KPIs and How to Develop Them
Key Performance Indicators (KPIs) are measurable values that assist you in steering towards and achieving your business objectives. By selecting and defining the KPIs that best suit your company, you can guide your business in the right direction. Here, you will learn what a KPI is, why businesses use them, what makes a KPI a "good KPI", and how to develop them.
KPIs are the metrics from which you can evaluate opportunities, shape future goals, and monitor your company's progress towards achieving your objectives - whether that involves driving change or ensuring that you stay within set limits.
When managed correctly, KPIs should provide you with complete insights into your company's strengths, weaknesses, progress, and opportunities. Identifying the right KPIs is a critical component both in strategic planning and in ongoing operations.
KPIs and Objectives
The overarching KPIs are the most crucial metrics and steering tools your company can define and measure. You should also have KPIs at lower levels in your corporate hierarchy per department or function, but the principle is the same. These operational/functional KPIs should ideally derive from and support the overarching KPIs and focus on efficiency and processes.
The operational KPIs can also be used in projects (status of deliveries and milestones) or for specific purposes, such as risk management (risk factors).
Your company objectives and the KPIs linked to these goals should not be too numerous, contradictory (goal conflicts), or unrealistic. Otherwise, there is a considerable risk of confusion about what is most important to focus on and/or dissatisfaction because the goals are too challenging to achieve.
To successfully steer with KPIs, there should be data to support the measurement, understanding of what the KPIs measure and the work that needs to be done related to them, understanding why they have been selected, and analysis and follow-up related to the KPIs.
This is important at several levels in the organisation. At the management level, you want to ensure that the discussion revolves around what actions or changes need to be taken, rather than how the key figure is defined or whether it can be trusted. And in operations, you want employees to understand why the key figure is important and how their efforts impact the business in the right direction.
Therefore, the follow-up aims to allow the business to act on the insights provided by the KPIs, and this must be done continuously.
Examples of KPIs
The KPIs that companies use can often be categorised as strategic, tactical, or operational. Often, they are financial but can also be more operationally related, addressing objectives and progress within areas such as sales, personnel, or production.
The KPIs listed here are of interest to decision-makers at various levels and are sometimes supplemented with industry-specific KPIs. The most important thing is that all the key figures selected are relevant and aligned with the company's strategy.
- Customer Lifetime Value (CLV)
- Customer Satisfaction
- Employee Satisfaction
- Revenue Per Employee
- Revenue Per Customer
- Operating Margin
- Gross Margin
- Return on Equity (ROE)
- Return on Assets (ROA)
- Debt Ratio
- Working Capital
Why Do Companies Use KPIs?
Companies use KPIs to maintain focus, communicate, engage employees, reward, create insights, and simplify decision-making. The key figures have a specific purpose, are linked to objectives and goal achievement, are measured continuously over time, are specific and apply to a specific time period.
KPIs should be used to measure precisely those activities that your operation considers to be the most important. The idea is that you should be able to improve or change your company's strategy, operational activity, Resource Management, and demonstrate what creates value, with the help of KPIs.
What Makes a Good KPI?
According to KPI.org, a good KPI should:
- Provide objective evidence of progress towards achieving a desired outcome (goal).
- Measure what it is intended to measure (to assist with better decision-making).
- Give you a comparison that measures the degree of performance change over time.
- Be able to track effectiveness, efficiency, quality, timeliness, compliance, behaviours, finance, project performance, personnel performance, or resource utilisation.
- Is balanced between leading and lagging indicators.
It's also beneficial to keep your key figures simple, well-defined, objective, and actually used for decision-making. Make sure to have someone responsible for following up on each KPI.
How Do You Develop a KPI?
It's a good idea for your KPIs to be SMART (Specific, Measurable, Accepted, Relevant, and Time-bound), just like your goals. You should also consider, at a relatively early stage, how easy each KPI is to manage and influence.
Differentiate Your KPIs
Input measures various attributes (such as quantity, time, type, and quality) of resources consumed in the process. Input KPIs help you understand what has been invested in the process.
Process or activity metrics focus on the efficiency, quality, or consistency of specific processes used to produce.
Output is performance metrics that indicate how much work is being done and define and measure what is produced.
Outcomes focus on achievements or effects. What you ultimately want to influence.
Outcomes are strategic KPIs, and the remaining categories are operational/functional and support the outcome. Therefore, they often become underlying KPIs.
You Need the Right KPIs and the Right Mix of KPIs
Defining what is the "right" KPI is challenging as it depends on what your operation looks like and wants to achieve. But a very simple example to illustrate could look like this: Suppose you are going to make and sell coffee. You have coffee, water, and time (inputs).
You brew coffee and measure how efficient you are at producing the coffee based on resources such as the water, coffee filter, and cup (process).
You have produced the coffee and measure quality (output), but the result is something you can't directly influence: How good your colleague thinks the coffee is (outcome).
The most important thing to measure is the outcome. If your colleague thinks the coffee is good, you are doing something right, but you need a mix of KPIs to understand and improve the result.
Questions to Ask When Developing KPIs
- What outcomes do you want to see?
- What behaviours or activities will drive a specific outcome?
- What data are available and in which data source?
- How should each KPI be defined (measurement, goal, and time)?
- What question will this KPI answer?
- How often will data be collected/followed up?
- Who is responsible for collecting and analysing data?
- What is the goal?
- How often should this KPI be updated/evolved?
- What is the cost of collecting and following up data?
- How should this KPI be interpreted?
- What data or underlying KPIs make up this specific KPI?
- Where in the operation and for which decisions is this KPI used?
A Tool for Measuring and Monitoring KPIs
Hypergene gives you and your company the ability to focus on the essential KPIs and key figures that describe the operation's performance in relation to the defined goals.
Decentralised and data-driven decision-making are success factors in your management today. As the volumes of information grow, it becomes both harder and more important for managers and employees to focus on the overall goal picture and the governing KPIs that have been defined. Then they can make better decisions and act in the right direction.
KPI Tracking is part of Hypergene's solution that enables goal and KPI-oriented planning, management, and monitoring in an automated and efficient way.
10-minute video demo of Hypergenes solution: