Key performance indicators or KPIs are one of the most powerful tools in a business’s toolbox. As a measurable metric, KPIs demonstrate how well your business is performing against your strategic objectives. While KPIs are often interchangeably used with ‘metrics,’ they are much more than numbers. By tracking the performance of departments and individuals, you can make critical adjustments as needed in strategy execution to achieve your business objectives. In addition, these indicators help you break down strategic objectives into smaller, quantifiable data points.
Some KPIs are specific to certain sectors or industries, while others are exclusive to certain companies. The primary purpose of all KPIs is to measure progress towards the company’s short- and long-term goals.
KPI development is all about knowing what KPIs to measure and how to align them with your strategic objectives. This blog post takes a closer look at the KPI description, benefits of performance indicators, and the steps to creating effective KPIs.
What are KPIs?
KPI’s are short for ‘Key Performance Indicators’ and are measurable values that indicate whether the strategic objectives are achieved.
KPIs help each department or individual in a company monitor, track, and analyze their performance using specific metrics. For instance, the sales department tracks the number of sales calls while the digital marketing team evaluates metrics such as website traffic, social media engagement, or conversion rates.
For KPIs to be effective and meaningful, they require alignment with the strategic objectives of the business. These indicators allow business owners to get an overview of the performance of individual departments, employees, and their company on the whole at any given time. With quantifiable data, the KPI helps a business track its goals over a specific period.
Not every KPI, however, measures the business’s overall performance. Larger corporations typically have multiple KPIs for each segment or department.
Here are some KPIs related to customer service:
- Customers acquired over a specific period
- Footfall at the retail store
- Percentage of customers who made a repeat purchase in a specified timeframe
- Customer acquisition cost
- Customer retention
- Customer lifetime value
- Customer satisfaction score
- Net promoter scores (that indicate if customers would recommend your company to others)
- Customer support tickets
- Resolution or response times
- The number of calls received by customer service
- Customer complaints received via email
Examples of Digital Marketing KPIs
- Monthly Website Traffic
- Qualified Leads
- Conversion Rate
- Subscriptions or app/ebook downloads
- Engagement with blog posts
How KPIs benefit organizations
Key performance indicators have a vital role to play in business success. While they are not business objectives or company goals themselves, they help businesses track their goals and targets. For instance, if a company’s goal is to boost sales of their products each month, KPI’s will show how far or close they are from reaching these targets.
A KPI metric that can be used to achieve this objective could be monthly lead generation. For example, if the metric indicates that the sales team generates 25 percent of the target leads, the manager can look into the reason for not achieving the target.
One of the most important benefits of KPIs is that they enable you to track progress and see where you are deviating. Tracking progress helps you make the necessary course correction to achieve your goals faster.
While this is the primary reason for using KPIs, their benefits extend to other realms.
Research from Gallup shows that for employees, knowing ‘what is expected of them at work’ is the key factor that boosts engagement at work. Employee engagement is linked to increased productivity, reduced absenteeism, higher employee retention, and overall better performance. KPIs clarify performance expectations across all levels for teams and individuals in the company, which can help boost employee engagement and motivation levels.
These indicators help communicate your expectations to all stakeholders clearly and unambiguously. Involving the stakeholders in KPI development assists in securing their buy-in and aligning them with the overall objectives. As a result, everyone in the company knows and agrees with the desired level of performance and what is unacceptable.
KPIs provide information on how successful each individual, and the organization as a whole, is in achieving a strategic objective. For instance, tracking the metrics on sales volume per month helps understand whether the revenue targets are being met.
On the other hand, if a goal was not reached, the metrics used to measure KPIs can help you understand why it was not achieved.
- Was the goal too high?
- Were there knowledge gaps?
- Did managers face difficulty in streamlining the sales process?
KPIs enable objective measures of employee performance that are ‘data driven’ rather than based on unconscious bias or guesswork. Metrics show the actual results achieved against ambiguous criteria such as ‘being busy’ or working for long hours.
