What are Key Performance Indicators?
As defined by KPI.org, Key Performance Indicators (KPIs) are the critical indicators of progress toward an intended result. These are the things that help provide the focus for you and your team on what your business really wants to accomplish. Those top business objectives that you set out in your strategic plan or your business plan.
5 Key Elements of a Good KPI
Simple Yet Specific
For a key performance indicator to be truly helpful it needs to be simple both in its language and its measurement. At the same time, it needs to be specific enough that it can be clearly understood. For example, a KPI such as “add 10 clients per month,” allows staff to make proactive decisions to influence the outcome. Business analytics expert Jay Liebowitz says that an effective KPI is one that “prompts decisions, not additional questions.”
To analyze positive and negative variations from a goal, a KPI must be measurable. This does not always need to be qualitative measurement such as “how many products did we sell last month,” but can also be qualitative such as “how satisfied are our customers with their experience with our business?” The latter can be determined with standardized surveys even though its subjective nature isn’t numerical. Always ensure that your KPI is based on a solid, focused goal such as sales, productivity, or customer satisfaction.
The National Federation of Independent Business says setting “unachievable goals” is one of the biggest employee de-motivators. It will be hard to get employee buy-in if they feel they can’t reach their goals. Key Performance Indicators must be established with goals that employees feel they can reach. Instead of setting large, seemingly unattainable goals, start small by chunking an annual goal down to per week or per month. Try to challenge but not overwhelm those tasked with achieving the goal.
Another one of the characteristics of an effective KPI is relevance, meaning that the appropriate department is in control of affecting specific KPIs. For example, a KPI that asks “how many new customers did we gain last month” should be the responsibility of the sales manager. By assigning the responsibility of the KPI to the relevant manager, the measurement will be more educated, and the results will be more successful. Additionally, each KPI must be aligned with the goals of the business as a whole.
Effective KPIs are timely by both having an appropriate reporting timeline and analyzing results in a relevant time period. Infrequent reports will create difficulty in accurately identifying trends while reporting too frequently can diminish the value of the data. To determine the appropriate frequency of your reports, consider the cost, accuracy, urgency, and sensitivity of the proposed timeline. Then, ensure that the results of the report are being acted on in a timely manner.
Does this look familiar? It should as it follows the SMART method of setting goals. Finally, make your KPIs visible to everyone in your business. Growth is achieved when everyone is engaged and aware of the goals of the business as a whole.
7 Questions to Ask When Creating Your Key Performance Indicators
- What is our desired outcome?
- Why does this outcome matter?
- Who is responsible for the outcome?
- How can we influence the outcome?
- When will we measure progress?
- How will we measure progress?
- How will we know when we have achieved the outcome?
Let’s say you own a meal delivery service and you want to increase units sold by 15%.
Your KPI would be: To increase unit sales by 15% this year. By achieving this target we will be able to add another route to our service. The Social Media Manager will be responsible for this KPI by driving traffic through a consistent social media strategy. We will measure progress on this KPI on a monthly basis. Progress will be measured as an increase in units sold and the resulting revenue. The outcome is unit sales will have increased by 15% this year.
A Key Performance Indicator is a tool to help you grow your business and reach your goals. by creating and measuring them you will be better able to keep you and your team’s focus on what is important in your business. Check out our blog post “Your Annual Business Checkup in 4 Easy Steps”.