What is a KPI?
Measure your performance against key business objectives.
Key Performance Indicators – Definition
A Key Performance Indicator is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs 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 in departments such as sales, marketing or a call center.
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What makes a KPI effective?
A KPI 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.
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 KPIs and with whom that information should be shared.
Being SMART about your KPIs
One way to evaluate the relevance of a KPI 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 a KPI can be tricky business. The operative word in KPI is “key” because it every KPI should related to a specific business outcome. KPIs are often confused with business metrics. Although often used in the same spirit, KPIs need to be defined according to critical 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 KPI your Sales Growth KPI. Here’s how you might define this 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
- The KPI 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.
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. KPIs 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 KPIs may have fallen out favour (depending who you ask), their potential value remains in the hands of those that use them.
Examples of common departmental KPIs
As noted above, KPI examples can be used to provide guidance, but you need to consider the specific goals and processes associated with your organization before adopting a template. These examples illustrate KPIs for several different departments.
Measures how effective your marketing campaigns are at generating increased revenue and sales. This marketing KPI highlights the importance of the relationship between marketing and sales for your organization.