KPI Meaning is Key Performance Indicator. The primary use of KPIs is to measure progress towards a critical business objective. KPIs provide targets, milestones to measure progress, and insights to inform decision making.
Many people confuse KPIs with OKRs or goals, but they’re quite different. Check this guide if you’re looking for a comprehensive guide on how to write KPIs equipped with tons of examples. But if you want to understand how the best teams in the world use KPIs, keep on reading.
Definition of a KPI
KPIs are time-bound quantifiable values that help measure the performance of your employees, strategy, and overall organization. It’s what you look at to understand how close you are to achieving your goals within your desired timeframe.
Developing great KPIs is an art as much as it’s a science.
What is a KPI? Good and bad KPIs
Key Performance Indicators (KPIs) are drivers of performance. If you want to drive performance towards specific organizational goals, choose KPIs that directly align with those goals. With the right KPIs in place, stakeholders know whether progress moves too slowly and what results they should expect.
If you don’t want to waste time on reporting, use our KPI reporting template and build your own KPI Dashboard.
Good KPIs usually follow the SMART (Specific, Measurable, Attainable, Relevant, Time-bound) framework and leave no room for misinterpretation.
Bad KPIs lack proper context and don’t align with their respective priorities.
How to set KPIs
Developing the right KPIs directly affects your plan’s execution. The mistake most people make when determining the KPIs for their goals is they try to choose one or two key performance indicators.
However, it’s more useful to think of them as prioritized clusters. That means that you write a set of KPIs that their performance gives you a more holistic view of progress.
So, how many KPIs do you need? At least three:
- Leading KPIs
- Lagging KPIs
- Counter KPIs
A leading KPI helps you predict whether you’ll achieve the associated goal.
A lagging KPI helps you understand what previous activities drive progress (and what doesn’t).
A counter KPI helps you balance your actions and not over-optimize for one key metric.
(More on leading and lagging KPIs below)
Over-optimizing means that the effort to increase a specific number comes at the detriment of another, unmeasured aspect of your business with negative effects. Think of counter KPIs like visits to your therapist. They’re sanity checks.
Counter KPI examples
Goal: Decrease production time.
Counter KPI: Number of defective products per week/month.
Goal: Online traffic to a web page.
Counter KPI: Conversion rates of the page.
Set up an alarm: a threshold that fires up red lights in the office once your counter KPI crosses it.
Get into this guide to learn how to create a KPI report.
Leading vs lagging KPIs: what is the difference?
There are significant differences between leading and lagging indicators that make them serve different purposes in the decision-making process.
What is a leading indicator?
We define leading indicators as measures whose current progress helps us make an educated prediction about the success of a goal. They’re called “leading” because they refer to the future.
Leading KPIs have two defining characteristics:
- They have predictive capabilities
- They are directly influenceable
When choosing your leading indicator, think of an activity that, if you do more often, will get you closer to your goal. The secret word here is activity. Leading KPIs tend to be activities because you want to be able to increase or decrease the frequency of the activity at will.
Try to be specific and highly relevant to how your organization works. There is a catch, though. Leading KPIs can be wildly inaccurate. That’s because they’re usually hard to report or because you’ve chosen to focus on the wrong activity. Tracking KPIs in an efficient and time-saving way is part of the challenge.
Remember, leading indicators are time-bound and action-oriented.
Leading indicators examples
Goal: Decrease work-related accidents.
Leading KPI: Increase weekly equipment checks.
Goal: Increase revenue.
Leading KPI: Increase the number of phone calls per day.
What is a lagging indicator?
We define lagging indicators as measures whose current progress helps us understand previous performance. They’re called “lagging” because they refer to the past.
Lagging KPIs have one defining characteristic:
- They measure results accurately
They are great for understanding what went well in the past because it’s easier (and thus more accurate) to measure past performance. However, they give you no information about the future. Much like the stock market, previous performance doesn’t predict future performance.
The lagging indicators have another great use. They validate your leading indicators. Do the predictions that you made based on the progress of the leading indicators turn out to be correct? Then you have determined great leading KPIs. If not, you need to revisit them.
Start by asking:
- Is our leading KPI hard to track or report?
- Is our leading KPI the right activity to focus on?
Remember, lagging indicators are time-bound and result-oriented.
Lagging indicators examples
Goal: Increase revenue.
Lagging KPI: Monthly closed deals.
Goal: Increase production.
Lagging KPI: Weekly finished products.
Goal: Reduce our environmental footprint
Lagging KPI: Monthly paper consumption