According to Investopedia, key performance indicators (or KPIs) are a set of quantifiable measurements used to assess a company’s long-term performance.
KPIs indicate whether the company reaches or surpasses its targets and whether the company performs well against its competitors.
KPIs, therefore, are something that every aspiring business leader must learn.
However, not all KPIs are created equally. According to All KPIs, KPIs can be classified into five types:
These are KPIs that describe different aspects of a company’s operation. They matter at different levels and to different people within the company.
Thus, different departments are focused on different sets of KPIs that are all relevant to the same set of strategic goals of a company.
All KPIs are metrics, but not all metrics are KPIs.
The keyword is, well, key: the selection of KPIs should be part of planning a project or initiative so that the KPIs fit well with the objectives set by the company.
Selecting a good KPI expands the company’s competitive advantages by giving the company a birds-eye view of how they fare in the market.
According to KPI.org, a good KPI should do the following:
How can we make sure that the chosen KPI is a good KPI? We can define seven criteria that we can use to select and/or define a good KPI. We have a shortcut to these criteria: SMARTER.
A good KPI is not just smart, but it’s SMARTER.
What does SMARTER mean? As put in The Financial Times Essential Guide to Leading Your Team:
These seven criteria should guide you in the process of selecting the right KPIs and their corresponding targets.
The answer to this question depends on the strategic goals set and on whose team you are assessing the performance. For instance, financial departments will be interested in KPIs related to revenues, costs, and profit margins; while marketing departments will be interested in KPIs related to conversion rate and return on ad spend.
What you need first is familiarity with the common metrics used by companies in assessing their performances.
We have written excellent guides to metrics that can be used to set KPIs. Here is a short list:
Product performance metrics
Customer behavior metrics
Customer satisfaction metrics
Social media metrics
Email marketing metrics
Online advertising metrics
Website analytics metrics
After becoming familiar with the metrics, you can now start selecting important ones to watch for as your project or initiative progresses.
There is another important reminder in choosing KPIs:
Management should not feel compelled to create KPIs to match those reported by their peers and competitors. The overriding need is for the KPIs to be relevant to that particular company.
Here are some examples of case studies involving application of KPIs to either improve the day-to-day operations or to achieve strategic goals. At this point we should note that the idea of KPI is actually useful beyond the business setup: any organization that engages will benefit from the use of KPIs. Here are some cases to examples of KPIs implemented to achieve a goal:
PWC says that an average of four to ten (4-10) metrics are set by companies as KPIs. However, instead of trying to come up with four to ten KPIs, the following should be considered foremost:
All in all, the most important thing to do when setting KPIs is to make sure that the choice of KPIs should be well-justified by what it is supposed to assess, whether it's the strategy or a project or an initiative.
Understanding your KPIs involves defining the following:
All of these help define the manner in which the KPI is measured. For example, the cost of goods sold (COGS) is defined by measuring the cost of producing the goods sold by the company. One way to calculate it is by measuring the following:
Now that the following quantities are defined, one can now gather the relevant data to be able to define KPI. This involves creating a data integration system that collects data from various sources, stores them in a consistent format, processes them, and then calculates the metrics and displays KPIs in a single dashboard or a set of dashboards. (This in itself is a challenge!)
Luckily, we have already created a data integration system for you.
Consider trying Lido!
With a few clicks on your laptop, you can now access all the relevant metrics (especially your KPIs) without having to go through the technical details of doing so. Let us do the job for you!