What is a KPI?

KPI, BSC 1779

What is a KPI?

A Key Performance Indicator 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 business, while low-level KPIs may focus on processes in departments such as sales, marketing, HR, support and others.

What makes a KPI effective?

Now that we know KPI stands for key performance indicator it 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.

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 a KPI dashboard and with whom that information should be shared.How to define a KPI
Defining key performance indicators can be tricky business. The operative word in KPI is “key” because every KPI should related to a specific business outcome with a performance measure. KPIs are often confused with business metrics. Although often used in the same spirit, KPIs need to be defined according to critical or core 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 your Sales Growth KPI. Here’s how you might define the 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
  • Will be reviewed on a monthly basis

What is a SMART KPI?

One way to evaluate the relevance of a performance indicator 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?

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.

Even SMARTER Key Performance Indicator
How to write and develop KPIs
When writing or developing a KPI, you need to consider how that KPI relates to a specific business outcome or objective. KPIs need to be customized to your business situation and should be developed to help you achieve your goals. Follow these steps when writing a KPI:

  • Write a clear objective for your KPI
  • Writing a clear objective for your KPI is one of the most important – if not THE most important – part of developing KPIs.

A KPI needs to be intimately connected with a key business objective. Not just a business objective, or something that someone in your organization might happen to think is important. It needs to be integral to the organization’s success.

Otherwise you are aiming for a target that fails to address a business outcome. That means that, at best, you’re working towards a goal that has no impact for your organization. At worst, it will result in your business wasting time, money and other resources that would have best been directed elsewhere.

The key takeaway is this: KPIs need to be more than just arbitrary numbers. They need to express something strategic about what your organization is trying to do. You can (or should be able to) learn a lot about a company’s business model just by looking at their KPIs.

Without writing out a clear objective, all of this will be lost.

Share your KPI with stakeholders
Your KPI is useless if it doesn’t get communicated properly. How are your employees – the people tasked with carrying out your vision for the organization – supposed to follow through on your goals if they don’t know what they are? Or perhaps worse: Not sharing your KPI risks alienating and frustrating your employees and other stakeholders who are unable to see the direction in which your organization is heading.

But sharing your KPIs with your stakeholders is one thing (though even this is something that too many organizations fail to do). More than that, though, they need to be communicated in the right away.

KPIs need context to be effective. This can only be accomplished if you explain not just what you’re measuring, but why you’re measuring it. Otherwise they are just numbers on a screen that have no meaning to you or your employees.

Explain to your employees why you’re measuring what you’re measuring. Answer questions about why you’ve decided on one KPI over another. And most important of all? Listen. KPIs aren’t infallible. Nor will they necessarily be obvious to all involved. Listening to your employees will help you identify where your organization’s underlying goals aren’t being communicated properly

Say you’re getting lots of questions about why profit isn’t a KPI for your company. It’s a reasonable belief for your employees to have. Making money is, after all, an essential part of what any business does. But maybe revenue isn’t the be all and end all for your organization at a given time. Maybe you’re looking to make major investments into research and development or are on a major acquisition spree. Getting lots of questions like this is a sign you need to do a better job of communicating your KPIs and the strategic goals behind them.

And who knows: Your employees might even give you some ideas on how to improve your KPIs.

Review the KPI on a weekly or monthly basis
Checking in on your KPIs regularly is essential to their maintenance and development. Obviously tracking your progress against the KPI is important (what else would be the point of setting it in the first place?) But equally essential is tracking your progress so you can assess how successful you were in developing the KPI in the first place.

Not all KPIs are successful. Some have objectives that are unachievable (more on that below). Some fail to track the underlying business goal they were supposed to achieve. Only by checking in regularly can you decide if it’s time to change your KPIs.

Make sure the KPI is actionable

Making your KPIs actionable is a five-step process:

  • Review business objectives
  • Analyze your current performance
  • Set short and long term KPI targets
  • Review targets with your team
  • Review progress and readjust

Most of this we’ve already gone over, but it’s worth focusing on the need to develop targets for both the short- and long-term. Once you’ve set a goal with a timeline that’s farther into the future (say the next few quarters, or your fiscal year) you can then work backwards and identify the milestones you’ll need to hit on the way there.

Let’s say, for example, you want to sign up 1,500 newsletter subscribers in the first quarter of the year. You’ll want to set monthly, bi-weekly or even weekly targets to get there. That way you’ll be able to continually reassess and change course as needed on your way to achieving the longer-term goal.

You could divide the targets up equally according to each month. In this case that would be 500 subscriptions in January, 500 in February and 500 in March. However you may want to get more specific. There are more days in January and March than February, so maybe you want to set a target of 600 for those months. Or maybe you typically get more website traffic in February (perhaps your business has a presence at a major trade show) so you decide to set a target of 800 in that month.

Whatever it is, make sure you break up your KPI targets to set short-term goals.

  • Evolve your KPI to fit the changing needs of the business
  • KPIs that never get updated can quickly become obsolete.

Let’s say, for example, that your organization recently started a new product line or expanded overseas. If you don’t update your KPIs, your team will continue to chase targets that don’t necessarily capture the change in tactical or strategic direction.

You may think, based on your results, that you are continuing to perform at a high level. In reality, though, you may be tracking KPIs that fail to capture the impact your efforts are having on underlying strategic goals.

Reviewing your KPIs on a monthly (or, ideally, weekly) basis will give you a chance to fine tune – or change course entirely.

You might even find new and possibly more efficient ways of getting to the same destination.

Check to see that the KPI is attainable
Setting achievable targets for your team is essential. A target that’s too high risks your team giving up even before they start. Set a target too low and you’ll quickly find yourself wondering what to do with yourself once you’ve achieved your annual goals two months into the calendar year.

An analysis of your current performance is essential. Without this you’re left to search blindly for numbers that have no root in reality. Your current performance is also a good starting place for deciding on areas upon which you need to improve.

Start rooting around in the data you’ve already collected to set a baseline for what you’ve accomplished in the past. Tools like Google Analytics are great for this, but so are more traditional accounting tools that track revenue and gross margin.

Update your KPI objectives as needed

KPIs aren’t static. They always need to evolve, update and change as needed. If you’re setting and forgetting your KPIs, you risk chasing objectives that are no longer relevant to your business.

Make a habit of regularly checking in not just to see how you are performing against your KPIs, but on which KPIs need to be changed or scrapped completely.

To someone who’s never developed a KPI before, all of this might sound exhausting.

But here’s the good news: Once you’ve gone through this process a few times, it’ll be that much easier to use it again in the future.

Bringing it all together

KPIs generally are an essential tool for measuring the success of your business and making the adjustments required to make it successful.

The usefulness of individual KPIs, though, have their limits.

The most important part of any KPI is its utility. Once its outlived its usefulness, you shouldn’t hesitate to toss it and get started on new ones that better align with your underlying business objectives.


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