
- What is your desired outcome?
- Why does this result matter?
- How will you measure progress?
- How can you influence the outcome?
- Who is responsible for the business?
- How will you know you have achieved the desired result?
- How often will you review progress against the outcome?
For example, let's say your goal is to increase your sales revenue this year. You will call this indicator the 'Sales Growth Key Performance Indicator'. Here's how you might define KPIs:
- To increase sales revenue by 20% this year
- Achieving this goal will allow the company to become profitable
- Progress will be measured as an increase in income measured in money spent
- Hiring additional sales staff, promoting existing customers to buy more products
- The sales manager is responsible for this value
- Revenues will be increased by 20% this year
- It will be reviewed monthly
What is a SMART/INTELLIGENT KPI?
One way to assess the relevance of a performance indicator is to use SMART criteria. Letters usually stand for criteria Specific, Measurable, affordable, Helpful, related to Time. In other words:
- It's your goal Specific?
- You may Measure progress toward that goal?
- It is that goal realistic enough to be Accessible?
- How Relevant is that the goal for your company?
- What is the range of Time to achieve this goal?
- Be even SMARTER with your KPIs
SMART criteria can also be extended to be SMARTER with the addition of ASSESSMENT and Revaluation. These two steps are extremely important because they ensure that you are continually evaluating your KPIs and their relevance to your business. For example, if you exceeded your revenue target for the current year, you should determine whether this is because you set your goal too low or if it can be attributed to another factor.
How to write and develop KPI indicators
When writing or developing a KPI, you need to consider how that KPI relates to a specific business outcome or objective. Indicators should be customized to your business situation and should be developed to help you achieve your goals. Follow these steps when writing such an indicator:
Start by writing a clear goal for the KPI
Writing a clear goal for your KPI is one of the most important – if not the most most importance – part of the development of KPIs.
A KPI must be closely related to a key business objective. Not just a business goal or something that someone in your organization might think is important. It must be integral to the success of the organization.
Otherwise, you're targeting a target that fails to address a business outcome. That means, at best, you're aiming for a goal that has no impact for your company. At worst, it will result in wasted time, money, and other business resources that could have been more well directed elsewhere.
The key takeaway is this: performance indicators must be more than just arbitrary numbers. They must express something strategic about what your organization is trying to do. You can (or should) learn a lot about a company's business model just by looking at their KPIs.
Without writing down a clear goal, all of this will be lost.
Share your KPI with stakeholders
Your KPI is useless if it is not communicated correctly. How are your employees – the people tasked with realizing your vision for the company – supposed to meet your goals if they don't know what they are? Or perhaps even worse: not sharing your KPI risks alienating and frustrating your employees and other stakeholders who can't see where your organization is headed.
But sharing your KPIs with your stakeholders is a well-known thing (although even this too many organizations fail to do). More than that, however, they must be communicated immediately.
KPIs need context to be effective. This can only be achieved if you explain not only what you are measuring, but also why you are measuring it. Otherwise, they're just numbers on a screen that don't mean anything to you or your employees.
Explain to your employees why you measure what you measure. Answer questions about why you decided on one KPI over another. And most important of all? Listen. KPIs are not infallible. Nor will they necessarily be obvious to everyone involved. Listening to your employees will help you identify where the underlying goals of your organization are not being properly communicated to everyone.
Say you get a lot of questions about why profit isn't a KPI for your company. It's a reasonable belief for your employees. Making money is, after all, an essential part of what any business could do. But maybe revenue isn't very important to your organization at a given time. Perhaps you are looking to make major investments in research and development or are in a major acquisition period. Getting a lot of questions like this is a sign that you need to do a better job of communicating your KPIs and the strategic goals behind them.
And who knows: your employees might even give you some ideas on how to improve your KPIs.
Analyze key performance indicators on a weekly or monthly basis
Regularly checking your KPIs is essential to maintaining and developing them. Obviously, tracking your progress against KPIs is important (what other purpose would you have to implement them in the first place?) but just as important is tracking your progress so you can gauge how successful you are had in the development of indicators.
