Key Performance Indicators, or KPIs, are used to measure performance; thus the name. They serve as useful indicators of how well an organization is progressing toward a given goal (Source: Key Performance Indicators (KPI)). For example, a KPI for a business concerned about customer retention might be income from repeat customers as a percentage of total revenue. While KPIs can quickly tell you how you’re doing, not all KPIs are created equally. For example, are you measuring the most important metrics with a KPI? With that in mind, here’s what to look for when evaluating key performance indicators to ensure that you’re honing in on the right metrics.
- Does the KPI align with organizational goals? Before you can possibly measure progress toward a given goal, you’ll need to know what that goal is. For example, is your goal to increase revenues 50 percent over the next 12 months? Great! Now you can set benchmarks and measure revenue. Is your goal to reduce employee turnover by 5 percent in the next six months? Now you can set a KPI that calculates your turnover rate and then monitor it as time goes by.
- Is your KPI quantifiable and measurable? The 12-month, 50 percent revenue increase in the example above is quantifiable whereas a goal such as “boost profitability” is not. You can measure revenue growth and see if you’re hitting your target or not when you quantify your goals. While you could still measure how much your company has boosted profitability, without a quantifiable goal, there’s no way to know if any boost in revenue is on target. Likewise, KPIs cannot possibly measure intangible goals such as “improve our workplace safety.”
- What will you use to measure your success? Usually, if you create a quantifiable and measurable goal, choosing a KPI is clear. For example, if your goal is to generate $100,000 in sales each day, then you know you need to measure daily sales figures.
- Which metrics are most important to you? Oftentimes you’ll find that there are several ways to measure progress. For instance, you could measure sales based on the number of units sold or by dollar amount. Which metric is most meaningful? Once you’ve adopted a KPI and are pleased with its ability to indicate performance, make sure to use it consistently. Measuring units one month followed by measuring dollars the next month could skew perceptions.
- Are your KPIs relevant to your company’s success? In other words, are you monitoring progress on your company’s most important goals or are you wasting time measuring things that have little bearing on it? Keep in mind that your organization may have a handful of overarching goals to measure while each functional department will have its own set that help to support those organizational goals.
Finally, how do you use your KPIs once you’ve defined them? Use them to monitor progress, set alerts if that something may be awry, and communicate the importance of reaching each goal (Source: . You can use KPIs to motivate teams to meet goals as well. Remember that business intelligence software helps businesses make sense of all that data “on the fly” with web-based dashboards and data visualizations that allow business users to quickly find patterns and relationships (Source: What is Big Data?).