Learn how to establish and monitor Key Performance Indicators (KPIs) to evaluate the success of your business plan.
Published 26 Jun 2023
A Key Performance Indicator is measurable value organizations use to track their progress toward achieving their business objectives. It's a metric used to evaluate the success of an organization or a specific project. Regardless of the industry, company, or project, KPIs should always relate to specific objectives and provide insight into the organization's performance.
KPIs should be reviewed regularly to track progress and identify areas for improvement. Organizations should also consider setting targets for each KPI to ensure they are moving in the right direction. By tracking these metrics, businesses can make data-driven decisions leading to increased profitability, improved customer satisfaction, customer retention, and overall success.
It’s common for people to use the terms “KPI” and “metric” interchangeably, but they are different concepts. A metric measures some aspect of your business, such as revenue or website traffic. A KPI, on the other hand, is a specific metric used to measure progress toward a particular goal or objective.
As an example, if you are trying to increase revenue, a metric you might track is total sales. However, a KPI related to that goal might be the percentage increase in sales over a certain period.
While the terms KPI, target, and goal are often used interchangeably, they have distinct meanings in business performance management. Rather than treating them as one thing, it’s better to treat them as three separate things.
Key performance indicators are essential for ensuring your team’s alignment with the organization’s objectives. The following are some of the primary reasons why KPIs are essential:
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KPIs come in many variations. They can measure progress monthly or focus on the long term. All KPIs are linked to strategic goals. Here are some of the most common KPI types.
These key performance indicators track overarching organizational objectives. Executives commonly rely on one or two strategic KPIs to assess the organization’s performance at any time. Some examples are Return on Investment (ROI), revenue, and market share.
Key performance indicators (KPIs) usually evaluate performance over a limited period and concentrate on organizational procedures and effectiveness. Several examples include regional sales, monthly transportation expenses, and Cost Per Acquisition (CPA).
Key performance indicators often relate to specific functions like finance or IT. Finance KPIs track return on assets and gross profit margin, while IT may track time to resolution. It is also possible to classify these functional KPIs as operational or strategic.
When defining key performance indicators, it’s important to distinguish between leading and lagging indicators. Leading KPIs are predictive while lagging KPIs are retrospective. Organizations utilize a combination of both methods to monitor crucial information effectively.
Several frameworks help organizations effectively measure and track their performance. Below are a few of the most popular KPI frameworks:
MBO is a goal-setting process that involves translating organizational objectives into individual goals through a management system. The strategy aims to direct individuals and groups towards actions that enhance overall achievement.
Objectives and Key Results establish a specific and challenging objective, accompanied by 3-5 Key Results to support it. The key results provide a roadmap for achieving the goal and include KPIs. It’s recommended to use a scale of 1-10 when scoring key results, with 10 indicating high ambition.
OMTM is a framework for improving only one KPI over a set period. For example, a marketing team might focus on improving its Customer Acquisition Cost (CAC). A sales team might focus on enhancing its Average Order Value. The entire team works together over weeks or months to improve that KPI. And in the process, they uncover the next OMTM to focus on.
The Balanced Scorecard framework enables performance evaluation from four distinct perspectives, followed by establishing goals and KPIs for each area. Typically, companies utilize it in a strategic capacity.
Establishing clear and measurable goals is essential for long-term success as it allows your organization to identify areas of progress and improvement. Here are the steps to help you set effective KPIs:
Consult with individuals utilizing the KPI report to determine their objectives and intended applications. This process can assist in identifying KPIs that hold significance and usefulness for business stakeholders.
KPIs must align with business objectives to be effective. It’s essential to align key performance indicators with overall organizational goals, even if they are specific to certain functions like Human Resources (HR) or marketing.
KPIs that adhere to the SMART formula are considered to be effective. When setting goals, it’s essential to ensure they are Specific, Measurable, Attainable, Realistic, and Time-Bound. A few goals examples are “Achieve a 5% quarterly sales growth” or “Raise the Net Promoter Score by 25% in the next three years.”
A clear understanding of the KPIs is crucial for all members of an organization to take appropriate actions. Data literacy is significant in this process, enabling individuals to work with data and make informed decisions to achieve desired outcomes.
Reviewing and adjusting your key performance indicators may be necessary as your business and customer base evolve. Some may be irrelevant or need to change according to performance. Ensure you have a plan for evaluating and adjusting performance measures.
Business intelligence provides organizations with extensive data and interactive visualization tools, facilitating the measurement of various metrics. Concentrate on KPIs that will make the biggest impact to avoid overload.
Key Performance Indicators can be measured weekly, monthly, quarterly, or yearly. Ideally, companies should track a KPI every week when setting monthly goals, such as sales goals. Frequent KPI measurement can lead to a misallocation of resources.
Developing non-financial KPIs for departments such as HR, Support, or Marketing may seem challenging to some. However, these KPIs don’t solely focus on non-financial aspects; they evaluate factors that indirectly affect financial or long-term performance. For example, Customer Satisfaction (CSAT) is a leading indicator of repeat purchases.
KPIs aid in employee engagement by providing precise and valuable data for assessing employee engagement levels, identifying the efficacy of inclusion and diversity initiatives, and pinpointing reasons for high turnover and absenteeism rates.
Rather than just reporting out numbers and metrics, KPIs provide you with a comprehensive picture of the health and performance of your business, enabling you to make critical adjustments to your execution to achieve your strategic objectives. You can achieve results faster if you use the right KPIs.
SafetyCulture (formerly iAuditor) is a cloud-based platform that helps organizations monitor and improve their operational and overall performance. With SafetyCulture, organizations can benefit from powerful features that simplify KPI tracking. Some of the benefits include:
Rob Paredes is a content contributor for SafetyCulture. He is a content writer who also does copy for websites, sales pages, and landing pages. Rob worked as a financial advisor, a freelance copywriter, and a Network Engineer for more than a decade before joining SafetyCulture. He got interested in writing because of the influence of his friends; aside from writing, he has an interest in personal finance, dogs, and collecting Allen Iverson cards.
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