What is KPI? Why are KPIs important?
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:
- Business KPIs show how well a business is doing in meeting its preset objectives and also help to identify areas of stagnancy.
- Sales KPIs are used by sales experts to ensure they are meeting their key goals.
- Marketing KPIs show how the marketing department of an organization is faring.
- Financial KPIs show how a company is doing in terms of the profit made and asset acquire.
- Project Management KPIs are indicators that managers and supervisors of projects use to determine their progress status.
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.
What is the difference between KPIs and metrics?
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.
What makes a good KPI?
According to KPI.org, a good KPI should do the following:
- Provide objective evidence of progress towards achieving the desired result
- Measure what is intended to be measured to help inform better decision making
- Offer a comparison that gauges the degree of performance change over time
- Can track efficiency, effectiveness, quality, timeliness, governance, compliance, behaviors, economics, project performance, personnel performance, or resource utilization
- Are balanced between leading and lagging indicators
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:
- S - specific: The KPI should be specific enough to have essentially removed any chance for misinterpretation. This means you should clearly communicate the KPIs to the teams concerned.
- M - measurable: The KPI should be quantifiable so that it can be measured. This also means looking for quantifiable measurements that closely correlate with qualitative observations so that the performance can be better evaluated.
- A - achievable: The KPI should be achievable so that it gives a good description of a company’s performance and progress. Very low KPI targets will overestimate the company’s capability while unrealistically high KPI targets will underestimate the company’s progress.
- R - relevant: The KPI should be relevant and important to the company or the team concerned.
- T - time-bound: A deadline for achieving a certain KPI will help set a sense of urgency to achieve the targets.
- E - evaluated: The KPI is part of the evaluation of the company’s performance, not just after the deadlines set but also during the period before the deadline.
- R - rewarded: Hitting the KPI targets set should be complemented by rewarding the outstanding performers in the company.
These seven criteria should guide you in the process of selecting the right KPIs and their corresponding targets.
What KPIs should I use?
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.
What are some examples of KPIs used effectively?
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:
How many KPIs should I set?
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:
- The choice of KPIs is unique to the company and strategy: it's possible that the same company comes up with a different set of KPIs for every strategy they use.
- The choice of KPIs should be complemented with an explanation on how they are keys to managing the companies: KPIs also serve to help transparency to the reader. For example, a potential investor would be interested to know how the company performs before investing, and will look to KPIs to make a decision.
- The manner of reporting of KPIs affect how they can be understood: not all KPIs are relevant to the same segment of the company, and so one should carefully collect and report KPIs so that it reaches the right segment of the company.
- The choice of KPIs may need to be changed over time: oftentimes this may be necessitated by a change of strategy or long-term goal of a company. Sometimes it's due to the market forces and so the company should be ready to adjust accordingly.
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.
How are KPIs measured?
Understanding your KPIs involves defining the following:
- How the KPI helps determine whether an objective or a set of objectives is achieved
- The data that will be used in measuring KPIs
- How the KPI is calculated from the given data
- How frequent the KPI is measured
- The target value of KPI and the threshold value
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:
- Total cost of inventory goods by the company at the start of the period,
- Total expenses spent in acquiring the inventory goods during the period, and
- Total cost of the inventory goods by the company at the end of the period.
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!