Whether your business is new or established, you and your team have certain goals you want and need to achieve. You probably have objectives for the overall organization as well as goals for individual departments, strategies, and initiatives. But how will you measure success? How do you know when you’ve achieved a goal? That’s where key performance indicators (KPIs) come in. These measurement tools allow you and your organization understand the needs you want to meet and how you can make it happen. Read on to learn about what KPIs are, why they’re important, and how you can use them to help your business define and achieve success.
A key performance indicator is a measurement that evaluates how well a business is achieving its goals in activities and initiatives. KPIs may focus on the success of the overall business or indicate the success of an individual project, products, departments, or strategies. A KPI must be measurable and is usually quantifiable, which helps organizations track and compare strategies against competitors and previous or similar initiatives.
KPIs have a long and illustrious history. While no one knows the exact origins, it is believed that the emperors of the Chinese Wei Dynasty (3rd century) rated the performance of members of their family in the first known instance of rudimentary KPI usage.
In 1464, Luca Pacioli published Summa de arithmetica, geometrica, proportioni et proportionalita (Summary of arithmetic, geometry, proportions and proportionality), which described how Venetian sailors evaluated their sailing expeditions. The sailors would compare the amount of money they used to buy the goods they purchased to the money they received from the sale.
In the 19th century, a Scottish miller kept track of employee performance using different colored cubes of wood placed on his employees’ desks.
In the early 20th century, companies began formally measuring the performance of employees. This evolved into the concept of return on investment (ROI). Eventually, France created the tableau de bord allowing employers to track performance within their businesses. Dr. Robert Kaplan and Dr. David Norton introduced the Balanced Scorecard to monitor all company progress, not just in the financial sense, in the 1990s. This period also saw businesses beginning to align individual employee performance objectives will organizational initiatives and goals.
How to Use KPIs
To use KPIs to meet a goal or objective in your organization, start by asking yourself the following questions:
• What are the needs of your organization?
• How will you meet these needs?
• What tools will you use to measure the success of your initiatives?
• How will you carry out your plans?
• Who will be responsible for enacting the plans?
A KPI needs to be clearly defined and stated, and your business must have a precise plan for measuring it and achieving the desired outcome. You should also have ways to track progress along the way to achieving your goal. For example, if you’re hoping to achieve a certain sales figure, the KPI will be the amount of money you want your team to earn within a window of time. You should be specific about this period of time, indicating the dates or month. You’ll also need to come up with a plan for achieving this figure. Which departments will be involved? Which key people will need to participate? What’s the plan of action to increase your revenue? You’ll also want to create check-in points or milestones to gauge your progress. If the KPI is set for one month, perhaps you want to evaluate progress weekly and set a sub-goal at the midway point.
Key Performance Indicator Examples
The KPIs you will use to measure your performance will depend on your industry, department, and role. Here are some common examples of KPIs in different departments and functions:
• Sales qualified leads (SQL — vetted leads who are likely to become customers and have strong direct sales potential)
• Monthly or quarterly revenue targets
• Sales growth
• Sales activity and investment vs. leads conversion
• Number of deals closed
• Average size of the sale
• Website traffic
• Organic traffic (website visits based on organic searches)
• Click-through rate (CTR)
• SEO rank for target keywords
• Social media traffic and growth
• Sales revenue from specific campaigns
• Marketing qualified leads (MQL — leads who have engaged with your content and are identified as potential customers)
• Customer satisfaction score (CSAT — asking customers to rate their experience on a numerical scale)
• Net promoter score (NPS — asking customers how likely they are to recommend you)
• Speed of response
• First contact resolution (percentage of issues resolved by customer service upon the first contact with the customer)
• Customer retention rate
• Number of customer callbacks
• Total tickets vs. open tickets
• Number of instances and average time of server downtime
• Number of issues and average time spent repairing issues
• Recurrence rate of issues
• Success rate of resolving issues
• System usage rate Finance
• Net profit margin
• Operating cash flow
• Accounts payable turnover
• Accounts receivable turnover
• Working capital
• Return on equity (ROE)
• Retention of talent
• Average time spent on recruitment
• Average duration spent in positions
• Promotion rate
• Employee engagement (specific measurement tools might include the number of employees who attend company-sponsored events and employee surveys)
• Planned budget compared with the actual budget
• Percentage of tasks completed
• Amount of schedule variance
• Percentage of tasks completed on schedule
• Return on investment (ROI)
When you’re implementing a KPI, it’s useful to develop a template to monitor your progress. Your template will vary based on your specific objective and measurement tool, but most should include the following elements:
This is the objective you are looking to achieve. Along with stating your aim, you should note why you chose this specific measurement tool to gauge your performance.
