A key performance indicator or KPI is a very important criterion for measuring business performance and its progress. In this article, we will discuss issues related to KPIs and explain how to develop an effective KPI.
Success in business requires specific metrics and criteria to measure the achievement of goals and to take appropriate actions according to specific indicators that are monitored. In this article, we will touch on these vital indicators, known as KPIs, and give you the details of this important topic, but first we need a more precise definition of KPIs.
What is the key performance indicator?
A key performance indicator (KPI) is a measurable quantity that shows a company’s efficiency in achieving its key business goals. To better understand a KPI, it is best to have a look at other similar definitions provided by various sources:
Oxford Dictionary definition of Key Performance Indicator: A measurable measure used to assess the success of an organization, its employees, etc. in achieving performance objectives.
Investopedia definition: A set of measurable metrics that a company uses to measure its performance over time.
Macmillan Dictionary definition: A method of measuring the effectiveness of an organization and its progress towards achieving its goals.
Different organizations at different levels use key performance measures to assess their success in achieving their goals, for example, these high level indicators can focus on the overall performance of the business; But KPIs at lower levels will focus on operations in different sectors, such as sales, marketing, human resources and support.
What are the key performance indicators?
KPIs are divided into different types from an academic perspective, and of course, since these divisions don’t make much difference to our most important need, which is to define KPIs better, they may not seem very useful; But it is better to get acquainted with their names and uses:
Lagging KPI: These show your performance over time. Lagging KPIs are very useful for showing how far employees are progressing and staying focused, but the impact of your actions on them is not immediately apparent. Therefore, it is not ideal for everyday decisions.
Leading KPIs: These show what is going on right now and can help you predict future results. A good example of this is customer scoring. Because you can see the change in the number of recordings immediately.
Strategic KPIs: These metrics measure your progress towards key goals, such as the number of monthly active users (MAUs). Strategic indicators usually do not change dramatically or suddenly and are therefore not often monitored on a daily basis.
Operational KPI: These measure more everyday items that need immediate attention. Operational KPIs show your progress in real time and vary widely based on current priorities.
Tangible Key Performance Indicators: These indicators are objective and tangible elements that can be easily observed and measured, for example, we can mention the number of customers or sales volume.
Intangible KPIs: These are a bit more abstract and more difficult to monitor and measure; For example, Net Promoter Score (NPS) or Customer Satisfaction Rate (CSAT) are among such indicators.
What is a KPI Dashboard?
KPIs are the most important method for any business as the main way to define achievements and measure the potential and extent of achieving goals. Of course, these indicators do not work in isolation; Instead, they overlap and influence each other. A KPI dashboard is a space where you can group KPIs and see how they affect each other. In other words, a KPI dashboard is a centralized source of information that displays everything you measure to track progress on your KPIs. Key performance and team goals and company goals.
For example, if different department heads define different metrics for their employees, the KPI dashboard will show the individual items that are monitored for all of the selected and assigned metrics. Similarly, the company’s executives can use the KPI dashboard to see the progress and efficiency of each department in achieving the company’s goals. To work with these systems, you must be familiar with the terms and expressions, the most important of which are the following:
Key risk indicator or (Key risk indicator) KRI: An indicator used in management to determine the risks of each action. Key risk indicators are the values that are monitored by organizations in order to be more aware of the increasing risks in various areas of business.
Critical success factor (CSF): A critical success factor is a management term used to refer to the components necessary to achieve an organization’s goal.
Performance Standards: Using these standards, we measure the behavior, actions and performance of the organization at the individual rather than the organizational level. For example, for a person who works in a call center, the following performance standards can be considered:
Number of calls answered, average waiting time, number of successful calls, and average time per call.
How can the effectiveness and efficiency of KPI be increased?
