Key
performance indicators: KPI meaning and examples
Often, acronyms like KPI get thrown around in the office and
it’s just assumed that everyone knows what they mean.
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”
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.
·
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