What are Key Performance Indicators(KPIs)?

What is KPI?

A Key Performance Indicators (KPIs) is a measurable indicator of performance that you have determined is significant. They're often used in business to keep track of progress toward objectives.

KPIs may be used to track progress at several strategic levels. For instance, a corporation may decide to use only one set of KPIs to assess its total business performance. However, employ a distinct set of KPIs to assess the success of other firm departments, such as sales, marketing, finance, human resources, and operations. KPIs may be used to track the progress of individuals, projects, campaigns, processes, tools, and even robots.

Types of Key Performance Indicators

Financial metrics

Financial key performance indicators are frequently focused on revenue and profit margins. After accounting for all of the company's costs, taxes, and interest payments for the same time, net profit, the most tried and tested of profit-based metrics, shows the amount of income that remains as profit for a particular period.

To be utilised in comparative analysis, net profit must be translated from a dollar number to a percentage of sales (known as "net profit margin").

The "current ratio," a liquidity-focused financial KPI, is calculated by dividing a company's current assets by current loans.

A financially strong company will often have enough cash on hand to pay its obligations for the following 12 months. However, because various sectors rely on varying levels of debt financing, a company's current ratio should only be compared to that of other firms in the same industry to see how its cash flow compares to its peers.

Customer metrics

Customer-focused KPIs include per-customer efficiency, customer delight, and customer retention.

Customer lifetime value is the total amount of money a client is expected to spend on your products over the length of their business relationship (CLV).

By contrast, customer acquisition cost (CAC) refers to the complete sales and marketing costs associated with acquiring a new client. By comparing CAC to CLV, businesses may assess the effectiveness of their client acquisition activities.

Process performance metrics

Process metrics are used to track and assess operational performance across the company.

Businesses may figure out what percentage of their products are defective by dividing the number of defective products by the total number of products produced, for example. The aim, of course, would be to reduce this number as much as feasible.

The overall amount of time it takes to perform a process is referred to as throughput time. A drive-through restaurant's throughput, for example, may be used to determine how long it takes to serve an average client from the moment they place their order to the time they leave with their food.

How do you set KPIs?

Start with the goal

Setting goals entails determining what you want to do and why you want to accomplish it.

Keep in mind that goal-setting is almost often done as part of a larger goal hierarchy. If you're defining goals for yourself or your team, you should think about how they complement or contradict the company's broader strategy. You should be able to define how strategic corporate objectives complement the organization's purpose or vision if you're creating them.

Remember that bad, non-specific strategic goal formulation makes it more difficult for your colleagues to create strong tactical objectives.

Smart goals

The SMART goals strategy is a common way for improving your objectives. George T. Doran created SMART objectives in 1981, and they are goals which are:

• Specific

• Measurable – (here is where you would use KPIs)

• Assignable

• Realistic

• Time-related (or time bound)

SMART objectives are a tried and true method for pinning down goals and making them actionable. However, there are some critical areas that SMART does not cover, in our opinion.

(Tips for time management)

Decide performance measures

When selecting KPIs, be deliberate. A limited number of useful KPIs is vastly preferable to a slew of measures that no one cares about or comprehends.

Consider direct measures first. Total Revenue per Month is an example of a direct measurement that may be used to enhance revenue. However, there are certain factors that cannot be directly quantified. For example, you may utilise indirect indicators like a CSAT study, Average Return Rate, or Repurchase Rate to gauge something more intangible like customer happiness.

It's safer to utilise more than one indirect KPI if you're employing indirect KPIs. You should also avoid using ineffective proxy measurements.

Get buy-in for KPIs from the start

We've all been in that situation. You're halfway through a project when someone raises an objection to the KPIs we're using to track progress.

"Are these the most accurate indicators of effectiveness?"

You've suddenly lost momentum, as well as months of hard effort, because you're forced to restart the goal-setting process.

KPIs don't have to be flawless to be useful. They do, however, need to have the trust of everyone who will be utilising them. Getting people to buy into your KPIs takes effort at first, but it's time well spent.

If you're a team leader, don't merely assign this job; you must be personally committed in the team's KPIs. However, don't create KPIs without allowing your staff to contribute to them. KPIs that are important to everyone are a source of intrinsic motivation. However, if your staff does not believe in your KPIs, they will remain extrinsic incentive at best, and ignored at worst.

Keep your KPIs visible and regularly review your progress

Unfortunately, many people go through the time-consuming process of establishing KPIs just to ignore them until the end of the year when the project is over. You can consistently ignite action and concentrate your team's attention by tracking KPIs and keeping them visible in the form of a live KPI dashboard.

You should also schedule frequent checkpoints to assess your progress. This provides an opportunity to consider what has worked in the past and what you may do differently in the future.

How do you set non-financial KPIs?

Developing non-financial KPIs, such as those used in HR, Support, or even Marketing, might be less reliable for some people. But it's not quite accurate to state that these KPIs are entirely non-financial; rather, they assess the performance of things that indirectly contribute to financial performance, or financial performance over time.

For example, customer satisfaction (CSAT) is a leading indication of repeat purchases. Future market share and long-term growth are inextricably related to brand awareness and salience.

Establishing non-financial KPIs is essentially the same as developing financial KPIs. To comprehend and communicate how your non-financial goals and KPIs relate to the company's strategic goals, use KPI frameworks.

Limitations of Using Key Performance Indicators (KPIs)

The following are some of the drawbacks of utilising KPIs:

• The considerable time it takes for KPIs to generate useful information

• To be helpful, they must be constantly monitored and closely followed up on.

• They give managers the opportunity to "game" KPIs.

• When managers are overly focused on productivity of employees, quality tends to suffer

• Employees may be overworked in order to meet specified KPIs.

Conclusion

KPIs are a useful tool for measuring and tracking a company's performance across a number of parameters. Understanding what KPIs are and how to use them effectively may help managers optimise their companies for long-term success.