A key performance indicator KPI is a measurable value that indicates how effectively a company is achieving its key business objectives. Companies use KPIs to assess their progress and success in achieving goals.
In simple terms, a KPI is a goal you are working towards.
KPI categories
Most KPIs fall into four different categories, with each category having its own characteristics, timeframe and users.
– Strategic KPIs are usually the highest level. While they don’t provide much information beyond a very high-level snapshot, such KPIs can show the overall picture of a company. Managers are more likely to use strategic KPIs.
– Operational KPIs focus on a much tighter timeframe. These KPIs measure what a company does from month to month (or even day to day) by analyzing different processes, segments or geographic locations.
– Functional KPIs focus on specific departments or functions within a company.
– Leading/Lagging KPIs: a lagging KPI measures past success, such as annual sales for the previous year. A leading indicator is a prediction of what will happen in the future, such as customer satisfaction. Many organizations benefit by using a mix of lagging and leading KPIs.
Be ‘SMART’ about building strong KPIs
A common and effective way to create KPIs is the SMART structure.
What is a SMART structure?
Teams often use it to measure goals related to employee performance, personal development and project management. SMART stands for:
– Specific: Does the KPI have enough detail to accurately assess progress? Are your objectives clear and unambiguously specific?
– Measurable: How will you measure progress?
– Achievable: Is the KPI achievable? Is it achievable?
– Relevant: Is this KPI useful for the organization?
– Time-bound: What is the timeframe for achieving this KPI?
SMART is often an effective formula for developing effective KPIs.
How to create KPIs in 5 simple steps?
Developing meaningful KPIs that track and clearly visualize performance requires some planning. Each KPI needs to address a specific business objective and provide timely, accurate information to assess progress towards goals.
Essentially, creating successful KPIs depends on understanding the aspirations of the business using a clear and structured process for creating KPIs.
How to create a KPI in 5 steps?
– Set a clear goal.
Clearly and simply state the purpose of the KPI. Setting clear goals and objectives provides guidance for everyone viewing the KPI to interpret the data in the right context.
– Summarize the success criteria.
What will the target be? Is it achievable? When should it be achieved? And how will progress be monitored ? Goals should be realistic, changes in business processes will take time to implement.
– Collect the data.
Investigate the availability and accuracy of data. Data can be accessed automatically from existing systems or hidden in reports and databases. All of this data will need to be brought together at regular intervals for reporting in one central place.
– Create the KPI formula.
Some KPIs include a single metric or measure. However, most are based on a combination that is brought together under a single calculated formula.
– Present your KPIs.
To communicate your KPIs efficiently, you need to transform data into understandable visuals such as charts or graphs. Creating Dashboards for Operational KPIs or Reports for Strategic KPIs offers a convenient way to track and distribute your KPIs.
The importance of choosing the right KPIs
In today’s challenging and competitive business environment, it is more important than ever for business leaders and senior executives to be able to make more informed decisions, improve performance and look for new ways to gain an edge over their competition. KPIs, when properly understood and used effectively, provide powerful tools to achieve your goals.