• Key Performance Question (KRQ)
The KRQ is essentially a reflection on where you are now and why you hope to improve. What’s the status quo? What’s the next step?
• How the KPI will be used
Once you achieve—or don’t achieve—your objective, what kind of change will you be implementing? Along with what you are going to do with the KPI and its results, you may want to state what you won’t do with it. This might be necessary if, for instance, employees fear losing their jobs over these results.
• How you will collect and measure data
You should come up with a clear plan for collecting data and define what tools you’ll use to measure it. For instance, are you going to use surveys or focus groups? Perhaps you’ll have a combination of factors. And how will you measure the objectives? For example, will you assign a numerical value to qualitative responses? What scale will you use? What does each number indicate?
• Key Result Indicators (KRI)
Many businesses use dashboards displaying graphs that show progress. This helps demonstrate the direction of growth visually and allows you to see whether you’re moving toward achieving your goal.
• Data collection method and frequency
You’ll need to have a system for collecting the data within your template. You’ll also want to state how often you’ll enter the data and report it to employees, stakeholders, or other audience members.
Every project needs an owner, and this one may have several. Who is responsible for entering the data, measuring the outcomes, and carrying out the plans?
How long will this project last? When you developed the KPI, you defined the time parameters. Include them in your template so you’re aware of what progress you’ve made over a certain period of time and how long you have to go.
What Is a KPI report?
A KPI report is a summary of your efforts and performance. When you create it, you’ll need to measure how you performed against your goals and objectives. If you used a dashboard as part of your KPI template, it will be useful in helping you create your report, since you’ll see the numbers and measurements displayed visually in real time. You’ll also use other elements of the template to report on your goals and performance. Your report could be a written document that you deliver to the intended audience, or you may use an alternative delivery method, such as a presentation.
Think about what you’re measuring and your audience to determine the best delivery method. Whether or not you’re happy with the results (and anticipate your audience being satisfied), you need to be honest and thoughtful when delivering them; don’t try to spin the numbers. Still, you may want to develop a plan for next steps if the results fall short of your hopes or expectations.
When you’re creating your report, considering the audience, frequency, and delivery method. Will you be making a presentation? If so, it’s a good idea to use visual aids, such as graphs and charts, to accompany your remarks. Will you be speaking to employees, stakeholders, or someone else? Understanding the needs of your audience will help you guide your presentation. What language should you use? Are there any terms with which the audience might be unfamiliar? Should you include a glossary? Also, consider how often you’ll be delivering a report. You may want to include a summary of the last report and demonstrate your progress since its delivery.
OKR vs. KPI
In searching for tools to improve your business efficacy and help you achieve your goals, you may have also come across the term “OKR.” What is an OKR and how is it different from a KPI?
What is an OKR?
Objectives and key results (OKR) are a metric that includes large-scale goals and the measurable steps participants will take to achieve them. OKRs help teams understand the bigger-picture goals and how each employee or participant plays a role in reaching them. Each objective created includes several clearly defined results.
What’s the difference between an OKR and a KPI?
OKRs and KPIs generally function together in your achievement of a specific goal. While the KPI is a measurement of your current performance, the OKR allows you to establish new goals. For example, if you’ve created a KPI measuring the number of Twitter followers you gain in a certain month, you may then evaluate your results and find that you want to increase your following by a certain percentage. This is your OKR. It will also include specific plans for achieving that result, such as increasing your Tweet frequency.
KPIs and Your Business
How will you use KPIs in your organization? Well, that depends on the nature of the work you do and the individual goals of your company and team. Spend some time reflecting on what your individual employee and organizational goals are and consider what it will take to achieve them. If you’re a manager, work with your peers and your team to create measurement tools to evaluate your performance in specific areas and consider how you can better reach your goals. KPIs can go a long way in helping you develop and improve initiatives, as well as allowing you to better the company as a whole.