What does KPI stand for?
KPI stands for Key Performance Indicator, a measurable value that shows the organization's progress toward achieving key business objectives. Organizations can use KPIs as a way to track whether their key business objectives are on track, behind, ahead, or have been achieved.
Why KPIs are Important
KPIs are important as they:
- Act as a scorecard for company health
- Measure progress through the tracking of metrics
- Help identify when to make adjustments
- Recognize and analyze patterns
The 4 step guide to writing KPIs
- Determine strategic objectives
- Define success
- Decide on measurement
- Write your SMART KPIs
Tip: Don't copy your KPIs straight from someone else's list!
While there's a wealth of KPI examples available online - scrolling through industry lists, picking out a KPI and attempting to force it into your strategy won't do you any favors.
Well, KPIs should be developed to contribute to achieving a specific strategic objective. If they're not developed with a specific strategic objective in mind, they run the risk of stealing attention, time, and money from KPIs that actually help to achieve strategic objectives.
The best KPIs for YOUR business are designed by starting with YOUR specific business objectives. Now, this is not to say all the content available on KPI examples is useless, because it's definitely not - it's actually an important resource. But, looking through KPI examples shouldn't begin till AFTER you have determined your own key strategic objectives.
Alternative vs Value-Based Decision-Making
To get a better understanding of why you should always start the KPI process by having first defined strategic objectives, consider the two potential ways of deriving your KPIs:
- Alternative-based decision-making
- Value-based decision-making
Alternative-based decision-making relies on choosing your preferred option from the alternatives offered.
Decision maker: I would like a coffee
Waiter: Sure, what milk would you like?
Decision maker: What do you have?
Waiter: We have full cream, skim, or soy milk?
Decision maker: I'll take the full cream milk.
Value-based decision-making relies on assessing what matters most to you and then making a decision that meets your needs.
Decision maker: I would like a coffee
Waiter: Sure, what milk would you like?
Decision maker: (Considers objectives: I like a good tasting coffee, but also want to keep the fat content down because I'm watching my weight) I'll take soy milk with one serve of artificial sweetener.
Waiter: No problem.
As you can see, the decision-maker in the first example listened to the alternatives presented and then selected their preference based on the options given.
However, the decision-maker in the second example examined their objectives and what they really wanted from a cup of coffee first and then made a decision that met their needs.
When writing KPIs, using the alternative-based approach and scrolling through industry KPI lists will leave you with your preferred KPI from that list, but achieving that KPI won't necessarily mean you've achieved your strategic objectives.
On the other hand, using the value-based approach and considering your key strategic objectives first will ensure you end up with KPIs that once achieved, will mean you've also achieved your strategic objectives.
How to Write KPIs - 4 Step Approach
Your organization's business model, industry, and even the department in which you operate will have an impact on the type of KPI you need.
Luckily, we've devised a best practice process for how to write KPIs that will allow you to create the perfect KPIs every time.
Step 1 - Determine the Key Strategic Objectives
Before writing KPIs, you'll first need to determine which of your organization's strategic objectives you're trying to gauge.
If you've been following along our mini-series "How To Write A Strategic Plan: The Cascade Model' then you will have already defined some strategic objectives for your organization, and you're ready to create some KPIs.
If you haven't defined any strategic objectives (or goals) for your organization yet, check out this article first and then jump back over here to create your KPIs.
E.g. Strategic Objective: Increase the flow of the marketing pipeline by 2022.
Step 2 - Define Success
Now that you've identified your strategic objectives, you'll need to begin thinking about what the success of each objective looks like.
Sticking with the same example used in Step 1, if my objective is to increase the flow of the marketing pipeline, the success of this objective means increasing the number of contacts that enter the pipeline, and increasing the number of contacts that pass through the end of the pipeline and get handed over to Sales.
By first defining what success looks like, deciding how you will measure the success of your objective becomes a lot easier.
When defining the success of your KPI, you will usually find there are multiple parts to the definition of the success of your objectives. In the example used above, we found there were two parts to achieving the success of our objective -
- Increasing the number of contacts that enter the pipeline.
- Increasing the number of contacts that pass through the end of the pipeline and get handed over to Sales.
As mentioned earlier, this is the time when it might be useful to look through a few KPI examples to help get some inspiration for how you can define the success of your key business objectives.
Again, you should avoid copying KPIs straight from a list, as, chances are, they won't perfectly fit your strategic objectives. Instead, use the KPI examples as a way to ideate how you can measure the success of your own strategic objectives.
We've collated a whole bunch of KPI examples already and grouped them by the department to help give you a little inspiration:
- Sales KPIs
- Marketing KPIs
- Financial KPIs
- HR KPIs
- Customer Service KPIs
- Health & Safety KPIs
- IT KPIs
- Change Management KPIs
Step 3 - Decide on measurement
Next, you'll need to decide how you will actually measure success. Going back to our example once again, we've identified that the success of our objective means increasing the number of contacts that enter our pipeline AND increasing the number of contacts that pass through the end of our pipeline
Let's start with the first part of this - Increasing the number of contacts that enter our pipeline. Contacts enter our marketing pipeline when they subscribe to our mailing list or exchange their details for content for the first time.
When contacts engage in either activity, they automatically get added to our marketing automation platform as a subscriber. Using the number of new subscribers added to our marketing automation platform over a time period is an easy way for us to measure the number of contacts entering our marketing pipeline.
