Key Performance Indicators (KPIs)
Key Performance Indicators (KPIs) are a set of quantifiable measures companies use to evaluate how well they achieve specific targets or objectives.
Setting measurable targets or objectives allows you to identify how effective your strategies are in achieving your business goals. This quantifiability enables you to make critical adjustments to achieve your strategic goals.
These measurable targets are called Key Performance Indicators, or KPIs. They’re a valuable decision-making tool for any company across all departments, especially those operating with agile methods.
This article explores what makes a strong KPI and provides practical examples.
Table of contents
What is a Key Performance Indicator?
A KPI is a means of quantifying how effective an organization’s initiatives are towards achieving its goals. They provide precise, numerical measurements for performance. You can use them to make strategic decisions, improve your operations, and help set priorities. KPIs should be set for every department, from human resources to marketing.
KPIs vs. Business Metrics
It’s easy to confuse KPIs with business metrics, mainly since you can use them both for process improvements. Key Performance Indicators and metrics measure what they do well, but there is one significant difference. KPIs focus on targets, while metrics can be estimated regardless of whether they have a specific target.
KPIs are the key targets you have to track to impact your strategic business outcomes. On the other hand, metrics measure the success of your everyday activities that support your KPIs.
In short, every KPI is a metric, but not every metric is a KPI.
Three Characteristics of a KPI
There are three main characteristics of KPIs:
- Quantitative: You can measure and present KPIs through numbers.
- Practical: KPIs can integrate well with the existing processes of a company.
- Actionable: You can use the insights derived from KPIs to take concrete action to improve them.
KPIs are a great way to measure success, but only if they’re based on legitimate data and reflect your business objectives. Additionally, KPIs should be defined where external factors (anything that’s beyond the company’s control) won’t impact them. Lastly, KPIs need to have an exact time frame divided into key checkpoints for accuracy.
High-level KPIs vs. Low-level KPIs
There are two types of KPIs: high-level KPIs and low-level KPIs.
| Type of KPI | Explanation | Example |
|---|---|---|
| High-level KPIs | These indicate the company’s overall performance. Employees do not directly influence high-level KPIs as these performance measures are the results of teamwork across multiple departments. | – Company’s Annual Growth – Relative Market Share |
| Low-level KPIs | These demonstrate the impact of tasks and projects led by individual employees or specific departments. These KPIs respond directly to the team or individual performance, making them more actionable. | – Number of analyses performed and recommendations issued – Monthly website traffic – Customer satisfaction |
KPIs are important because by defining and tracking them, business owners and managers get to have an overview of how each component of the company, from individuals to departments, is performing at any given time.
Why KPIs Are Important for Businesses:
Here are a few benefits of using KPIs, no matter what kind of business you’re running.
1. KPIs monitor company health.
KPIs help measure your company’s health, and you only need a handful of KPIs to do so. Tracking KPIs in categories such as revenue, processes, employees, and customers makes it easier to stay on top of things and remain profitable or otherwise aligned with high-level goals.
2. KPIs make everyone accountable for performance.
Individual performance management frameworks typically focus on setting objectives, measuring performance, and managing related activities. Incorporating KPIs into performance measures helps employees measure the impact and how their role plays an integral part in the company’s goals.
In addition, KPIs allow everyone to be on the same page going the same direction, making every employee a happy contributor to the company’s success.
3. KPIs measure progress over time.
Measuring the progress of a company is not an easy task. One way to do so would be by setting targets at the start of each year, like the number of employees, gross margin, and revenue. Then, you can use weekly, monthly, and quarterly reports to stay on track with the KPIs and make immediate changes to strategies when necessary.
4. KPIs allow making adjustments to stay on track.
With KPIs, companies can see more quickly when drifting away from the organizational goals. Through this, they can predict the future of their business and navigate strategies on areas where improvements may be needed to avoid costly mistakes before they’re made.
5. KPIs help solve problems & tackle opportunities.
Companies can use key performance indicator dashboards to solve problems or tackle opportunities. KPI dashboards are tools that collate data and provide at-a-glance visual feedback on your company’s performance.
For example, if a company is experiencing a sales slump, it’s worth looking at which KPIs could turn things around. Alternatively, before launching new products to the market with full force, you can test them out to a few clients combined with KPIs that will validate the product’s success before it’s launched.
Key Performance Indicator: Tracking Your Success At A Glance
Key performance indicators are an essential tool for determining your business performance, including your teams and employees at a glance. They allow you to quickly decide whether or not you’re getting close or farther away from your goals.
Of course, it’s not enough to have KPIs; they must be clearly informed by your initiatives and what you want to achieve so you can act on them. Consider each KPI carefully to ensure that your efforts to improve them are well-spent.
