What is a KPI?
Measure your performance against key business objectives.
Key Performance
Indicators – Definition
A Key
Performance Indicator (KPI) is a measurable value that
demonstrates how effectively a company is achieving key business objectives.
Organizations use KPIs at multiple levels to evaluate their success at reaching
targets. High-level KPIs may focus on the overall performance of the
enterprise, while low-level KPIs may focus on processes or employees in
departments such as sales, marketing or a call center.
What makes a KPI
effective?
A
KPI is only as valuable as the action it inspires. Too often, organizations
blindly adopt industry-recognized KPIs and then wonder why that KPI doesn't
reflect their own business and fails to affect any positive change. One of the
most important, but often overlooked, aspects of KPIs is that they are a form
of communication. As such, they abide by the same rules and best-practices as
any other form of communication. Succinct, clear and relevant information is
much more likely to be absorbed and acted upon. KPIs are an
effective tool to help build better performing teams.
In
terms of developing a strategy for formulating KPIs, your team should start
with the basics and understand what your organizational objectives are, how you
plan on achieving them, and who can act on this information. This should be an
iterative process that involves feedback from analysts, department heads and
managers. As this fact finding mission unfolds, you will gain a better
understanding of which business processes need to be measured with KPIs and
with whom that information should be shared.
What is a SMART KPI?
One
way to evaluate the relevance of a KPI is to use the SMART criteria.
The letters are typically taken to stand for Specific, Measurable, Attainable, Relevant, Time-bound. In other words:
- Is your objective Specific?
- Can you Measure progress
towards that goal?
- Is the goal
realistically Attainable?
- How Relevant is
the goal to your organization?
- What is the Time-frame for
achieving this goal?
How to define a KPI
Defining
a KPI can be tricky business. The operative word in KPI is “key” because it
every KPI should related to a specific business outcome. KPIs are often
confused with business metrics. Although often used in the same spirit, KPIs
need to be defined according to critical business objectives. Follow these
steps when defining a KPI:
- What is your
desired outcome?
- Why does this
outcome matter?
- How are you going
to measure progress?
- How can you
influence the outcome?
- Who is responsible
for the business outcome?
- How will you know
you’ve achieved your outcome?
- How often will you
review progress towards the outcome?
As
an example, let’s say your objective is to increase sales revenue this year.
You’re going to call this KPI your Sales Growth KPI. Here’s how you might
define this KPI:
- To increase sales
revenue by 20% this year
- Achieving this
target will allow the business to become profitable
- Progress will be
measured as an increase in revenue measured in dollars spent
- By hiring
additional sales staff, by promoting existing customers to buy more
product
- The Chief Sales
Officer is responsible for this metric
- Revenue will have
increased by 20% this year
- The KPI will be
reviewed on a monthly basis
Being even SMARTER about
your KPIs
The
SMART criteria can also be expanded to be SMARTER with the addition of evaluate and reevaluate. These two steps are
extremely important, as they ensure you continually assess your KPIs and their
relevance to your business. For example, if you've exceeded your revenue target
for the current year, you should determine if that's because you set your goal
too low or if that's attributable to some other factor.
Top 22 questions to
use when designing a key performance measure
Review these questions when building out your key business performance
measurement systems.
Performance measures should:
1. Be derived from
strategy
2. Be simple to
understand
3. Provide timely and
accurate feedback
4. Be based on
quantities that can be influenced, or controlled, by the user alone or in
co-operation with others
5. Reflect the
“business process” – i.e. both the supplier and customer should be involved in
the definition of the measure
6. Relate to specific
goals (targets)
7. Be relevant
8. Be part of a closed
management loop
9. Be clearly defined
10.
Have visual impact
11.
Focus on improvement
12.
Be consistent (in that they maintain their significance as time goes by)
13.
Provide fast feedback
14.
Have an explicit purpose
15.
Be based on an explicitly defined formula and source of data
16.
Employ ratios rather than absolute numbers
17.
Use data which are automatically collected as part of a process whenever
possible
18.
Be reported in a simple consistent format
19.
Be based on trends rather than snapshots
20.
Provide information
21.
Be precise – be exact about what is being measured
22.
Be objective – not based on opinion
Business
Metrics
A Business
Metric is a quantifiable measure that is used to track and assess
the status of a specific business process. Every area of business has specific
metrics that should be monitored – marketing metrics can include
tracking campaign and program statistics, while sales metrics may
look at the number of new opportunities and leads in your database, and executive
metrics will focus more on big picture financial metrics. Learn more: Business
Metrics.
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