Now let's look at the second part - Increasing the number of contacts that pass through the end of our marketing pipeline. Contacts pass through the end of the marketing pipeline when they're ready to be handed over to our Sales Team.
We use the term "SQL" (Sales Qualified Lead) to define a lead that has moved through the end of our marketing pipeline and is ready for our Sales Team to pick up. Our marketing automation platform adds a tag on each contact profile to identify which life-cycle stage they are in based on a certain activity.
Again, through our marketing automation software, we can use the number of contacts who become a SQL in a given time period to measure our success.
This is where it might be wise to start considering dashboard software to track and display your KPIs.
You'll likely use various platforms and tools across your business to measure your KPIs, but having a central location to track and view all your departmental and organizational KPIs will ensure you have a clear view of your success.
Cascade's Dashboard tool is extremely powerful and allows you to pull data from all around your business, so you can display your most important information, real-time, to whoever in your organization needs it.
Step 4 - Write your KPIs
Finally, it's time to begin actually writing your KPIs. KPIs should follow the SMART format (specific, measurable, attainable, relevant, and time-bound), to ensure your KPIs meet this criterion, we've devised a formula that you can follow to ensure you end up with SMART KPIs every time.
The main advice here is to keep things simple. KPIs should be understood by everyone within the organization. That means no jargon (if possible), and keeping them to one sentence long.
We suggest a structure as follows:
Action Detail Value Unit Deadline
Putting it all together, our KPI example may look something like this:
Increase new HubSpot lead profiles to 40,000 people by 31st December 2019
Increase new SQL profiles to 20,000 people by 31st December 2019
Starting off with a verb forces you to be specific about what you’re trying to do. A metric and unit ensure your KPI is measurable and a deadline will do wonders for staying timely on your progress.
How are KPIs Used in an Organization?
Key performance indicators are a communication tool for organizations. They inform business leaders of their organization's progress towards reaching key business objectives.
KPIs are able to provide this information because they actually track the most important performance measures, which can be taken together to represent how successful you are in achieving an objective.
This information channel is extremely valuable as, in a well-designed strategy, an organization's key business objectives should have a direct impact on the organization's overall performance.
Therefore, KPIs will communicate whether your activities are achieving, for example, business growth at the rate expected or not, and how much growth you've actually achieved.
KPIs also assist in identifying issues with organizational processes. If the progress on an objective falls behind, the key performance indicator associated with it will communicate this to business leaders as soon as the trend begins to show itself (assuming you have leading & lagging KPIs).
The organization will know that something has gone wrong and an investigation is required. A strategy to mitigate the issue can then be created and implemented before it has far-reaching effects on the organization's performance.
How Many Key Performance Indicators Do You Need?
The question of how many key performance indicators you need will vary with every company. However, we do have a framework that you can apply to help you assess how many KPIs you'll need to implement for your organization.
The number you need will depend on how many key business objectives you have in your organization. As a rule, we generally say you should have 2-3 KPIs per objective, to ensure a variety of measures without overwhelming the picture.
The reason we use a minimum of 2 KPIs as a rule, is because we believe each business objective should have at least 1 leading indicator and 1 lagging indicator.
This allows you to predict future performance as well as record the actual performance and compare these to the direction of your business objective.
What are Leading and Lagging KPIs
Leading and lagging KPIs are often mentioned when it comes to strategy, but what is the difference between the two? A leading KPI indicator is a measurable factor that changes before the company starts to follow a particular pattern or trend.
Leading KPIs are used to predict changes in the company and future performance, but as predictors, they cannot always accurately forecast the future. On the other hand, a lagging KPI is a measurable fact that records the actual performance of an organization.
Leading key performance indicators are often easier to influence than lagging KPIs, however, generally measuring them can prove more difficult.
Lagging KPIs, on the other hand, are usually easier to measure, though much harder to influence. If you'd like to learn more about Leading and Lagging KPIs, check out this post.
Creating relevant, measurable, and time-bound key performance indicators is great, but it's only half the job done. The other half (which can often go overlooked) comes down to figuring out how to actually track and report on them appropriately and accurately.
While it can be tough setting up this kind of tracking and reporting, if you don't create an easy way to view and stay on top of progress, the KPIs aren't going to be of much use. A KPI report is a presentation that displays and communicates the current performance of an organization compared to its business objectives.
It's a tool used by management in order to analyze performance and identify issues. These reports can take many formats, including formal written reports, spreadsheets, powerpoint slides, or dashboards.
Creating a KPI dashboard is a great way to provide at-a-glance views of key performance indicators relevant to a specific business objective, department, or the whole organization.
Now, before your eyes glaze over with boredom as another business term is introduced, dashboards are just another name for a progress report. However, what makes dashboards more powerful than your typical business report is that they're usually hooked up to business systems so the data is automatically updated.
The benefit of this is it ensures the data is always relevant, as it doesn't rely on someone in the organization continuously updating numbers. This is just one of the many benefits of using dashboard software for your strategy report.
Dashboards also give you total visibility of your business performance instantly, display KPI progress in a visual presentation to keep reporting engaging, and save time when compared to the hours poured into creating regular reports.
You can also find the individual articles here:
- How To Write A Strategic Plan: The Cascade Model
- How to Write a Good Vision Statement
- How To Create Company Values
- Creating Strategic Focus Areas
- How To Write Strategic Objectives
- How To Create Effective Projects
- How To Write KPIs (This Article)
As always, here's a quick recap of the Cascade Strategy Model and how this post fits into the bigger picture.