What is a KPI?
A Key Performance Indicator (KPI) is a performance measure usually associated with organisational performance rather than individual performance. KPIs are frequently used to determine progress towards strategic goals and objectives. They can also be used to monitor the ‘repeated’ success of an operational goal.
Key Performance Indicator (KPI) Definition
A KPI is a quantifiable measure that an organisation uses to gauge the performance of an objective over a specified time.
Let’s break this down.
- A quantifiable measure is a value that can be counted.
- An organisation might be a company, charity, government or school but not a person
- To gauge performance means to compare a value to something that is good or bad.
- An objective is something that an organisation wants to achieve
- A specified time is the amount of time required to achieve an objective
A quantifiable measure is something that can be counted, for example, Revenue or Customer Satisfaction. Furthermore, Your should be using Key Performance Indicators to measure improvement. By measuring improvement, we can see whether or not you are getting closer to our desired end-point, goal or strategy. A KPI may be an index of several measures.
KPIs should not be used to measure the progress of a project. The only thing you can say about a project is, it has started, is running, or has finished. A project may or may not contribute to an objective, and the real measure is the improvement the project makes, not the project itself. You can use a different method to measure projects at an operational level.
EXAMPLE: Return on Investment (ROI), which is a percentage, is made up of two measures, Investment Cost and Net Profit (from the investment over a given time).
We’ve said that KPIs are used to measure performance at an organisational, or business, level. They won’t usually be applied to measure the performance of an individual. Sometimes, an indirect relationship might exist between a KPI and a business measure – such as a sales bonus. In this example, the achievement of the sales-related measure would trigger the related bonus for the sales team. However, the bonus element is a business measure – not a personal measure.
EXAMPLE: You could use Return on Investment (ROI), to look at how well a new product or service has performed in the market
It helps to picture a speedometer when we think about gauging performance. The top end of a speedometer tends to be red and will indicate an unacceptable outcome. We could also picture a petrol gauge. If we are in the ‘green’ area, then we have enough fuel and don’t need to worry. Moving into the amber zone suggests we need to fill up. Hitting the red means we’re in trouble! We need to have similarly defined thresholds to flag up what is considered good or bad. One way that many organisations gauge the performance of their Key Performance Indicators is to use the RAG – or Red, Amber, Green – measurement system. RAG is highly intuitive, easy to apply and well-known.
EXAMPLE: Continuing with the ROI example from above. If the cost was £100,000 in year one and the returned profit in year two £52,000 then the ROI would be 52% at the end of year two. Is this good or bad? If the objective was to attain a 50% ROI in year two, then this is good. If the aim was to achieve a 70% ROI in year two, then this is bad.
You need to judge performance against an objective. Before setting gauge thresholds, you need to determine why you are setting them in the first place. In other words, what is your objective? What is it that the organisation wants to achieve?
The golden rule: You must base key measures against organisational objectives.
Example: The objective for Return on Investment is quite easy to describe: “To achieve 220% ROI after two years from product function X.” With this objective, you can put the correct KPIs in place. It may be that that ROI would be measured quarterly with incremental thresholds leading to the final 220% target, as shown in the diagram above.
All key performance indicators need targets and are therefore time-bound. The time scale can be staged based on the desired outcome of the objective.
EXAMPLE: Again, look at the ROI example above. Year one is the investment year and has no ROI expectation. You could profile year two and three as follows:
- Q1 – 10%
- Q2 – 20%
- Q3 – 30%
- Q4 – 50%
- Q5 – 75%
- Q6 – 100%
- Q7 – 150%
- Q8 – 220%
You can better control progress towards the objective by staging the KPI thresholds over time. The overall target is 220% in year three. However, a sensible plan will always phase the KPI targets rather than merely waiting two years and checking if the objective has succeeded!
Not sure where to start? Don’t start with key performance indicators! Good KPIs come as a result of understanding where to take an organisation or business. It is imperative to understand where you want to go before deciding how you will get there. Agree on clear objectives first, and then meaningful key performance indicators can be generated.
Most organisations will use the well-known SMART model when creating their Key Performance Indicators. SMART stands for:
- Specific: So that the KPI is clear and objective.
- Measurable: So that its progress can be measured and tracked to assess attainment of the goal or objective.
- Attainable: With the right level of stretch to encourage high-performance, but achievable so that the organisation’s employees remain motivated and empowered to deliver.
- Relevant: To the goals and objectives of the business strategy.
- Time-Bound: Define a start and end-point.
This model is intuitive and easy to use, and it makes sure that every resulting KPI is robust.
Writing Meaningful KPIs
Many businesses simply try to adopt industry-standard KPIs and then wonder why they don’t work. All organisations are unique in terms of their strategy, their nature, their competitive position. Adopt standard KPIs, and they will inevitably be meaningless to your business and its strategy. The real value lies in translating your strategic objectives and goals into the key performance indicators, which will truly measure their performance towards the desired end-point.
