Key performance indicators: KPI meaning and examples

 KPI stands for key performance indicator. It’s a number that allows you to measure whether you’re meeting your objectives or not.

 Having a way to measure performance in your business is critical to its success. The problem is that it can be hard to tell what metrics you should use or how to measure them. That’s where KPIs come in.

 The acronym KPI stands for key performance indicator. KPIs are performance indicators that give you a way to measure your business’ progress against your most important strategic objectives.

 In this article, we will explain what KPIs are, and how you can use them in your business. Plus, we will provide you with some examples of KPIs that you can start to track in your own business.

 What is a KPI?

Often, acronyms like KPI get thrown around in the office and it’s just assumed that everyone knows what they mean.

 So first, let’s clear up exactly what the KPI meaning is. KPIs give your organization or department milestones and goals to aim for. They allow you to tell if you’re making progress. They also give real data points to management that can be used when making decisions.

At the highest level, you can have a business KPI that assesses the whole company’s performance. You can also have smaller, more specific KPIs that examine the effectiveness of specific teams or departments.

Your finance, marketing, HR, and IT departments likely all have their own KPIs they’re trying to hit. On social media, your KPIs might be things like how many retweets you get, how many followers you have, or your conversion rate. If you’re working in a cloud call center, a key KPI may be your first call resolution rate. It could also be sales per agent, speed of answers, or other similar metrics.

 

Why use KPIs?

Using KPIs can be crucial if you want to stay on track and meet the goals set by your organization. Here are some specific reasons why KPIs are so useful.

·       Keep people accountable: key performance indicators can track progress down to the individual level. One of the KPIs in your sales department might be the number of monthly sales closed per salesperson. That will make it clear how much each person is contributing to the success of the department.

·       Allows you to make adjustments: now you’ve got accountability. You can start to adjust for anyone or anything that is causing you to fall short of your KPIs. That doesn’t necessarily mean firing the weakest performers on your team. It does mean that managers can use KPIs to provide additional training and guidance to those who are struggling.

·       Make sure everyone is on the same page: different people may have differing opinions of what success means if left to their own devices. For example, if an IT worker and a finance person are working together on a project, they may have very different ideas on measuring success. KPIs give everyone common goals to work toward. They keep everyone moving toward those goals instead of going off and doing their own thing.

·       Assess the health of your business: KPIs give you an objective way to see how your organization is performing. You can use financial KPIs to indicate how profitable your business is. Or you can monitor sales and other KPIs to see if they’re trending up or down over time.

Types of KPIs

As we’ve alluded to, there are tons of different key performance indicators. It’s up to you to decide which you want to use within your organization. All KPIs are used to assess whether you’re meeting the strategic goals that you’ve set. But that’s where the similarity ends.

Some KPIs are high-level, others are low-level within your organization.

Some KPIs may be focused on the short term and are measured in weeks or months. Others are more long-term and may be measured in years or more. Here are some of the most common categories that KPIs fall into:

·       Operational: these are KPIs that measure processes and efficiencies within an organization. Think of them as KPIs that indicate how things are going day to day. Naturally, they’re measured on a shorter timeframe than other KPIs.

·       Strategic: a strategic KPI is in direct contrast to an operational KPI. These key performance indicators focus on more long-term, big-picture goals within an organization. A strategic KPI can be something like revenue. A CEO can look at just a couple of KPIs and get a strong idea of how the organization is performing overall.

·       Leading or lagging: a given KPI can be either a leading or lagging indicator. A lagging KPI tells you about something that has already happened. A leading indicator attempts to provide you with a heads-up and predicts what’s likely to happen in the future. All organizations need to use a mix of both key performance measuring types.

·       Qualitative or quantitative: most KPIs are quantitative indicators. That means they can be easily measured and assigned a number. A qualitative KPI cannot be easily assigned a number. For example, something like employee satisfaction.

 

KPIs at different business levels

KPIs can be used all the way up and down a company’s structure. But it’s easiest to break them out into 3 main categories.

1.     Company-level KPIs

·       Company or organizational-level KPIs are centered around the overall health and performance of a business.

·       They might be things like employee retention rates or the lifetime value of a customer.

2.     Department level KPIs

·       Different departments and teams have very different KPI requirements. Different teams within your organization are attempting to accomplish very different things, after all. Your accounting people need very different indicators than your human resources department.

·       Some departments, like human resources, have KPIs that are harder to define. For example, employee turnover or happiness would be important HR KPIs. They may also measure quantitative metrics, like how long it takes to hire someone.

·       The marketing department of a company often has some of the most data-driven and complicated KPIs.

·       They typically need specialized tools to track and analyze marketing KPI metrics. These tools help them discern complicated data like the conversion rates of marketing campaigns and other KPIs.

3.     Project level

·       The KPIs of a project will be much more honed and specialized, at least compared to those at an organizational or departmental level.

·       Key performance indicators are needed to analyze the performance before, during, and after a project.

·       In order for a project to be successful, there must be goals set for it and progress tracked against each goal.

·       Creating project-level KPIs is often one of the first steps when a new project is being put together.

 

How to create a KPI

·       Creating useful KPIs is key to the success of your organization.

·       As the old computer science adage goes, “garbage in, garbage out.”

·       Your key performance indicators need to be tied to a strategic objective if they’re going to be useful.

·       Measuring a KPI that doesn’t provide you with useful information for making business decisions isn’t helpful. In fact, it’s a waste of time.

·       So it’s important to know what you want to measure and how you’re going to measure it, as well as how the resulting data will be used.

·       Here are some things to keep in mind when creating a KPI.

 

“When performance is measured and reported, the rate of improvement accelerates”

— Thomas Monson

 Decide on the type of KPI that you’re going to create

In the section above, we discussed a variety of different KPI types.

