A Key Performance Indicator, also known as KPI, is a value that can be estimated or measured, which shows the effectiveness of your business in meeting and exceeding its key objectives.
Businesses utilize KPIs at different levels to assess their success in attaining set goals. High-level KPIs examine overall business performance.
Low-level KPIs, on the other hand, factor in processes at the departmental levels such as business processes in HR, sales, marketing, support, and others.
What makes KPI useful?
KPIs are as valuable as the actions they inspire. Several businesses blindly use industry-standard KPIs and end up with surprises as to why those KPIs fail to communicate the essence of their business and produce any meaningful impact.
One major aspect of KPIs, which is often downplayed, is the fact that KPIs are means of communication. Thus, it is highly essential to stick to the rules and the best practices of communication. People will likely absorb or act upon a concise, clear, as well as relevant information.
When it comes to devising a strategy for the formulation of KPIs, ensure your team begins with the basics and come to terms with your corporate objectives. Not only that, they must be conversant with the strategies you want to deploy to achieve them, and stakeholders that can act on the relevant data.
KPI reports may be used to help everyone assess progress and guide further actions. This process should be iterated with feedback from heads of department, analysts, and managers. As this process evolves, more clarity will be gained on how best the business can be measured and whom the data should be shared with.
How can you define KPIs?
It is usually tricky to define your KPIs. This is because every key performance indicator should relate to a particular department within an organization. For example, KPI's pertaining to digital marketing may be vastly different than those of the sales department. Most times, people interchange KPIs with business metrics. They are not the same. You need to define KPIs in line with your critical business objectives.
- Here are steps to follow in defining KPI:
- What are your desired expectations?
- Why do these expectations matter?
- How do you intend to measure progress?
- How do you intend to influence the expectation?
- How do you measure if the expectations have been met?
- How often do you intend to evaluate progress in line with the expectations?
For instance, if you expect to improve your revenue from sales this year. You will term this your 'Sales Growth KPI.' This is how you can define it.
- To improve revenues from sales by 20 percent this year
- Meeting this expectation will enable your business to reach profitability.
- Success will be estimated as an improvement or growth in your revenue estimated in dollars spent.
- By recruiting new salespersons, improving promotion to existing clients to purchase more products.
- The Chief Sales officer is in charge of this metric.
- Revenue is expected to grow by 20 percent this year.
- Assessment will be done every month.
Actionable KPIs are SMART. So what's a SMART KPI?
One approach to assess the impact of a performance indicator is to leverage the SMART technique. The letters represent:
- SPECIFIC- Is your target specific?
- MEASURABLE-Can the progress towards the target be measured?
- ATTAINABLE-Is the target attainable in reality?
- RELEVANT-How is the target relevant to your business?
- TIME BOUND-What's established timeframe to achieve this goal?
5 Practical Approaches To Set KPIs
Here are 5 proven steps to design meaning performance metrics, indicators, and measures.
It is important to adopt the right approaches when you want to establish KPIs that would be meaningful. The impact of KPIs in managing your business or organization's performance cannot be over-emphasized. Nevertheless, without a rigorous procedure for establishing KPIs, there's a possible chance that you may encounter these issues:
- Measures being discarded as people see it as irrelevant.
- No obvious connection between the business strategy and the measures.
- No clarity on how to measure targets and goals, especially the qualitative and the intangible goals.
Perhaps you have been facing these issues; here are 5 proven steps that can guide you in setting your performance metrics, indicators, and impactful measures.
- Be clear about what performance indicators or measures are and are not.
- Assess your existing performance measures and KPIs to know what to discard or extract.
- Ensure your targets or goals can be measured before developing performance measures.
- Avoid the use of brainstorming while establishing KPIs.
- Facilitate buy-in among the stakeholders that are relevant to the KPIs.
1: Be clear about what performance indicators or measures are and are not.
Perhaps you intend on developing meaningful KPIs or performance measures; you need to understand what the word 'meaningful' means. Several people confuse the following things as performance measures or KPIs:
- Employee Productivity
- Positive respondents' satisfaction survey
- Introduce a new recruitment framework by June.