The factor of effectiveness and efficiency of the KPI lies in the word “key” of this phrase. In many cases, we see that different organizations, through blind imitation, identify common KPIs in their field of activity as a measure of their performance. After a while, they wonder why the KPI is not aligned. main with
Its actions, however, do not have a positive impact In fact, when compiling a KPI, it should be noted that just as each key is generated for a particular door, each KPI is determined by the specific characteristics and circumstances of each company and organization.
The interactive aspect of these indicators is one of the most important dimensions of a KPI and at the same time one of the most neglected dimensions, in other words, KPIs follow the same effective rules and methods that govern any other type of interaction and communication, just like human interactions, the probability of understanding and performing an action is based on Concise, clear and relevant information would be plenty;
In order to develop a KPI development strategy, you need to start with the basics, define organizational goals and how to achieve them, and identify those who will use this information. This process has no end and must be modified regularly after receiving feedback from analysts, department managers, and senior managers in the organization. As you progress through this process of researching, reviewing, obtaining information, and making necessary changes, you will gradually gain a better understanding of the processes that need to be evaluated according to key metrics and the people who need to be evaluated. To share information with them.
How is a key performance indicator determined?
Defining KPIs is not without complexity, and to this end, each KPI must be linked to specific outputs that we expect from the company through the performance measurement tool. In many cases, KPIs are confused with typical business metrics and metrics, of course, although The two are not far apart conceptually, KPIs are defined by the main or most important objectives of the business.
To select a KPI, answer the following questions step by step:
What do you think is the desired outcome?
Why is such output important to you?
How will you measure your progress?
How can you influence and improve the desired outcome?
Who is responsible for obtaining this outcome for the business?
How do you know you got it?
What are the timeframes in which you assess progress towards the outcome?
For example, suppose your goal is to increase sales revenue for the current year. We call this the “sales growth KPI” and define it as follows:
Increase revenue from sales this year by up to 20%
Achieving this goal leads the company to profitability
Progress will be measured based on revenue growth based on the amount spent
By hiring more employees and advertising to existing customers with the aim of increasing product sales
The Sales Manager will be responsible for achieving this indicator
With a 20% increase in revenue this year it will be reviewed monthly
SMART key performance indicator
One way to assess the quality and relevance of KPIs to advance business goals is to use SMART criteria. The word stands for intelligent, but it is actually a keyword made up of the initials of the words “specific,” “measurable,” “attainable,” and “relevant.” and “time bound.” In other words, in order to evaluate your KPI, you need to answer the following questions:
Is your goal specific?
Can you measure your progress towards the goal?
Is the goal achievable from a realistic point of view?
How relevant is this goal to your organization?
What is the specific time frame for achieving this goal?
By adding two more elements to this criterion, more SMARTER indicators can be defined: evaluation and reassessment.
These two steps are also very important. Because according to them, constant evaluation of key indicators and their relevance to your business is ensured, for example, if you have exceeded the goal of making money this year, you need to determine if it is because the goal is too small or if there is something else involved.
How to formulate and develop key performance indicators
When writing or developing a KPI, you need to be careful about how the KPI relates to a specific outcome or goal. Note that these metrics need to be tailored to your business situation and need to help you achieve your goals. To define a KPI, pay attention to the following steps and points:
1 Write a clear objective for your KPI
Writing a clear objective is one of the most important – and perhaps the most important – parts of developing KPIs. Each KPI should be closely related to one of the key business objectives; It’s not a trivial goal or something a company employee thinks is important; The desired goal must be essential to the success of the organization, otherwise, you are aiming at a goal that cannot achieve a specific result for your work, so at best, you are trying to achieve a goal that has no impact on the organization, and at worst, the time, money and other resources of the company that could have Wasting it for better purposes and actions.
In short, your KPI needs to be something beyond aimless numbers. Instead, it needs to represent a strategic issue in terms of what your organization is trying to achieve. As a result, you need to be able to get a lot of information about its business model. Just by looking at the key performance indicators of the organization, without writing a clear goal, none of this will happen.