Not all KPIs are successful. Some have unattainable goals (more details below). Some fail to pursue the basic goal they were meant to achieve. Only through regular analysis can you decide if it's time to change your performance indicators.
Make sure your KPIs are actionable
To be able to turn your indicators into actionable indicators, a five-step process is required:
- Reviewing business objectives
- Analyzing current performance
- Setting short and long term KPI targets
- Reviewing goals with your team
- Assessing progress and readjusting it.
We've already covered most of these, but it's worth focusing on the need to develop both short-term and long-term goals. Once you've set a goal with a timeline that's further into the future (for example, the next few quarters), you can work backwards and identify the milestones you'll need to hit along the way.
Let's say, for example, that you want to reach 1,500 newsletter subscribers in the first 3 months of the year. You'll want to set monthly, bi-weekly, or even weekly goals to get you there. That way, you'll be able to continually reassess and change course as needed on the way to achieving your long-term goal.
You can divide the goals equally according to each month. In this case, there will be 500 subscriptions in January, 500 in February and 500 in March. However, you may want the information to be more specific. There are more days in January and March than February, so you may want to set a target of 600 subscribers for those months. Or maybe you routinely get more traffic on websiteweb in February (perhaps your business has a major commercial presence), so you decide to set a target of 800 subscribers that month. You can generate more traffic on the website by calling on the services of SEO optimization or online promotion.
Whatever it is, make sure you break down your KPIs to set short-term goals.
Evolve your KPIs to meet changing business needs
KPIs that never update can quickly become outdated.
Let's say, for example, that your organization recently launched a new product line or expanded internationally. If you don't update your performance indicators, your team will continue to chase targets that don't necessarily capture change in a tactical or strategic direction.
You may believe, based on your results, that you continue to perform at a high level. In reality, however, you may be tracking performance indicators that fail to capture the impact your efforts are having on your core strategic objectives.
Reviewing your indicators monthly (or ideally weekly) will give you a chance to fine-tune – or completely change their course.
You may even find new and possibly more efficient ways to reach the same destination or goal.
Check if the KPI is achievable
Setting achievable goals for your team is essential. A target that's too big risks encouraging your team to give up before they even get started. Set your target too low and you'll quickly find yourself wondering what you can do now that you've hit your annual goals just two months into the calendar year.
An analysis of your current performance is essential. Without it, you are left to blindly search for numbers that have no root in reality. Your current performance is also a good starting point to decide on areas you need to improve.
Start digging into the data you've already collected to establish a baseline for what you've accomplished in the past. Tools like Google Analytics are great for this, but so are more traditional accounting tools that track revenue and gross margin.
Update your KPIs as needed
KPIs are not fixed in nature. They must always evolve, update and change as needed. If you set and forget your metrics, you risk chasing goals that are no longer relevant to your business.
Get into the habit of checking in regularly, not just to see how you're doing against your KPIs, but which indicators need to be changed or dropped entirely.
For someone who has never developed a KPI before, all of this might sound exhausting.
But here's the good news: Once you've gone through this process a few times, it will be much easier to use it again in the future.
Bringing it all together
KPIs are generally an essential tool for measuring the success of your business and making the necessary adjustments to be successful.
However, the usefulness of individual performance indicators has its limits.
The most important part of any KPI is its usefulness. Once it has outlived its usefulness, you shouldn't hesitate to ditch it and start with new ones that better align with your business goals.
KPIs as part of your performance management framework
The most common elements among most performance management frameworks are setting goals, measuring performance, and managing all related activities.
According to the old classic adage, Goodhart's Law, "any observed statistical regularity will tend to collapse once pressure is placed on it for control purposes."
Charles Goodhart was an economist in 1975 whose research was used to help critique government decision-making processes, particularly regarding monetary policy. This concept was then generalized by Marilyn Strathern, "when a measure becomes a target, it ceases to be a good measure".