·       You’ll need to decide what level of your organization you want these key performance indicators to reflect. Do they deal with the entire organization, a specific team, or a project?

·       Also, keep in mind if they’re more operational or strategic in nature.

·       Discuss how your KPIs will be used

·       If you aren’t sure what type of KPI you’re creating yet, talk to the people who will actually be using them.

·       The person you’re reporting information to likely has specific metrics in mind that they want to see measured. Talk to them about how they’ll use the KPIs you provide them with, as well as what they’re looking to achieve.

 

Make your KPIs clear

·       Try to keep your KPIs clear of too much jargon or other confusing details. It will make them easier to understand.

·       Everybody in your organization should be able to understand what your KPIs are measuring and how to interpret them.

·       People will make better decisions if they can understand what the KPIs are supposed to show.

 

Communicate and make people aware of KPIs

·       A KPI has no value if people don’t know it exists.

·       Imagine how differently your salespeople will perform if they know there’s a specific sales KPI they’re aiming for, versus just not mentioning it and then seeing how they measure up at the end of the year.

·       Communicating your key performance indicators makes it clear to everyone what you’re working toward.

·       Don’t just inform people about KPIs at the beginning of a new project or once a year. They need to be constantly reminded of what the organization’s goals are.

 

Avoid creating too many KPIs

·       The data analysts in your organization may love having tons of KPI data to sort through. It provides them with tons of useful information.

·       But keep in mind that regular employees are going to be the ones having to measure and track all of that data.

·       If you overload employees with KPIs, they could spend more time tracking activities instead of actually performing them.

·       Pick around 5 key performance indicators that are most relevant to your department or project.

·       Keep refining KPIs over time

·       When you first create a KPI, you might not know what success looks like.

·       Say you measure shrinkage within your company for the first time. That’s the amount of inventory lost due to being damaged, stolen, or through clerical errors.

·       You might be able to look up the average shrinkage for your industry when creating your KPI, but you won’t know what is normal for your business until you’ve been tracking it for a while.

·       You’ll need to keep checking on how your KPI is progressing and refine it over time.

 

 

Questions to ask when creating a KPI

Still struggling with creating a key performance indicator? Here are some questions that you should ask yourself during the creation process.

·       What outcome are you trying to achieve?

·       Why is this outcome important?

·       Who is responsible for the outcome?

·       How can the outcome be influenced?

·       How will you measure progress?

·       How often will you measure progress?

·       How will you know if you achieve your goals?

 

Creating better KPIs

·       Your KPIs may be falling short and not providing the useful information and results you want. In that case, you need to re-evaluate them and adjust.

·       An effective KPI is one that:

·       Measures what it’s intended to measure

·       Allows for better decision making

·       Is aligned to strategic goals

·       Provides objective and unbiased data

·       Shows progression — or lack thereof — toward the desired goal

·       Offers a balance between lagging and leading KPI types.

 

Here are 3 key factors to keep in mind when creating your KPIs:

1.     The iterative process

·       Part of creating great KPIs is iteration.

·       To start this process, you need to have been using a particular key performance indicator for a while. You can re-evaluate and revise them when you see how they’re performing.

·       Iteration is essentially taking the outcome of your KPI and using that to improve or change your KPI for the next cycle.

·       You may need to revise KPIs over time based on the needs of your organization or customers, as well as overall changes in the market or your industry.

·       Set some time aside regularly to review your KPIs. Look at how they’re performing and whether you need to make any tweaks to them.

·       If you change your KPIs, be sure to keep your entire team informed. They’ll need to be aware of any changes you implement.

·       Sometimes you may find that old key performance indicators are simply no longer useful or relevant. At that point, you’ll need to stop using them and consider a different KPI that you could measure instead.

 

2.     Learn from your past failures

·       If you fail to meet a key performance indicator, you must understand why.

·       There’s no point in creating a KPI and then just falling short of it year after year.

·       If you don’t achieve a KPI, you’ll need to figure out why not and iterate for the future.

·       Was the original KPI unrealistic? Is there something inefficient about the KPI-related process that needs to be improved? You’ll need to investigate to find out.

 

3.     Creating better KPIs with the SMART structure

·       The SMART acronym is often used in goal-setting.

·       It can be used for measuring the various goals associated with employee performance, as well as personal development and project management.

·       However, you can also benefit from using the SMART acronym when creating key performance indicators.

·       The SMART acronym stands for:

o   Specific: make sure your KPI is not too vague

o   Measurable: how will you measure progress?

o   Attainable: is it realistic that you’ll achieve this KPI?

o   Relevant: is this KPI useful for the organization?

o   Time-bound: what is the time frame to achieve this KPI?

·       An example of a bad KPI that doesn’t follow the SMART formula might be something like: “Increase sales.” It’s not very specific, and there’s no time frame associated with it.

·       A better SMART KPI would be something like “Increase sales by 10% by the end of the year.” It provides you with a measurable target to aim for and a time frame that it needs to be achieved within.

 

KPI examples

Every area of your business has its own KPIs that will be most important for them to track. Here are some examples.

·       Sales

o   Average order value

o   New qualified opportunities

o   New inbound leads

o   Sales volume by location

 

·       Marketing

o   Conversion rates

o   Sales qualified leads

o   Lifetime value of customer

 

·       Finance

o   Gross profit margin

o   Net profit margin

o   Operating expense ratio

o   Working capital ratio

 

·       IT

o   Ticket resolution time

o   Open support tickets

o   Uptime / downtime

o   Total support tickets

 

·       Customer Service

o   Number of calls handled per hour

o   Customer satisfaction (improved with helpdesk software)

o   Average call wait time and average handle time

o   Cost per conversation

o   Support agent with most sales per month