To develop them, begin with the basics of your objectives. Ask how you intend to achieve them. Ask who will be able to act on the information you are gathering. KPI development is an iterative process that requires input from managers, department leads, functional specialists, technical analysts and specialists.
For much more information on this subject, read How to Develop Meaningful KPIs.
As part of a strategic process
KPIs are almost worthless if used in isolation. They need to be related to objectives to be meaningful. But more than that, KPIs are the most significant output of a strategic planning process. When a business or organisation is planning for the future, whatever strategy it puts in place need to be verified through measurement, KPIs provide that measurement.
The key here is to have a structured communications plan in place which ensures a systematic cascade of your business strategy and its elements. You should provide core messages for each tier of your organisation for onward briefing, with resources such as structured team briefing materials, blogs, town halls. Two-way communication between staff and managers should be encouraged to ensure everyone understands KPIs, their usage, and everyone’s role in delivering them.
Once your KPIs are in place, it’s vital to monitor them regularly. Many businesses will do this by scheduling in a monthly review meeting with key internal stakeholders and KPI owners. A monthly dashboard and report will be produced – ideally using a system such as QuickScore to automate the process – and this will be reviewed beforehand and discussed in the meeting.
By approaching your KPI development robustly and thoroughly, you can assess your objectives and goals and unlock the full value of your strategic planning process. We recommend using our Strategic Planning Process model to make the process of creating KPIs easier. Businesses can also use the expertise of a strategy consultancy for guidance, as they develop their in-house capabilities with the strategic process. For further support and resources, please see the Intrafocus resources pages or contact our team for a no-obligation chat about your needs.
Top 10 most asked questions about KPIs
Can I use them to measure individual performance?
Generally speaking, no. KPIs measure organisational performance, rather than the individual employees within your organisation.
How do I define a them?
The right approach is to take your objectives and goals and ask leading questions, such as:
- What is the desired outcome of this objective?
- Why does it matter to our business?
- How can we measure progress towards the goal?
- What can we do to influence the outcome?
- Who will own this outcome?
- How will we know that we’ve achieved it?
- How often do we want to review progress?
By working through these critical questions, you will cover the essential considerations for each KPI. From a practical perspective, you could do this at a workshop with your team and a large number of post-its! This dynamic approach is one that we find works very well at Intrafocus guided strategy sessions.
How can I make them as valuable as possible?
We talked about using the SMART methodology earlier. But there is a further step that organisations can take to leverage the value of their KPIs. Add an action for evaluation, and re-evaluation, into the management process. Continually assess that KPIs and that their ongoing relevance to the business is confirmed. As an example, what if your sales revenue figure exceeded your target, or if you hit it early? Then was the goal initially pitched too low, or was another factor responsible?
What should they tell me?
Various business stakeholders will look at KPIs. Stakeholders include executives, managers, investors, lenders, and employees. So the takeaway is that a KPI should always be more than just an arbitrary set of numbers. They need to tell the reader something strategic about the organisation’s goals and objectives and allow them to learn something about the business model by assessing the full suite of available KPIs.
How often should I track them?
Tracking depends on the KPI and the business. Review some weekly, review others monthly or quarterly. Err on the side of frequency, so that you can make adjustments if concerns are flagged.
Can I change them?
Yes, they can, and in a rapidly changing market, many KPIs can become obsolete over time. Change is why a regular review process is essential. It gives you a chance to fine-tune your KPIs, and to ask whether they are still valid.
How do I know if they are attainable?
It’s crucial to set a stretch target, which is realistic and achievable. Start with a baseline of performance. Your business will already have a wealth of data, so use it to get an accurate starting point. A baseline will help you to create a target with the right amount of – attainable – challenge.
Who should see them?
The answer is – most people who work in your organisation. Business leaders and managers are an obvious example. All employees should see them as well, and understand how their performance objectives link with and support relevant KPIs. Most companies will make this link stronger by tying any performance bonuses to KPIs. Show your KPIs to external stakeholders too. For example, if you have a KPI that relates to sustainability, then its progress might be shared with investors, partners, suppliers. Even customers can benefit if you show your commitment to its attainment.
How should I track them?
Most businesses will use an automated system such as Spider Impact to make the process quick and easy. It is time-consuming and inefficient to gather data using spreadsheets, and this approach results in errors and waste. Integrate Systems such as Spider Impact with your existing applications. Spider Impact can create rich, powerful dashboards which present progress data and analysis for review and decision-making.
Is it challenging to develop them?
The honest answer is that it can be – but it does get easier with time and practice. Like anything else, a sound business methodology requires time to embed, and trial and error to get right. The team at Intrafocus work with organisations of all sizes to help them develop their business strategies and to create robust, impactful KPIs which make a difference. We usually start with a business strategy workshop and can deliver this remotely as required. Please contact our team to find out more.