What Is KPI?
The acronym KPI stands for ‘key performance indicator.’ A key performance indicator (KPI) is a verifiable measure that indicates how well a company meets key business objectives. KPIs are used by businesses to analyze their progress towards targets.
One of the buzzwords going around in every industry is KPI. Companies are more and more focused on setting targets and achieving them. KPIs help in measuring that achievement.
KPI stands for Key Performance Indicator.
A key performance indicator (KPI) is a measurable metric that indicates how well a company meets vital business objectives. Businesses develop KPIs to evaluate their success at meeting targets.
Let’s understand what KPI is in detail and how you can set it up through this post.
Understand the Meaning of KPI and Metrics
Product managers commonly confuse KPIs with metrics. However, the two are pretty different.
The first thing to remember is that KPIs and metrics are types of ‘measure,’ but they have different scopes.
We use metrics to quantify many aspects of company activities at a given time.
On the other hand, KPIs represent strategic goals and measure performance against a predefined target.
These targets have a range of performance. You can decide them in your strategy, planning, or budget meetings.
KPIs are exact parameters used to track company objectives.
A metric can be anything that can be quantified. But when you set specific objectives and measures that indicate their achievement, it’s a KPI.
In short, all KPIs are metrics. But, not all metrics are KPIs.
What Are the Types of KPI?
A key performance indicator is a measurable indicator. However, most people associate it with quantity. Since KPIs measure out goals against their success, they are of various types.
Here Are Some Common Types of KPIs-
The simplest straightforward KPIs are quantitative indicators. We solely measure them with numbers. One can classify quantitative KPIs into two types: continuous and discrete.
Continuous quantitative indicators can take on any value (including decimals) throughout a range and can include metrics such as Miles Traveled (for a mobile service or shipping company) or Time Spent Per Call (for call centers and help desks).
Complaints, accidents, and client acquisition numbers are all examples of discrete quantitative measures since they are whole numbers.
Qualitative indicators are those which we cannot quantify. They are usually associated with intangible items such as experiences or sentiments.
A typical example of qualitative key performance indicators is employee or customer satisfaction surveys.
Leading indicators are used to forecast the outcome of a process change and corroborate long-term data trends.
In a nutshell, leading indicators consider what can happen, such as when you launch a new product or service.
Forecasting such indicators might help you make more informed decisions about forthcoming market trends or client wants. They are not sufficient indications of success in and of themselves.
Lagging indicators measure outcomes after an action has occurred to assess the success or failure of the effort.
Companies frequently use them to assess historical performance or the impact of business activities.
Businesses might use lag indicators to identify whether their business decisions achieved the desired outcome.
Input indicators measure the resource consumption to generate a specific output.
Input indicators calculate the number of resources required for a business process or project.
You need them for tracking resource efficiency in large projects with many moving components. Still, they are also beneficial in smaller projects. Input indicators are most helpful for resource capacity planning.
Staff time, cash on hand, and equipment necessary are some examples of input indicators.
Output indicators assess the success or failure of a business process or decision.
Output indicators are one of the most common types of KPIs. Revenues, profits, and new clients obtained are examples of output KPIs.
They are usually quantitative in nature but can be qualitative as well.
Some other types of KPIs include- process indicators, practical indicators, directional indicators, and actionable indicators.
Why Are KPIs Important?
KPIs act as a reference point to help your organization achieve its objectives. And the pursuit of your objectives depends on the consistent and targeted delivery of outcomes.
Here’s why KPIs are important-
Connecting Vision with Strategy
KPIs aren’t just numbers that measure how much money you’re making. Because KPIs are so varied, they help connect your company vision with your business strategy.
“I want to make it big” isn’t enough. It is wise to use KPIs to determine what that ‘big’ means and measure whether you achieve it. This also helps align everyone in the organization toward the same vision.
KPIs determine the collective goals and specific results that individuals and teams need to work on. This helps engage employees and foster cross-functional collaboration as well.
KPIs bring employees together to work toward a single objective.
Employee engagement, a problem that many businesses deal with, can directly influence your bottom line. Individual or organizational KPIs are a valuable technique for measuring performance, which directly links to employee engagement.
KPIs aid in the resolution of inadequate communication regarding strategy between management and individual contributors.
Individual and Collective Accountability
Individual performance management frameworks are traditionally concerned with creating objectives, monitoring performance, and managing the associated tasks. So, why not use KPIs for performance management as well?
Performance KPIs will assist employees in measuring their influence and how their everyday activities contribute to the achievement of bigger organizational goals.
Since KPIs are so defined, they help pinpoint who is accountable for which outcome.