A performance indicator or key performance indicator is just one type of performance measurement. There are many performance management frameworks that look similar but are different. Each of these frameworks brings elements that can be brought together to contribute to data-driven success. Let's find out how.
Step 1: Aligning the business strategy
A popular theme in startups today is One Metric That Matters (OMTM). The key takeaway from this simple yet extremely powerful tool is that you need to have a deep understanding of your business model. to hone these values and align your entire organization.
Many will argue that sales is the most important metric when it comes to measuring the success of a business. The challenge with this value is the measured result.
Ask yourself this question: What is the one value that would help increase sales?
One answer to this question might be to track how many customers have integrated your product with 3 other apps. This measure could indicate the level of commitment, and their probability of choosing another product would probably be reduced.
The reason is that once customers are closed, the opportunity to choose another product or company decreases, which creates the right unit economy for your business to grow. So in this case, instead of looking at sales numbers, we would count a customer if and only if they logged in with 3 apps.
This is just an example and does not mean that there is only one value that you should be interested in! This framework helps you keep everyone focused on the one thing they should care about most.
Step 2: Cover all your bases
With business comes compromises.
You've probably heard the saying, “You can have cheap, good, or fast. But you can only choose 2”.
Let's start with a classic framework that helps navigate these trade-offs. The Balanced Scorecard (BSC) helps you break down the key areas of your business (insights) where activities need to be monitored.
The four perspectives that must be balanced are:
- Financial perspective
- The customer's perspective
- The internal perspective of the business process
- Learning and growth perspective
These four key areas of your business are interconnected and all need to be aligned. When one is affected, there is an impact on the other, in other words, there will be a trade-off.
Step 3: Implementation of the BSC strategy framework with OKRs
The Balanced Scorecard (BSC) strategy suggests that for each perspective you should develop objectives, measures (KPIs), set targets (goals) and initiatives (actions). A more recent framework that is gaining popularity is the OKR framework. Popularized by its use at Google, the OKR (Objectives and Key Results) framework is used to define and track goals and their outcomes. Many would argue that this framework sits somewhere between a KPI strategy and the Balanced Scorecard approach.
OKRs are used as a performance tool that sets, communicates and monitors goals in an organization so that all employees are focused in the same direction. The system encourages employee success through clear work objectives and key desired outcomes. The beauty of the system is that it provides a simple, practical and straightforward framework for defining, tracking and measuring goals, both as something to aspire to and as something that can be measured.
Step 4: Monitoring with a KPI dashboard
A KPI dashboard gives you an "outside" look at your business's performance in real time, so you can get a better picture of the health of your entire organization.
Common terms found in these frameworks that are worth understanding include:
Key Risk Indicator (KRI): a measure used in management to indicate how risky an activity is. Key risk indicators are indicators monitored by organizations to provide early warning of increased risk exposure in various business areas.
Critical Success Factor (CSF): is a management term for an element required by an organization to accomplish its mission. Critical success factors should not be confused with success criteria. Success criteria are most commonly used in project management to determine whether or not the project was a success. Success criteria are defined together with objectives and can be quantified using KPI indicators.
Performance measures: measures the behavior, activities and performance of an organization at the individual level rather than at the organizational level. For example, a person working in a call center might have the number of calls answered, average wait time, number of successfully processed calls, and average call duration as performance metrics.
Creating good KPIs for your organization is an iterative process.
10 criteria to consider when designing key performance measures
Consider this list of criteria when building your company's key performance measurement systems:
- Rely on quantities that can be influenced or controlled by an individual user or in cooperation with others
- Be objective and not based on opinion
- Be derived from strategy and focus on improvement
- Be clearly defined and easy to understand
- Be relevant with an explicit purpose
- Be consistent (in that they maintain their meaning over time)
- Be specific and relate to specific goals / targets
- Be precise – be exact about what is being measured
- Provide accurate and timely feedback
- Reflect the “business process” – i.e. both the supplier and the customer should be involved in defining the measure
Let's use Tesla as an example
Step 1: A Value That Matters (OMM), in Tesla's case, is the number of new cars delivered per quarter. This is an interesting topic for investors to gauge their success.
