Key Performance Indicators – Definition
A Key Performance Indicator (KPI) is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use key performance indicators at multiple levels to evaluate their success at reaching targets. High-level KPIs may focus on the overall performance of the enterprise, while low-level KPIs may focus on processes or employees in departments such as sales, marketing or a call center.
For more detailed definitions, check out these resources:
What makes a KPI effective?
Now that we know KPI stands for key performance indicator it is only as valuable 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 fails to affect any positive change. One of the most important, but often overlooked, aspects of KPIs is that they are a form of communication. As such, they abide by the same rules and best-practices as any other form of communication. Succinct, clear and relevant information is much more likely to be absorbed and acted upon. KPIs are an effective tool to help build better performing teams.
In terms of developing a strategy for formulating KPIs, your team should start with the basics and understand what your organizational objectives are, how you plan on achieving them, and who can act on this information. This should be an iterative process that involves feedback from analysts, department heads and managers. As this fact finding mission unfolds, you will gain a better understanding of which business processes need to be measured with a KPI dashboard and with whom that information should be shared.
What is a SMART KPI?
One way to evaluate the relevance of a performance indicator is to use the SMART criteria. The letters are typically taken to stand for Specific, Measurable, Attainable, Relevant, Time-bound. In other words:
- Is your objective Specific?
- Can you Measure progress towards that goal?
- Is the goal realistically Attainable?
- How Relevant is the goal to your organization?
- What is the Time-frame for achieving this goal?
How to define a KPI
Defining key performance indicators can be tricky business. The operative word in KPI is “key” because every KPI should related to a specific business outcome with a performance measure. KPIs are often confused with business metrics. Although often used in the same spirit, KPIs need to be defined according to critical or core business objectives. Follow these steps when defining a KPI:
- What is your desired outcome?
- Why does this outcome matter?
- How are you going to measure progress?
- How can you influence the outcome?
- Who is responsible for the business outcome?
- How will you know you’ve achieved your outcome?
- How often will you review progress towards the outcome?
As an example, let’s say your objective is to increase sales revenue this year. You’re going to call this your Sales Growth KPI. Here’s how you might define the KPI:
- To increase sales revenue by 20% this year
- Achieving this target will allow the business to become profitable
- Progress will be measured as an increase in revenue measured in dollars spent
- By hiring additional sales staff, by promoting existing customers to buy more product
- The Chief Sales Officer is responsible for this metric
- Revenue will have increased by 20% this year
- Will be reviewed on a monthly basis
Being even SMARTER about your KPIs
The SMART criteria can also be expanded to be SMARTER with the addition of evaluate and reevaluate. These two steps are extremely important, as they ensure you continually assess your KPIs and their relevance to your business. For example, if you've exceeded your revenue target for the current year, you should determine if that's because you set your goal too low or if that's attributable to some other factor.
Check out our blog on How to write and develop KPIs.
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Are KPIs still relevant?
KPIs often have a negative connotation associated with them. Unfortunately, many business users are beginning to see KPI monitoring as an obsolete practice. This is because KPIs fall victim to that most human of all problems: lack of communication.
The truth is that KPIs are only as valuable as you make them. Key performance indicators require time, effort and employee buy-in to live up to their high expectations. Bernard Marr, best-selling author and enterprise performance expert, sparked an interesting conversation on this subject in his article, "What the heck is a KPI?" The comments make it clear that while key performance indicators may have fallen out favour (depending who you ask), their potential value remains in the hands of those that use them.
So then why are key performance indicators so important?
Setting key performance indicators for an organization usually happens during the strategic planning phase, whether you do that yearly, quarterly or even more frequently, the goal is to ensure the entire organization is aligned towards the same objectives. Imagine a large row boat with ten people, if 3 people think the boat is heading left, 5 people think the boat is supposed to be heading right and 2 people think the boat is supposed to turn around. What happens to the boat?
The boat will start spinning around. Therefore, ensuring alignment from top of the organization all the way to the front line employees is the difference between a boat moving forward in unison vs getting nowhere.
Key performance indicators in Action
Alright so now that you have defined all your key performance indicators now what?
Whether you share a KPI report daily, weekly, monthly, quarterly, annually or all of the above, setting up a good KPI report platform is key to your success. At Klipfolio we monitor a few KPIs but then track more deeply all the measures and activities that can effect that KPI.
For example, if we track Monthly Recurring Revenue (MRR) we know that # of quality leads, # of trials started, # of successful onboards and many other measures will impact the success of MRR. So we track a daily number of new leads created with an email report every morning at 8am. We have a dashboard to track several key activities to ensure the product trial starts are going smoothly in real-time and we track monthly the number of onboards completed successfully by the customer success team.
With KPI dashboards becoming more and more prevalent in today's fast moving organizations such as SaaS and cloud-based businesses, they usually represent a consuming format where an individual can review their data in real-time whereas reports tend to be specific snapshots in a moment of time.
One of the most common uses cases of KPI dashboard tools are in startups who share their core organizational performance measures to get alignment from all the employees. When you walk around their offices, TV's will be placed near specific teams highlighting the results in real-time such as number of support tickets resolved today or number of new wins.
So what about key business performance measures?
If key performance indicators are your most important objectives for your business, how do you align your organization to get there? Performance measurement as defined by Wikipedia says "Performance measurement is the process of collecting, analyzing and/or reporting information regarding the performance of an individual, group, organization, system or component".
Therefore, business performance measures can be viewed as a way to quantifying (i.e. measure) the effectiveness and efficiency of an action or outcome that can align or impact your key performance indicators. Before picking and defining a business performance measure, managers and leaders need to know how to write them. There is a lot of great literature and research on this topic including Andrew Neely from the University of Cambridge, who wrote in designing performance measures you can leverage a structured approach by going thru a list questions to consider as you build your performance measurement system.
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Top 22 questions to use when designing key performance measures
Review these questions as a checklist when building out your key business performance measurement systems:
- Be derived from strategy
- Be simple to understand
- Provide timely and accurate feedback
- Be based on quantities that can be influenced, or controlled, by the user alone or in co-operation with others
- Reflect the “business process” – i.e. both the supplier and customer should be involved in the definition of the measure
- Relate to specific goals (targets)
- Be relevant
- Be part of a closed management loop
- Be clearly defined
- Have visual impact
- Focus on improvement
- Be consistent (in that they maintain their significance as time goes by)
- Provide fast feedback
- Have an explicit purpose
- Be based on an explicitly defined formula and source of data
- Employ ratios rather than absolute numbers
- Use data which are automatically collected as part of a process whenever possible
- Be reported in a simple consistent format
- Be based on trends rather than snapshots
- Provide information
- Be precise – be exact about what is being measured
- Be objective – not based on opinion