What gets measured also gets done. Employees who have multiple tasks to handle are able to prioritize their work when they know which tasks matter the most.
What are lagging and leading KPIs?
Leading KPIs track performance before the process or outcome starts to follow a trend. Leading KPIs predict trends or changes and are forward-looking in nature. These are used to manage the process or system’s performance. Also described as inputs, leading indicators define what actions the business needs to take to achieve its goals.
While not accurate all the time, leading KPIs help set a benchmark for the company, such as:
- Increase in annual subscriptions
- Number of website visitors
- Percentage growth in market share
- Number of customers who purchase software products
Lagging KPIs measure the trend that a process or business has followed or the business’s actual performance. Lagging indicators show how well the system or process was managed.
A lagging indicator can help business stakeholders understand the current performance, such as:
- How many managers attended the corporate event?
- How many products were manufactured in the year?
- What was the annual net income in 2021?
Both these indicators work in tandem to help businesses understand present conditions and future trends. In addition, these metrics show whether the company is on track to meet its objectives. Another approach to rethink KPIs is to look at the threats from competitors and disruptors and the opportunities from developing customer needs, product features, and capabilities introduced.
Steps to follow to write effective KPIs
Step 1 – Identify your organization’s strategic objectives
Writing effective KPIs begins with an in-depth understanding of your organization’s strategic objectives. These objectives are measurable, have a defined timeframe, and specific. For instance, a company’s financial objectives may be to:
- Boost gross revenue to $5m by January 30, 2022
- Increase net profit by 30 percent by June 31, 2023
- Build reserve working capital of $1 million by December 31, 2024
- Decrease overhead spending by $10,000 by 1 st of January 2022
Growth objectives can include
- Expand business intelligence team by 2022 to five members
- Enter three new overseas markets over the next three years
- Capture 25 percent of regional market shares by 2022
- Open eight new locations in the next five years
- Increase product options from 6 to 10 by December 31, 2022
- Increase conversion rate by 10 percent by January 1, 2022
Customer service objectives examples
- Improve customer satisfaction
- Decrease product returns by 25 percent by January 1, 2022
- Increase net promoter score by 45 percent by October 1, 2021
- Reduce response time by 30 percent to complaints
- Boost returning customers by 50 percent by 2023
- Win an industry award by January 1, 2024, for customer service excellence
If you haven’t yet formulated strategic objectives, you can go through our blog post on ‘How to develop strategic objectives and strategic focus areas.’
Step 2 – Define the criteria for success
Once you have identified your company’s strategic objectives, reflect on what criteria define the success of each of these objectives.
For instance, achieving the strategic objective of boosting gross revenue to $5m by January 30, 2022, will entail:
- Increasing the customer base
- Increasing transaction size (each customer purchases more).
- Increasing the per customer frequency of transactions (encouraging people to purchase more often.)
- Boosting overall yearly sales
- Cutting down overheads
This example shows that each objective can involve multiple components that determine the success of the overall objective. For example, to boost revenue, growing the customer base, increasing transactions, cutting down overheads, and increasing the frequency of transactions are all important.
Meaningful performance measures can only be set when the objectives are clearly worded and measurable.
Step 3: Develop key performance questions
Developing essential KPQs (key performance questions) can help you determine how to meet a specific objective. Avoid close-ended (yes-or-no) questions and ask thought-provoking, open-ended questions to create meaningful KPIs.
Here are some obvious examples of KPQs:
- What’s most important to the organization?
- Where is value really created?
- What result or outcome do we want to achieve?
- Why is that result or outcome important?
- How can we define progress?
- How do we want to measure that?
- What kind of performance leads to those kinds of outcomes?
- How will we know when we have achieved the end goal?
Step 4- Collect supporting data
Before you decide what measures you will use to track performance, it is important to identify the information you have currently and gather additional supporting information. Depending on the industry or the strategic objective, the additional information you need could be competitor analysis, demographics, industry trends, conversion rates, and other data.
As each business is unique, what works for your competitor may not work for you. Therefore, dedicate time to understand what measures will benefit your company.