Step 2: To build as many cars as possible while maintaining quality, Tesla needs to balance its core assets on its balance sheet dashboard.
Financially: I can make the decision that delivering the cars is more important than making a profit on the cars.
Customers: Customers have submitted their orders and are waiting for their delivery, the longer it takes, the less happy they will be and the more likely they will cancel. So keeping customers happy is extremely important.
Step 3: Now that we have established some goals with performance indicators, we need to establish key results.
A customer KR that is a standard measure in supply chains might be: Delivery Performance (DP) is set to 90% as the measure of meeting the customer's promised delivery date.
Step 4: Using a KPI dashboard to monitor key results.
Dashboards often provide an aggregate view of the KPIs relevant to a particular objective or business process.
Three ways KPIs can help you build a better team
There's a temptation in the business world to assume that key performance indicators (KPIs) are the sole purview of "organizational leaders": Administrators, presidents, board members, and other C-suite executives who make important strategic decisions.
The reality couldn't be further from the truth.
KPIs, the primary metric that defines strategic success and acts as an indicator of areas that may need improvement, are an essential tool for developing your team and achieving high-quality results across your organization.
It might even provide an innovative solution to the intractable problem of employee engagement.
The problem with employee involvement
Hiring employees is something that many companies struggle with. Only 33% of workers in the United States (15% worldwide) define themselves as "engaged, enthusiastic and passionate about their job and their workplace" at work, according to Gallup.
This has a profound impact on the bottom line of many companies. To cite just one statistic: Organizations with a highly passionate workforce experience an average 20% increase in sales, Gallup says.
1) Unlocking the power of employee engagement
Hiring individuals is one of the most elusive – and misunderstood – concepts in today's business world.
Many executives struggle to cope in a world where employee expectations seem to be rising every day. Workers are more mobile than ever, moving from job to job at a pace that would have seemed impossible only decades ago. In a world where the other side of the fence is as tight as a Glassdoor.com search and articles about what workplace culture should grow on LinkedIn, it's also more informed than ever.
Served lunches or a football table in the break room might be enough to make things better in some workplaces, but these are more of a temporary fix.
So how can managers bring a disengaged workforce to life?
Of course, there is no clear cut solution. But one area that should receive greater focus is informing employees about and involving them in developing your organization's purpose.
Connecting employees to your organization's purpose
There's a story (which may or may not be true, but we'll leave that aside for now) that frequently makes waves in employee engagement blog posts. It refers to a visit by John F. Kennedy to NASA in the 1960s. The president approached a man who worked at the facility to ask what he did with his life.
"Mr. President", answered the porter, "I am helping a man to reach the moon. "
This response is often touted as the pinnacle of employee engagement. What business owner, manager, or executive wouldn't want each of their employees to feel this level of connection to their organization's purpose?
part of that, of course, comes with defining your organization's mission. "Making money" isn't enough. If you want an employee who is truly engaged, you need to find the unique quality that should make your employees want to get out of bed in the morning. (And no, "getting a paycheck" won't do).
Once you've decided, you need to find a way to show your employees how they can log into it.
This is where KPI indicators come into play.
Connecting employees to your organization's purpose
Ask any employee why they don't feel motivated at work and you'll likely get some variation on the same theme.
- They feel disconnected from the larger purpose of the organization.
- They fail to see any impact of their day-to-day efforts—the activities that take up most of their time—on the company's larger goals.
- I don't understand the strategic direction of the organization.
These are in some ways distinct issues. But in other ways, they all stem from the same problem: poor communication about strategy between management and lower-level employees.
KPIs help solve this problem.
