Key Performance Indicators

A Key Performance Indicator (KPI) is a measurable value that establishes just how effectively a company is achieving key business objectives. Key performance indicators are used at all levels of an organization to evaluate success at reaching targets. High-level KPIs may focus on the overall performance of the enterprise, while lower-level KPIs may focus on individual processes, applications, teams, or departments.

Why are KPI's Important?

Setting key performance indicators for an organization usually happens during a strategic planning period, whether that is done yearly, quarterly or even more frequently, the goal is to ensure the entire organization is aligned towards the same objectives and goals. The important thing is that a KPI needs to be intimately connected with a key business objective - not just any objective, or something that someone thinks might be important. The KPI needs to be focused on somethiing that is an integral factor in the organization’s success. Without that link, you are attacking a target that fails to address a business outcome. At best, you’d be 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 spent elsewhere.

In short, KPI's are all about focusing your resources on and moving everyone in the same direction. They help ensure that every effort is tied to a goal and every action supports "moving the needle"in the right direction for the organization.

What makes an effective KPI?

Any KPI is only as valuable as the action it inspires. One of the most important aspects of KPIs is that they need to be communicated. Succinct, clear and relevant information is much more likely to be absorbed and acted upon. How are the people carrying out the vision for the organization supposed to follow through on goals if they don’t know or understand what they are? Failure to communicate your KPI's clearly and in context risks alienating and frustrating your teams and stakeholders who are unable to see the direction in which your organization is heading.

When developing a strategy for creating 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 business experts, department heads and managers. As this discovery process 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.

SMART(er) KPI's - A better way

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.

• Is your objective Specific?
• Can you Measure progress towards that goal?
• Is the goal realistically Attainable?
• How Relevant is the goal to your organization or team?
• What is the Time-frame for achieving this goal?

The SMART criteria can also be expanded to be SMARTER with the addition of Evaluate and Reevaluate. These two steps are very 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. You should be regularly assessing the value and relevance of your KPI's.

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 while metrics are typically focused on individual efforts to support a larger KPI. When defining a KPI, the main considerations should be:

• 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

Useful Questions when planning KPI’s

Review these questions as a checklist when building out your key business performance measurement systems:

• Be derived from strategy
• Be simple to understand
• Provide timely and accurate feedback
• Be based on quantities that can be influenced, or controlled, by the user alone or in co-operation with others
• Reflect the “business process” – i.e. both the supplier and customer should be involved in the definition of the measure
• Relate to specific goals (targets)
• Be relevant
• Be part of a closed management loop
• Be clearly defined
• Have visual impact
• Focus on improvement
• Be consistent (in that they maintain their significance as time goes by)
• Provide fast feedback
• Have an explicit purpose
• Be based on an explicitly defined formula and source of data
• Employ ratios rather than absolute numbers
• Use data which are automatically collected as part of a process whenever possible
• Be reported in a simple consistent format
• Be based on trends rather than snapshots
• Provide information
• Be precise – be exact about what is being measured
• Be objective – not based on opinion

This list of questions is based off the work of Andy Neely at Cambridge. His work, Design performance measures: a structured approach is an excellent resource when thinking about KPI's.

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KPIs are a useful tool for measuring the success of your organization 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.