How
To Define and Select Good KPIs for Your Business-
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KPI (key performance indicator) is one of those
buzzwords heard often in today’s business environment. In theory, the
meaning of the term is obvious enough. However, for many companies, the
implementation often poses a dilemma resulting in a pile of data with little or
no actionable value. That outcome may be due to a variety of factors,
including a lack of clarity of the intent of KPIs. This article offers a
simplified definition of KPIs and suggests some criteria for selecting
actionable indicators for your enterprise.
Definition of KPIs
A simple approach to selecting appropriate KPIs in any
organization is to examine the three component words in the term: key, performance,
and indicator.
- “Key” suggests a leading principle; something of critical or
central importance to the organization. This means that not
everything can be tagged as key – regardless of the availability and
abundance of data.
- “Performance” suggests a process; an action recognizable to
everyone (or at least the essential personnel) in the organization.
This means that the activity is public (within the organization or broader
business arena).
- “Indicator” suggests a pointer; a gauge for a specific outcome
in the organization. This means that an indicator tracks change over
time.
Put together, KPIs are pointers that track outcomes of
central importance to an organization.
Typically, “outcomes of central importance” are
formulated as business goals or objectives. They embody the survival (success)
strategy of the enterprise. Hence, well-defined KPIs provide a basis
for assessing the achievement of enterprise objectives. Depending on the
quality of the underlying data, KPIs allow for objectivity in telling a
company’s success story.
Few businesses are exempt from fluctuations in
operations resulting from internal, industry, or economy-wide volatility.
Consequently, it is important to think of KPIs in terms of trends (over
reasonably long periods) rather than focusing on them as a one-time measure.
It is also important to use the same definition of KPIs for the same objective
to ensure consistency during the periodic performance reviews.
Criteria for Selecting KPIs
It is reasonable to expect that businesses in the same
industry sector will have generally similar survival objectives. However,
the likelihood of operational differences means that KPIs are customizable
for specific enterprise goals. The point being that generic KPIs may not
always be the best for your business.
It is, therefore, important to have specific criteria
for selecting KPIs that are consistent with the objectives of the
enterprise.
The ability to assess the components of performance
constitutes an advantage in the use of key performance indicators (KPIs).
We suggest the following as desirable characteristics in good KPIs:
1. Strategic:
Put simply, the best KPIs originate from the central objectives of the
organization. This means that a good place to start the selection of KPIs
is a thorough internal assessment of corporate objectives – particularly those
considered critical to the survival of the enterprise. The idea is to
develop a set of questions or guidelines to help the company translate its
objectives into actionable indicators.
An internal assessment is vital as a reference point
for KPIs so that as enterprise goals change, KPIs can change
accordingly. Using a question format to develop the KPIs is
effective in minimizing any fuzziness about the indicators and reinforces
the links between KPIs and company objectives.
2. Relevant:
Relevance provides meaning within the context of the organization’s
hierarchy. One of the most important reasons for tracking performance is
to foster learning and improvement. The logical approach to learn and
improve is to design indicators that management and staff can identify with.
Relevance is vital to ensuring the informed
participation of employees and management whose performance is critical to
enterprise survival. Additionally, relevance fosters realism in goal setting.
If the enterprise consists of multiple departments, which are engaged in
multiple projects, relevance makes the monitoring of multiple goals manageable.
3. Quantifiable: An enterprise mission statement is the place for lofty
expressions. KPIs, on the other hand, must be reliably
quantifiable. Measurement is what makes tracking meaningful for learning
and improvement purposes. Measurement is what adds intelligence and
credibility to business decision-making.
KPIs summarize business strategy in ways that
take the guesswork out of performance management. The periodic (quarterly
or annual) reviews allow for trend comparisons, assessment of set target
levels, and systematic revision of goals. Measurement minimizes
subjectivity in the evaluation of individual employee and corporate
achievement. The ability to track KPIs encourages transparency in
business performance metrics.
The Role of Good Data and Technology
While the criteria for selecting good KPIs apply
across all enterprises, the actual implementation is clearly a function of
size. The more complex the organizational structure and activities, the
more complicated the management of business performance. In all cases,
good enterprise data is of paramount importance.
Understandably, small companies can handle the choice
of a few good KPIs, set up the data collection process, perform periodic
measurements and reviews with relative ease.
The more complicated the management structure, the
more deliberation should go into the selection, measurement, and periodic
reviews of KPIs. The data requirement of medium- and large-size
enterprises tends to be more than that of small enterprises. This would
explain why medium- and large-size companies are more likely to deploy IT
support to facilitate the measurement and reporting of their KPIs.
One such technology is business intelligence (BI)
technology. BI software (fully licensed onsite or acquired on a SaaS
platform) provides tools for gathering, coordinating, and transforming data so
that information is derived efficiently. The more integrated the BI
system, the more functionalities it offers, including data management tools,
reporting tools, and dashboards for viewing and sharing results.
An Example of KPIs for a Professional Services
Consultancy
The survival of a professional service provider
depends on the number of ongoing and new projects the company handles.
Specifically, the company’s gross revenue is primarily determined by the
billable hours it invoices. KPIs for such an enterprise must be
strategically linked to target growth in number of projects (not necessarily
number of clients) and time billed by consultants.
The indicators could be refined to include target
levels of growth in billable hours for each category of consultants, profit
center, department, and geographical location. Data needed for tracking
this type of KPI are contained in employee timesheets, which show hours
billed by project. It is relatively easy to compile the information
necessary for assessing progress toward set targets, which in turn provides the
gauge for company revenue growth.
Incidentally, the professional service provider could
be a large multi-national entity or a single proprietorship. The process
of tracking revenues based on billable time is similar – the main difference is
the amount of data involved.
Conclusion
Realistically, KPIs are seldom perfect measures.
However, their usefulness for tracking organizational performance hinges on how
well the indicators connect with the central objectives of the
enterprise.
Ensuring that the selected indicators are strategic,
relevant, and quantifiable improves the likelihood that they will foster
realism, objectivity, and transparency in performance management.
IT support may facilitate the measurement and
reporting of KPIs, especially in enterprises with complex organizational
structure and activities. Done manually or with the help of technology,
good data are crucial to meaningful KPIs.
How to Develop Key Performance Indicators (KPIs)
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