How To Define Your KPIs
It’s a question asked by leaders at maturing startups and at established companies alike: “How do we define our organization’s KPIs?”
This fundamental question, though deeply important, is often asked before its two underlying assumptions are addressed:
- that there’s an established, agreed-upon objective in place
- that the core team is defining KPIs in the same way.
The result? One of an organization’s most important conversations—indeed a conversation that will allow the overall company and the departments within to better chart their course—gets off to a rough start.
Once these assumptions are addressed, defining your organization’s key performance indicators ultimately comes down to a two-step process:
- Determine your organization’s most important objectives
- Choose KPIs that are fixed, capable of forecasting, and that avoid common mistakes.
Before we dive in, it should be noted that although we’re speaking here at a company-wide level, many of these same principles can apply to departments that are working to define their KPIs.
Let’s take it from the top:
Defining organizational objectives
Charles H. Granger riffed off of the following quote in The Hierarchy of Objectives, his 1964 Harvard Business Review classic:
This can be taken in many ways, but perhaps chief among them is the idea that a team without an objective will have to work incredibly hard—either to reclaim that objective or because without an objective much of their work will be inefficient.
As setting organizational objectives is an entire subject and field of study unto itself, the following list is one tried-and-true way to get on the right track:
- Assemble the core team that will be responsible—keeping in mind that the larger this team gets, the more difficult it will be to keep each person in the loop and aligned.
- The core team interviews leaders from each department, asking them: "What do you see as the company’s long-term goals (say 5 years) and which quarterly steps will be most crucial for us to reach them?"
- Each individual from the core team answers that question and then conducts a collective SWOT (Strengths, Weaknesses, Opportunities and Threats) Analysis.
- Using all assets from the interviews and the SWOT Analysis, the core team collectively sets SMART (Specific, Measurable, Attainable, Relevant, Time-bound) organizational objectives.
Once a few key organizational objectives are established and agreed upon by the core team, it’s time to make sure there’s general alignment around what KPIs are (and what mistakes many organizations make when both defining and adopting them).
Defining KPIs and avoiding the most common mistakes
Here at Klipfolio, we’ve been thinking deeply about KPIs for over a decade. After many iterations, here’s the simple definition we’ve come to find most valuable:
A key performance indicator is a measurable value that demonstrates how effectively a company is achieving key business objectives.
Like the appearance of our business dashboards, there’s a lot going on under the hood that enables this simplicity. To us, a KPI must remain fixed yet be able to forecast. Let’s break each of those down:
By fixed we mean there’s a continuity and reliability among the measured outcomes. This means that an outcome at one point in time can reliably be compared to an outcome at another time.
For example, if in January and February you found that 1 out of every 100 people who started a trial of your product became a customer, this would be a fixed statistic from which you might want to build a key performance indicator.
Finding what can forecast
There’s no need to go full-on artificial intelligence here, but KPIs must, at some level, help you forecast a result.
Let’s say it seems the time between trial-to-customer becomes significantly shorter when you reach a certain Net Promoter Score. Seeing this correlation may allow you to forecast: increased customer success = decreased time between trial-to-customer.
Depending on what organizational objectives you’ve decided on, building a KPI around this forecast may be worth your time.
Common KPI mistakes
Even elite organizations struggle to avoid these mistakes. They can occur at various points of a company’s development—including when new team leaders are hired, when new objectives are established, and/or when old KPIs are held onto even as an industry undergoes rapid change. The most common KPI mistakes are:
- Reliance on intuition. This can arise from the overconfidence effect.
- Blindly adopting commonly-held best practices rather than creating your own.
- Bias toward the most recent information learned.
- Confusing lagging indicators (the easy-to-measure output) with leading indicators (the difficult-to-measure input).
The process for defining your organization’s KPIs
Jumping directly into defining your company’s KPIs can be tempting; it makes you feel like you’re taking control of a business that may feel out of control. But as a company that has thought much about this topic—and has certainly experienced our own struggles along the way—we’ve come to realize that patience in this process often prevails.
To recap, here’s the 2-step process we outlined:
Step 1: Determine your organization’s most important objectives
Keeping in mind that there are a variety of ways to do this, here's one method to get started:
- Assemble the core team
- Core team interviews leaders from other departments about goals
- Core team assesses goals and conducts a SWOT Analysis
- Core team establishes SMART organizational objectives
Step 2: Choose KPIs that are fixed, capable of forecasting, and that avoid common mistakes
Keeping in mind that your team must be aligned on how it defines KPIs, here are the critical components to keep in mind:
- Fixed means a continuity and reliability among measured outcomes
- Capable of forecasting means predicting based on a correlation
- Avoid the 4 most common mistakes and you'll be well on your way
Once you’ve defined your organization’s KPIs, you’ll then be tasked with the responsibility of determining which activities (and all departments must be included on this) will best drive towards those KPIs.
From there, you’ll need to regularly assess your objectives, KPIs and activities. They are all likely to change as you gather new insights into the market and/or your product, which means assessments can and should be done both at the company and departmental levels.
Ready to kickstart your creativity by browsing some of the most common KPIs in various industries and departments? Check out our comprehensive KPI Examples page.
Originally published February 27, 2017, updated Jun, 10 2019