KPI indicators are, by their nature, strategic. Because it differs from values, it helps companies really focus on what's important. Not everything can be a KPI. KPIs force you to focus on those metrics that truly underline your organization's ultimate goals.
These indicators force an organization not only to measure the performance of their strategy, but to decide what is their strategy in the first place. They show employees a lot about what really matters to management.
For example: a charity's profit is unlikely to qualify as a KPI. Why? Because a charity is a charity – it exists to achieve some kind of greater impact beyond just quick transformation. Such an organization would be much more concerned with the amount they invest in scientific research, perhaps, or the number of laws they have been able to change.
Wouldn't it be nice if your employees could see the end goals they are working towards?
2) The role of KPI indicators in the employee engagement process
Here are the top three ways adopting KPIs can help your organization build a better team.
They make everyone pull in the same direction
A problem that team managers constantly struggle with is bringing together the disparate elements of an organization to focus on key objectives. The sales team is concerned about the idea of attracting new customers and converting them into customers. Your product development team focuses on the latest technology and tries to bring it to market. Your HR team is concerned with filling any vacancy in the company and keeping your workplace as engaged as possible.
Adopting performance indicators can help bring everyone together.
By focusing on the key values that truly underpin business success, you'll be able to show employees the role their work plays beyond what they do on behalf of their departments.
They help connect employees' roles to organization-wide goals
Performance indicators are a great way to communicate strategy to your employees. They help you navigate the sometimes messy, cryptic, and ambiguous world of tactics and connect them to your organization's ultimate goals.
Many of us have experienced this. We get so caught up in our own work environments, trying as much as possible to make sure we stay on top of our own specific task sets, that we often fail to see why we're doing it in the first place.
Is it any wonder that frustration and ultimately demotivation sets in?
KPIs help eliminate this confusion. They step back from the chaotic world of tactics to identify the ultimate goals everyone is working towards.
Achieve key goals more effectively
Micromanagement creates a lot of problems for employee morale. But one of the worst is the "brake" it puts on employee creativity.
Let's say, for example, that you're a manager in charge of launching a new product with great potential. The fact that you want to make your product launch a success should go without saying. But there's a big difference between telling your team about the sales numbers you'd like to achieve and being directly interested in how you want the site to look, what marketing channels you'd like to use, and even when to send posts from social networks.
Some managers may think they are doing their job or even helping employees by giving them "suggestions." In reality, what they do is diminish the creativity of their workforce and probably frustrate them to no end.
No one expects managers to become completely obsessed with what their employees are doing. But the line between setting an end goal and communicating to your employees how to get there is a thin one.
The advantage of setting KPIs is that they allow you to set an expectation for what you want to achieve, while leaving the specifics to the creativity and ingenuity of your team.
3) How KPI decision making can take your team's engagement to the next level
- A debate about strategic direction beginsè: You'd be surprised how few organizations actually articulate their strategic direction in a clear, codified way. Instead, employees—including some fairly senior managers—are left to read between the lines to discern their organization's strategy. To make money? Sell widgets? "To make the difference"? Establishing these indicators helps you start a strategy discussion. It forces you (and your employees) to ask the question, "OK, what are we REALLY trying to do here?"
- It helps establish how the indicators connect to the strategic objectives: it is not enough to set a bunch of KPIs for your employees and say "here are the KPIs, achieve them". Without context, KPIs are just a jumble of meaningless numbers. Engaging in an exercise like this will allow employees to not only know what the performance indicators are, but to see how they connect to an organization's ultimate goals.
- Directly hires employees: people like to be listened to! Taking the time to listen to what your employees have to say is guaranteed to have inherent workplace engagement benefits.
- Are KPIs still relevant?
KPIs often have a negative connotation associated with them. Unfortunately, many business users are starting to see KPI monitoring as an outdated practice. This is because KPIs fall victim to the most human of all problems: lack of communication.