Step 5: Determine what to measure and how frequently you should measure
In this step, you will need to decide what KPIs are best suited for your strategic objectives. Effective KPIs trickle all the way from your overall strategic goals to the daily operations of individual employees for whom you are writing the KPIs.
Each KPI should also relate to a specific strategic objective. Asking these questions can help you create effective KPIs:
- What measures are best suited to indicate progress towards achieving an objective?
- Are these measures quantifiable?
- Is there a standard format to capture the metric?
- Are the measures realistic and time-bound?
In many cases, there can be more than one method of measuring your goals. For example, for the objective” Increase customer satisfaction,” the measures you can use include:
- Boost net promoter score
- Increase the percentage of satisfied customers
- Reduce product returns by X percent
Similarly, if the strategic objective is to boost gross revenue, the metrics can be:
- Monthly sales growth
- Average profit margin
- Sales closing ratio
- Average purchase value
- Lead conversion rate
- Sales per representative
For an e-commerce company that is looking to increase the conversion rate by 10 percent by 2022, some measures include:
- Conversion rate
- Cart abandonment rate
- Cumber of visitors to the company site
- Bounce rate
The decision to select specific measures over others may relate to its:
- Relevance or link to strategic objectives
- The time needed to gather data and
- The budget allocated (customer satisfaction index can require a detailed survey that can be more expensive than tracking the percentage of happy customers)
However, the main criterion in picking the metrics is to ensure the KPI is aligned with a strategic objective.
While there are multiple ways to measure the goals, not all of them need to be tracked, having too many KPIs to track can be time-consuming, counterproductive, and complicate the performance evaluation process.
For instance, if an organization’s strategic objective is to improve its employee training programs, the measures can include the percentage of employees trained and the training time. However, neither of the measures correlate with the result the organization seeks, which is developing people’s skills. A better measure is to track reduction in errors or delays as a result of the training program.
Step 5: Develop the KPIs.
Remember that KPIs must be SMART in nature (Specific, Measurable, Actionable, Relevant, and Time-bound) to be effective.
Unlike most other objectives that do not meet the SMART criteria, these characteristics are inherent in KPIs:
- Specific – it must be specific to an area as its linkage to a process, functional area, or preferably an objective.
- Measurable – it must be measurable; otherwise, it won’t indicate anything
- Assignable – unless the KPI is assigned, it will not be measured
- Realistic – setting realistic targets is fundamental in the documentation and use of KPIs.
- Time – it is implied in the measurement process
So, a KPI shouldn’t even be called KPI if it does not meet these criteria. For this reason, the term SMART KPI is in a way doubling up on the SMART criteria and should denote the most relevant KPIs as organizations track hundreds of measures; only a limited number qualify as “key measures.”
The criteria for SMART KPIs are:
- Being recommended for their usefulness in academic and practitioner publications
- Frequency of use across functional areas and Industries
- Fulfillment of the criteria of how good KPIs should be defined and used.
Answer these questions before you write the KPIs:
- What is the desired outcome?
- How will you measure progress?
- Who is responsible for the outcome?
- What criteria indicate achievement of the outcome?
- How often will the progress be tracked?
- Are the KPIs easily quantified?
- Does this KPI align with the strategic objective?
- Is it simple and easily understandable?
- Is it easy to measure?
- Can you measure the KPI in an accurate and timely manner?
- Will it be relevant to the company in the future?
The key to the KPI’s effectiveness is in its simplicity. It’s essential for everyone in the organization to be aware of the expected outcomes and how you measure and how often you measure progress towards the objectives. This is important not only for those who have ownership of these performance indicators but also for people across different levels in the company.
Communicating the organization’s vision, mission, strategic objectives, and KPIs to all relevant stakeholders is crucial to secure their buy-in.
Well-designed KPIs make it possible for all employees to understand how their work influences progress toward accomplishing organizational goals. Everyone gets clarity on where and how their work aligns with the strategic objectives that motivate them to achieve them. They will also see opportunities for improving efficiency, collaboration, and helping their teams meet collective targets.