How much do you know about Key Performance Indicators (KPIs)?
During strategy sessions or performance reviews, you’re bound to hear managers and executives using the term KPI in almost every other sentence but in many different contexts. This is mainly because they understand that KPI is an acronym that stands for Key Performance Indicator but don’t really know what it means. Considering the fact that these three letters define values that help companies improve performance, minimize errors and gain an edge over the competition, let the following FAQs formally introduce you to KPIs.
“What is KPI?”
A key performance indicator is a set of quantifiable measures which companies use to evaluate their own success or that of a particular activity they engage in. Also known as key success indicators, KPIs can be used across multiple levels of an organization. However, they differ between companies and industries as each has its own priorities, performance criteria, and strategic and operational goals.
“Aren’t Performance Indicators the same as Metrics?”
Before answering this question, you should know the meaning of the term ‘metrics’. By definition, a metric is a quantifiable measure that tracks and assesses the status of a specific process in an organization. Therefore, it is compared against established benchmarks or business objectives.
Now the reason you may confuse both terms is because the line between the two terms can get blurry with time, especially if the metric hugely impacts your company’s bottom line. The latter scenario is possible when the metric can provide recommendations for actions that help the company achieve its goals or succeed. As a result, a metric can be promoted to become a performance indicator.
To further simplify this concept, here’s an example. Sales Target is a metric as it measures the number of wins over a certain period and compares it to a target value and past performance. On the other hand, Sales Growth is a KPI as it analyzes the pace at which an organization’s revenue grows and helps decision makers plan their next steps.
“Can I get more KPI examples?”
Certainly; here are five more examples of KPI:
1. Profit – One of the most important performance indicators out there, profit helps organizations make better decisions. However, you’ll need to factor in two KPIs – gross and net profit margin – to learn how successful your company is at generation high ROI.
2. Customer Lifetime Value – Optimizing customer acquisition doesn’t only entail minimizing cost alone. CLV allows you to look at the value your organization receives from long-term customer relationship. Using this KPI helps you narrow down which channel to get the best customers from and for the best price.
3. Number of Customers – This KPI is quite straightforward. By determining the number of clients you’ve gained and lost, you can learn whether or not you’ve been able to meet customers’ needs.
4. Customer Support Tickets – A process related KPI, it allows companies to analyze the number of new tickets, resolved tickets and resolution time to improve the customer service department.
5. Employee Satisfaction – Happy employees are bound to work harder. Therefore, ensure your employees’ satisfaction through surveys to ensure both departmental and organizational health.
“So what characteristics should my KPIs have?”
In order to be effective, your key performance indicators should have the following characteristics.
1. Simple – Helpful KPIs should be simple in two ways – easy to comprehend and easy to measure. After all, an effective KPI should be capable of prompting decisions rather than additional questions.
2. Aligned – A performance indicator needs to descend from strategic, tactical and operational dashboards. This means that it should be related to the overall strategic goals as well as the daily operations affecting them.
3. Relevant – Relevance is an important characteristic of effective KPIs. Therefore, decision makers who need the specific indicator should define it. For instance, a marketing manager will need a KPI that targets how many products were sold during a sampling event. Only then can this measurement be more educated and the results be more successful.
4. Measurable – This characteristic is important to analyze positive and negative variations from a goal. Based on this, KPIs should be qualitative and quantitative and based on solid, focused goals.
5. Achievable – Setting unachievable goals causes many issues, but its biggest disadvantage is demotivating your employees. Therefore, consider goals that your employees can easily reach before challenging them with higher goals.
6. Timely – For KPIs to be considered timely, they need to be reported on a suitable timeline and analyzed in a relevant time period. Infrequent reports will make it difficult to accurately identify trends while reporting too frequently may reduce the value of collected data. In addition, act on the results in a timely manner. For example, don’t analyze an isolated month from the previous year to create a benchmark for the next month in the current year.
7. Visible – Your performance indicators should be visible across the entire organization to achieve growth and engage employees easily. While many departments may not share the same goals, the KPIs will increase accountability for future projects.
So now that you know what does KPI mean and the basics of creating your own, it’s time for you to establish your own and factor them in your deciison making process to ensure your company’s success.