None of the above items qualify as KPIs or true performance measures because they lack clarity; they are ambiguous and are not quantitative.
The first item is vague and an unclear concept that has different interpretations and can be measured in diverse ways. The second item is a data collection technique- a survey. The third item is a milestone that indicates the progress of a project and not its performance.
A meaningful KPI has a unique definition:
'A quantification that offers objective evidence of the extent to which a performance outcome is occurring over a given timeframe.'
2. Assess your existing performance measures and KPIs to know what to discard or extract.
If you presently lack a holistic approach to developing measures and KPIs, all hope is not lost. You only need to assess your existing measures and KPIs. This will help you keep the good measures and discard the unproductive ones.
Begin by establishing an assessment framework. It may be a spreadsheet that includes the criteria for meaningful KPIs. Then collate all existing measures in your assessment spreadsheet, audit each of them to ensure they contain complete details that any meaningful measure must possess. Also, remember that it is not a bad idea to add several KPIs in your assessment spreadsheets.
3. Ensure your targets or goals can be measured before developing performance measures.
Most conversations around KPIs always start with, 'What should we measure?' This is a wrong question that leads to a dead-end with people working on quick-fixing of KPIs. You could even end up with complicated measures that cannot produce meaningful decisions.
Any meaningful KPI must begin with measurable goals. It means those goals must be clearly and worded explicitly in such a way that you can visualize how they will be recognized when you achieve them. Therefore, the first task is to verify if the goals are measurable.
4. Avoid the use of brainstorming while establishing KPIs.
Alex Osborn could not imagine how the brainstorming technique he invented would be widely accepted in business. Virtually every business makes use of the brainstorming technique in any session or event. However, there is a meeting where this technique should be considered as an exception, and that's in a session where performance measures are to be developed.
Brainstorming produces lame KPIs. A performance measure brainstorming meeting for the target of staff engagement will only generate vague concepts, indirectly related indicators, milestones, and trivial counts:
"sick days, turnover, retention rate, overtime, the introduction of talent management, engagement index, staff survey, leadership development, employee happiness, and performance management."
Therefore, avoid establishing KPIs via brainstorming. Become more deliberate; you can utilize the puMP Measure Design Technique to develop the most relevant to your goals.
5. Facilitate buy-in among the stakeholders that are relevant to the KPIs.
KPIs that are developed by consultants, small teams, or in private meetings with no supportive documentation for selecting them usually get ignored. No one would buy into an idea they were not involved in. It is not even enough to request sign-off from people. KPIs yield results only with buy-ins, not sign-offs.
You can only achieve meaningful and lively KPIs when they are deployed in boosting performance. However, they will lackluster if the stakeholders who collate the data, analyze and communicate performance measures do not buy-in.
So how do you facilitate buy-ins?Utilize an Assessment Team
This team should include individuals who are conversant with function or process, the data, the clients, and the recent issues of the aspect you intend covering.
Archive Your Thoughts
Do this as you create your KPIs so they can be easily assimilated by others and be critiqued appropriately.
Establish an open space
This will ensure people visualize, explore, communicate, and share feedback on the draft work.
Conclusion: Share Your Actionable KPIs
Lastly, you need to share your KPI with relevant stakeholders for it to be meaningful. Your workforce can easily follow through your vision if they understand your goals. Not communicating your KPIs can cause separation and frustration on the part of your employees who could not find the direction your business is heading.
Not only that, you need to communicate the KPIs appropriately. Otherwise, they will remain figures on the screen with no meaning to your workforce and other stakeholders.
You need to explain to the stakeholders the purpose behind measuring the KPIs. Respond to questions that bother on why you have picked one KPI instead of others. Then, receive feedback and listen.
Being attentive to your stakeholders will help you track the missing link in the communication of your underlying objectives.
For instance, profitability is a significant objective of any business. Meanwhile, you may be prioritizing research and development above revenue generation as far as your objectives are concerned. Listening to your employees may even afford you the privilege of taking brilliant ideas from your team on how you can set actionable KPIs.
Then review your KPIs periodically. It could be monthly or weekly. This will help you in tracking progress and know how successful you are in setting achieving your actionable KPIs.