2 Share the key performance indicators with the people who have a role in achieving it
If your KPIs are not properly communicated to the people involved in achieving them, they will be useless. If your employees – the same people responsible for achieving your goals and aspirations for the organization – don’t know your goals, how can they help achieve them? Even worse, not sharing KPIs with employees and other relevant people will cause them to blindly move in their course of action and will reduce the efficiency of the organization’s work by creating frustration and straying away from your goals.
At the same time, while it is important to share KPIs with stakeholders, the method of this transfer is even more important.
A KPI is effective, it has to be in context, and that’s only possible if you specify not only what you’re measuring, or why you’re measuring it, otherwise, these KPIs will just be numbers that won’t mean much to your employees.
Therefore, it is essential that you explain to your employees why you are measuring what you are measuring, answer questions about why the KPI is being asked elsewhere, and most importantly, listen carefully. Note that neither you nor your indicators are error-free. In addition, your KPI may not be clear to all involved. Listening to what employees have to say will help you identify obscure parts of a topic.
For example, you might get a lot of questions about why you didn’t choose profit as a key indicator of your company’s performance. It makes sense to have such a question; After all, making money is one of the most important components of any business, but making money may not be all about your organization at some point, for example, you may be looking for a major investment in research and development or integrating another business into your organization. These questions mean that you must work harder to better convey to your colleagues the foundation of the KPIs and the strategic goals that support them.
3- Review key performance indicators on a weekly or monthly basis
Continuous monitoring and review of KPI cycles is essential to maintain and improve their performance. Of course, monitoring progress is important in view of KPIs; But monitoring overall progress is just as important. Because this way you can measure your ability and success in determining KPIKeep in mind that not all KPIs are successful, some of them have unattainable goals, some do not focus on the goal they should have achieved, only through regular and continuous review, you can identify current shortcomings And decide on the need to change the KPI.
4- Make sure your KPI is actionable
To ensure that you are able to act on your KPI is a five step process, for this purpose:
Examine business goals
Analyze your current performance
Set short and long term KPI goals
Check goals with your team members
Check progress and set your KPI.
So far we’ve outlined most of the above steps, but we need to be more clear about the need to set short- and long-term goals. After you’ve set a goal for the future (for example, for the next few seasons or fiscal years), you can go back and identify the milestones you need to hit to achieve it. .
For example, suppose you want to have 1,500 email newsletter subscribers in the first quarter of the year. Here it is better to set a goal every two weeks, months, or even every week. In this way, you can constantly monitor the effectiveness of your actions and, if necessary You can make changes to achieve your long-term goal.
5- Ensure that the KPI is achieved
Choosing goals that are achievable is very important and vital for a company. Choosing a goal that is too big can get your employees frustrated and give up before they even start. By choosing goals that are too small, you will reach your annual goal in a couple of months and learn what to do with all the available time.
To set the right goals, you first need to analyze your current performance; Otherwise, you just have to look blindly for numbers that have no roots in reality. In addition, your current performance is a good place to make decisions about areas that need improvement.
Root and analyze the information you have in order to set a benchmark for your past accomplishments. For this purpose, you can use tools such as Google Analytics, as well as more traditional accounting tools that measure gross income and profit margins.
6- Update your key performance measures to meet the changing needs of your business
KPIs that are never updated will soon lose their usefulness, for example, suppose your company recently launched a new product or started operating in a foreign country, if you do not update your KPI, your employees will continue to pursue goals that may not be compatible necessarily with your strategic or tactical goals.
A monthly (or ideally weekly) review will enable KPIs, and the opportunity to adjust, or change the path you’re on, in time, that way, you may find new and better ways to get to your destination.
Keep in mind that while KPIs play an important role in measuring business success and making the necessary changes to grow and improve it, the usefulness of each one is limited. In fact, the most important aspect of any KPI is its effectiveness, so once the indicator loses its effectiveness, you should not Feel free to put it aside and create new metrics that better fit your core business goals