KPI's
Key performance indicators (KPIs) are targets that help you measure progress against your most strategic objectives. While organizations can have many types of metrics, KPIs are targets that are “key” to the success of your business.
Types of KPIs.
Key performance indicators come in many forms. While some are used to measure monthly progress against a goal, others have a longer-term focus. The one thing all KPIs have in common is that they’re tied to strategic goals. Some of the most common types of KPIs are:
Strategic: These are big-picture key performance indicators that monitor organizational goals. Executives typically look to one or two strategic KPIs to find out how the organization is doing at any given time. Examples are return on investment, revenue and market share.
Operational: These KPIs typically measure performance in a shorter time frame, and are focused on organizational processes and efficiencies. Some examples include sales by region, average monthly transportation costs and cost per acquisition (CPA).
Functional Unit: Many key performance indicators are tied to specific functions, such as finance or IT. While IT might track time to resolution or average uptime, finance KPIs track gross profit margin or return on assets. These functional KPIs can also be classified as strategic or operational.
Leading vs Lagging: Regardless of the type of key performance indicators that you define, you should know the difference between leading indicators and lagging indicators. While leading KPIs can help predict outcomes, lagging KPIs track what has already happened. Organizations use a mix of both to ensure that they are on tracking what’s most important.
How to Develop KPIs
With so much data, it can be tempting to measure everything, or at least things that are the easiest to measure. However, you need to be sure you are measuring only the key performance indicators that will help you reach your business goals. The strategic focus is one of the most important aspects of KPIs. These are some of the best practices for developing the right KPIs.
Define how KPIs will be used: Talk to people who will be using the KPI report to find out what they want to achieve and how they will use them. This will help you define KPIs that are relevant and valuable to the business.
Tie them to strategic goals: If your KPIs don’t relate to what you’re trying to achieve in your business, then it will be a waste of time. While they may be related to a specific business function like Human Resources or Marketing, every key performance indicator should tie directly back to your overall business goals.
Smart KPIs: The most effective KPIs follow the proven Smart formula. Make sure they are Specific, Measurable, Attainable, Realistic and Time-Bound. Some examples include “Grow sales by 10% per quarter” or “Increase Sales Score 50% over the next three years.”
Keep them clear-cut: Everyone in the organization should understand your KPIs so they can act on them. When people understand how to work with data, they can make decisions that will move them in the right direction.
Plan to iterate: As your business and customers change, you may need to revise your key performance indicators. Possibly certain ones are no longer relevant, or you need to adjust based on performance. Be sure you have a plan in place to evaluate and make changes to key performance indicators when necessary.
KPI overload: Business intelligence has given organizations access to mounds of data and interactive data visualization, making it easy to measure anything and everything. Keep in mind that the key performance indicator definition refers to the most important targets. Stay clear of KPI overload by focusing on the most impactful measures.