What are Key Performance Indicators (KPIs)?
Key Performance Indicators (KPIs) are metrics used to periodically track and evaluate the performance of a business or organization toward the achievement of specific goals. They are also used to gauge the overall performance of the company against other comparable companies within the industry.
Source: CFI’s KPI Dashboard Course.
Key Performance Indicators can either be internal or external. Internal KPIs are used to gauge internal goals in the departments or sections, but will also impact achieving the core goals of the company. KPIs help to mobilize employees to work toward the achievement of core objectives.
External KPIs are used to gauge departmental/section performance in relation to the overall core objectives of the company. KPIs vary from one company to another, depending on their particular goals and chosen performance criteria.
Steps in Developing Actionable KPIs
Step 1: Establish goals
An organization must first set the goals it wants to achieve before it can measure its performance based on KPIs. It should create goals and objectives in relation to all aspects of the company’s operations, including things such as expenditures, asset management, revenues, etc. The goals should encompass the company’s stated business mission, not just revenues alone.
Step 2: Establish Critical Success Factors
The Critical Success Factors (CSF) are the activities that the organization or its department should focus on to achieve success. A CSF must be measurable and include a specific time frame within which the organization will meet the business goals and objectives.
For example, an organization with annual earnings of $50 million may set the goal of earning $60 million over the next 12 months. Such a goal is more specific than just setting a goal of “increasing revenues” without putting in place a way to measure performance, a target number, and a time frame within which to achieve the goal.
Step 3: Establish KPIs from the CSFs
KPIs focus and quantify the critical success factors and, most importantly, enable the measurement of performance. For example, a critical success factor related to the KPI of “number of website views” might be “persuasive social media postings”. You can look at CSFs as the critical activities that, properly executed, will be reflected in improving figures for KPIs.
Step 4: Collect Measures for all Aspects of Operations
This step involves determining the changes that have occurred in terms of numbers within a specific time frame. The current numbers will help the organization create more actionable and measurable goals for the future. For example, if the company’s goal is to grow revenues from $50 million to $60 million in the next one year, it can start by looking at the progress made between the previous month and the current month.
Step 5: Calculate Metrics from Measures
The metrics are expressed in the form of ratios, percentages, or rates. They show how various areas under review are performing. All Key Performance Indicators are metrics, but not all metrics are KPIs. For a metric to be considered a KPI, it must be significant enough to show that actual progress – and progress that is considered meaningful to the company achieving its long-term goals – has occurred within a specific time frame.
How to Measure KPIs
Once an organization has identified its Key Performance Indicators, it should communicate this information to the employees so that everyone understands the metrics being used to measure the business’ performance. When implementing KPIs in specific departments of the organization, there is no need to involve all company employees – just the staff attached to the particular department.
Most organizations track KPIs through business analytics and reporting tools. These tools collect data and present the information in the form of reports that include numerical representations of the measured performance levels. In many organizations, performance indicators are presented to the management in the form of performance scorecards and intelligence dashboards for easy review and analysis of all areas of the business. The executives use the data to evaluate how the business is performing and the progress they have made towards achieving the company’s overall goals.
If some KPIs are no longer useful, they can be altered or dropped. The development and refinement of KPIs will be an ongoing process. Over time, some KPIs will become more important and others less so. As you use KPIs, you will learn how to fine tune them to produce precisely the measurements that are most helpful. As with using any professional business tool, you will get better at both identifying and implementing KPIs in the most efficient manner possible.
Factors to Consider when Setting KPIs
1. Fundamental goals that you want the company/employees to achieve
Goals can either be internal or external. Internal goals are successes achieved daily within the departments or sections. External goals are successes that contribute to the central business objectives.
Example: The role of a marketing manager is to ensure the best mode of communication is used to reach out to clients. The method will be the internal goal. The external goal is to implement strategies to minimize marketing costs and maximize customer awareness. Without internal goals, it will be difficult for an organization to achieve its overall objectives.
2. Strategy to meet the objectives
These are the ways and means used to achieve goals. The following questions should help in formulating goals: “WHY,” “WHAT,” “WHO,” “WHERE” “WHEN,” and “HOW.”
“Why” do we need these strategies? What are the requirements to achieve these goals? Who is to implement the strategy? Where are we to apply these strategies? When is the deadline to achieve these goals? How are we going to attain these goals?
Challenges Faced in Developing KPIs
An organization may set too many KPIs so that they are effectively impossible to track and implement. Some executives may be overly ambitious and develop too many performance indicators that may reduce attention to the core KPIs. The result of this can be the duplication of responsibilities, unmet targets, and even losses to the business. An organization should limit its scope to only a few critical KPIs that will be easy to implement and track.
Another challenge is the lack of clear objectives and strategies. The first step in developing KPIs is setting the goals and objectives that the organization intends to achieve. If the goals are not clear, it will hinder the effectiveness of the performance indicators outlined by the organization.
The key things to remember about key performance indicators is that they should be measurable – quantifiable – and that they should be directly related to both the specific nature of your business (such as whether you market products or services) and to the specific goals and aims of your business. For example, a company with the primary goal of establishing its brand identity in the marketplace will have markedly different KPIs than a company with the primary goal of establishing international offices.
Thank you for reading CFI’s guide to Key Performance Indicators (KPIs). To further your knowledge and advance your career, see the following free CFI resources.