The truth is, they are only as valuable as you make them. KPIs take time, effort and employee engagement to live up to their expectations. Bernard Marr, best-selling author and expert in enterprise performance, sparked an interesting conversation on this topic in his article, "What the heck is a KPI?" The comments make it clear that while KPIs may not be in everyone's favor (depending on who you ask), their potential value remains in the hands of those who use them.
So why are KPIs so important?
Establishing key performance indicators for an organization usually happens during the strategic planning phase, whether you do it annually, quarterly or even more frequently, the goal is to ensure that the entire organization is aligned towards the same goals. Imagine a big boat with ten people, if 3 people think the boat should go left, 5 people think the boat should go right and 2 people think the boat should go back. What happens to the boat?
The boat will start to spin. Therefore, ensuring alignment from the top of the organization down to the frontline employees is the difference between a boat moving forward in unison and one going nowhere.
Key performance indicators in action
So, now that we've defined all of our KPIs, what do we do next?
Whether you distribute a KPI report daily, weekly, monthly, quarterly, annually, or all of the above, creating a good KPI reporting platform is key to your success. At Klipfolio we monitor a few KPIs, but then look deeper into all measures and the activities that that KPI can perform.
For example, if we're tracking monthly recurring revenue (MRR), we know that the number of quality leads, the number of attempts started, the number of success boards, and many other metrics will impact the success of monthly recurring revenue. So we track a number of new leads daily, generated with a report via email every morning at 8. We have a dashboard to track several key activities to ensure the start of product testing runs smoothly , in real time, and we track monthly the number of boards completed without any problems, by our team that takes care of each client's success.
KPI dashboard tools
As KPI dashboards become more prevalent in today's fast-moving organizations such as SaaS and cloud-based companies, they are typically a consumable format where an individual can review their data in real time, while reports tend to be specific snapshots over a period of time.
One of the most common use cases for KPI dashboards is at startups that share their core organizational performance measures to gain alignment with all employees. When you walk around their offices, TVs will be placed next to certain teams, highlighting real-time results such as the number of support tickets solved today or the number of new wins.
So what about key business performance measures?
If KPIs are your most important goals for your business, how do you align your organization to get there? Performance measurement as defined by Wikipedia says that "Performance measurement is the process of collecting, analyzing, and/or reporting information regarding the performance of an individual, group, organization, system, or component."
Therefore, enterprise performance measures can be viewed as a way of quantifying (ie measuring) the effectiveness and efficiency of an action or outcome that can align or influence key performance indicators. Before choosing and defining a business performance measure, managers and leaders must know how to write them. There is a lot of wonderful literature and research on this topic, including Andrew Neely at the University of Cambridge who has written about the design of performance measures.
You can also use a structured approach by going through a list of questions to consider as you build your performance measurement system.
Top 5 Most Frequently Asked Questions We Get About KPIs
What does KPI mean?
KPI or Key Performance Indicator translates as "key performance indicator".
What is a Key Performance Indicator (KPI)?
A Key Performance Indicator is a measurable value that demonstrates how effective a company is in achieving its business objectives or goals.
What is the KPI used for?
These indicators are used by individuals or companies that want to measure their success in achieving business goals. High-level KPIs focus more on overall company performance, while low-level KPIs focus on the processes taking place in company departments.
How can I develop such a performance indicator?
We recommend the SMARTER approach. SMARTER stands for Specific, Measurable, Accessible, Relevant, Time-bound, Evaluate and Reevaluate.
As you create an initial list of metrics that best demonstrate progress toward key business goals, ask yourself and/or your team the following questions about them:
- Your objective is Specific?
- You can Measure progress towards this goal?
- The objective can be reached in the mode Accessible?
- How Relevant is the goal for your organization?
- What is the range of Time to achieve this goal?
- How and when you will Evaluate short term progress?
- How and when you will revalue long-term progress
Why should I reevaluate my KPIs?
Goals may change over time, and performance and progress toward those goals will certainly change. As such, a KPI from three months ago may not be as relevant. This is why it is important not to set and forget about KPIs.