What are Key Performance Indicators?

A Key Performance Indicator (KPI) is a measurable target that shows how well individuals or businesses are doing in terms of achieving their goals. By reviewing and analyzing their key performance indicators (KPIs), businesses can know if they are on track.

Businesses can identify what works and what doesn’t by examining a variety of important indicators. These include categories like profitability, sales figures, staff turnover, and average yearly costs. Regularly analyzing KPIs gives managers a clear picture of how their company is doing. It allows them to determine whether to keep things as they are or refine their strategies.

Synonyms

• Performance Metric
• Success Indicator
• Performance Measure
• Business Metric
• Performance Index

Importance of Key Performance Indicators (KPIs)?

KPIs play a crucial role in measuring business success. They determine if team efforts are supporting the overall goals of the business. Here are some of the top reasons why you need key performance indicators:

1. Maintain Team Alignment

• Key performance indicators help your teams stay on the same page when measuring employee performance or project success.

2. Provide a Health Check

• By tracking key performance indicators, you get a true picture of your organization's health. This ranges from risk factors to financial indicators.

3. Make Changes

• You can also use key performance indicators to identify strengths and weaknesses. This enables you to focus more on what is successful and less on what is not.

4. Hold your Teams Responsible

• Key performance indicators help to set clear expectations for employees. This makes it easier to track individual and team contributions.

Types of Key Performance Indicators (KPIs)

There are several types of key performance indicators. And they each have a unique purpose. Some track long-term goals, while others track short-term performances. Here are the most common types:

1. Strategic

• • These types of KPIs monitor the overall goals of the company. Executives use strategic KPIs to assess performance. A few examples are revenue, market share, and return on investment (ROI).

2. Operational

• • These types of KPIs are usually more focused on business operations and efficiency. They monitor performance over a shorter period of time. Regional sales, average monthly transportation expenses, and cost per acquisition (CPA) are a few examples. 

3. Functional Unit

• • These KPIs are tied to specific functions, such as IT or finance. IT KPIs can include average uptime and time to resolution. While finance includes return on assets and gross profit margin. It is also possible to categorize these functional KPIs as strategic or operational.

4. Leading vs. Lagging

• Leading KPIs are useful for forecasting results. While lagging KPIs monitor past events. A mix of both is needed to track progress effectively.

What Makes a Good Key Performance Indicator (KPI)?

The best KPIs align with business long-term goals and follow the SMART goal framework:

• Specific: Clearly define the goal of the KPI and why it matters.
• Measurable: Ensure that you can measure success.
• Achievable: Set achievable and realistic KPI targets.
• Relevant: Align KPIs with business goals. Make them relevant to the overall objectives of the business. 
• Time-bound: Establish a reasonable timeline based on previous performance.

How to Develop Good Key Performance Indicators (KPIs)

With access to so much data, it’s tempting to track everything. However, to accomplish your company goals, you will need to focus on the right key performance indicators. One of the most important aspects of KPIs is the strategic focus.

Here are some guidelines for creating the appropriate KPIs:

1. Define How KPIs will be Used

The first step is to understand the purpose of the KPI. This way, it can provide valuable insights for business growth. You need to know what the KPI will measure and how employees will use it. 

2. Link them to Strategic Goals

Your KPIs must align with the goals of your company. Every KPI should be closely linked to your overall business goals, even though it has been assigned to a specific department.

3. Write SMART KPIs

Ensure each KPI is Specific, Measurable, Achievable, Relevant, and Time-bound. Following the SMART goal framework allows you to create effective KPIs.

Examples:

• “Increase Net Promoter Score (NPS) by 25% in the next three years.”
• “Grow sales by 5% per quarter.”

4. Keep Them Simple

A good KPI is easily understood by every member of the company. This way, everyone can take appropriate action.

5. Make a Continual Plan

You may need to update your key performance indicators as your business grows. Some KPIs may be outdated, or your performance might call for an adjustment. 

Make sure you have a strategy in place for reviewing and altering key performance indicators when needed.

6. Steer Clear of KPI Overload

Too many KPIs can lead to confusion. Focus on tracking the most important metrics that directly impact your business goals.