Best Practices To Develop Effective and Relevant KPIs
Developing effective and relevant Key Performance Indicators (KPIs) is crucial for any organization to measure progress toward achieving its goals. Here are some best practices for creating compelling and appropriate KPIs:
- Identify your business goals: KPIs should be directly linked to the organization’s business goals. Therefore, the first step is to identify the business objectives and determine what you want to achieve.
- Select the most relevant KPIs: After identifying business goals, select the KPIs that are most relevant to those goals. Ensure that the KPIs are specific, measurable, achievable, relevant, and time-bound (SMART).
- Use both lagging and leading indicators: Lagging indicators measure the results of past actions while leading indicators provide insights into the potential outcomes of future activities. Combining both hands provides a more comprehensive view of progress toward the goals.
- Involve stakeholders: Involve all relevant stakeholders in the KPI development process to ensure their buy-in and to incorporate their perspectives into the KPIs. This includes managers, employees, and customers.
- Please keep it simple: Don’t overwhelm yourself or others with too many KPIs. Focus on the most critical ones that directly impact business objectives. Fewer KPIs are easier to track, understand, and communicate.
- Review and refine: Regularly review KPIs to ensure they remain relevant and effective in measuring progress toward business objectives. If necessary, refine them based on feedback and changing business needs.
- Communicate results: Share the results of KPIs with stakeholders regularly, and use this information to make informed decisions about improving processes and achieving business objectives.
How To Set up a Performance Review System With KPIs?
The correct KPI system for performance review assists you in aligning your business goals on the right track, and the KPIs must align with performance measurements.
Make sure the KPIs for your performance review system are SMART-
A key performance indicator (KPI) must be defined and represent an actual value that you can monitor to track performance metrics.
For example, “customer satisfaction increase” should be changed to “customer satisfaction survey should result in a 20% rise by the end of Q4.”
A fully measurable KPI for employees is always preferable to one that is not specified or measurable.
For example, in our previous example, we mentioned how we don’t just want to increase customer satisfaction. We want to increase it by 20%.
Making sure your KPIs are attainable is a good place to start. If a 20% increase in customer satisfaction seems like too much within a quarter, aim for 15%.
Here’s where you align your organizational, team, and individual goals.
Make sure your KPIs are relevant. You may use a top-down approach for this.
For example, begin with your broader vision, narrow it down to your long-term goal, then the short-term goal, and finally, what a specific team will need to do to achieve it.
The reason KPIs exist is to measure your success. And to measure success, you have to stop trying at some point.
A deadline is the key to any task. Make sure your KPIs are time-bound.
For example, we previously set a KPI of a 20% rise in customer satisfaction by Q4. This means your next quarter will have new goals and KPIs.
If your key performance indicators are not time-bound, you may never achieve your goals.
How Are KPIs Measured?
Once you set up a KPI for any aspect of your business, it’s time to implement and measure it.
The following are some key elements to consider when adopting and measuring the KPI system for performance reviews.
- Determine which areas of business performance you want to assess and under what conditions.
- Determine the industry benchmark for each KPI.
- Compare your latest iteration or version to the objectives previously established.
- Examine the most current performance changes.
- Create the ideal time interval for reviewing every KPI.
Companies benefit from better business decisions that lead to higher profitability and enhanced performance management by establishing well-thought-out KPIs.
KPI Examples and Templates by Department
Here are some examples of common KPIs used by different departments within an organization to help you get started:
- Sales revenue
- Sales growth rate
- Sales conversion rate
- Customer acquisition cost (CAC)
- Sales team performance
- Website traffic
- Lead generation
- Cost per lead (CPL)
- Return on investment (ROI)
- Social media engagement
Customer Service KPIs:
- Customer satisfaction score (CSAT)
- Net promoter score (NPS)
- First response time
- Average handling time
- Customer retention rate
Human Resources KPIs:
- Employee turnover rate
- Time to hire
- Training effectiveness
- Employee satisfaction
- Absenteeism rate
- Profit margin
- Return on investment (ROI)
- Cash flow
- Debt-to-equity ratio
- Return on assets (ROA)
Remember to select KPIs that are relevant, measurable, achievable, and aligned with your business goals.
For various reasons, you may fail you meet your KPIs. However, because you set KPIs to gauge your overall performance, it may have inevitable consequences when you fail to meet them. For example, failure to meet KPIs may result in reduced morale, strain on the business, disengagement of top management, market competitiveness, and a success plateau.
According to business analytics specialist Jay Liebowitz, an effective KPI “prompts decisions, not additional questions.” A good KPI is SMART- Specific, measurable, attainable, relevant, and time-bound.
The word “KPI” may be outdated and overused, but the underlying measurement process is not. However, you need to ensure you use modern and relevant measures while creating your KPIs. While KPIs are a system of measurement that is still relevant and helpful, some of its types may not be.