Key Performance Indicators (KPIs)

Key performance indicators, also called KPIs, are the elements of your organization’s plan that express the quantitative outcomes you seek and how you will measure success. In other words, they tell you what you want to achieve and by when and are crucial for evaluating the success of an organization.

The base of the KPI is "what you measure you improve" which means that it is only through numbers and clear tracking that we have any idea if we are getting better or worse.

Key Performance Indicators (KPIs) are quantifiable measurements used to gauge a company’s overall long-term performance. Key performance indicators (KPIs) are metrics that measure a company’s success vs. a set of targets, objectives, or industry peers.

KPIs can be financial, such as net profit, revenues, or liquidity, or customer-focused, such as customer satisfaction, retention, or efficiency. KPIs can also be used for investment analysis, such as return on investment (ROI), internal rate of return (IRR), or payback period, process-focused such as process improvement, marketing, IT, sales, operations, health/safety/environmental, human resource and staffing, or project management.

KPIs help managers and investors evaluate the performance of the organization, and determine a company’s strategic, financial, and operational achievements, especially compared to those of other businesses within the same sector.

Here are some examples of KPIs:

• Financial Metrics and KPIs: These KPIs are tied to the financials and typically focus on revenue and profit margins.
• Customer Experience Metrics and KPI: These KPIs generally center on per-customer efficiency, customer satisfaction, and customer retention.
• Process Performance Metrics and KPI: These KPIs aim to measure and monitor operational performance across the organization.
• Marketing KPIs: These KPIs are used to measure the effectiveness of marketing campaigns and strategies.
• IT KPIs: These KPIs are used to measure the performance of IT systems and services.
• Sales KPIs: These KPIs are used to measure the performance of sales teams and their activities.
• HES KPIs: These KPIs are used to measure the Health, Safety, and environmental performance of business operations and their activities in accordance with regulatory compliance.
• Human Resource and Staffing KPIs: These KPIs are used to measure the performance of HR and staffing teams and their activities.
• Project Management KPIs: These KPIs are used to measure the performance of project management teams and their activities.

Please note that KPIs vary between companies and industries, depending on performance criteria.

Key Takeaways

• Key performance indicators (KPIs) measure a company’s success vs. a set of targets, objectives, or industry peers.
• KPIs can be financial, including net profit (or the bottom line, net income), revenues minus certain expenses, or the current ratio (liquidity and cash availability).
• Customer-focused KPIs generally center on per-customer efficiency, customer satisfaction, and customer retention.
• Process-focused KPIs aim to measure and monitor operational performance across the organization.
• Businesses generally measure and track KPIs through analytics software and reporting tools.

What makes a good KPI?

To drive meaningful insights and support data-driven decision-making, it is important to identify and define the right KPIs.

These are the heartbeat of your performance management process and must work well! They tell you whether you’re making progress or how far you are from reaching your goals. Ultimately, you want to make progress against your strategy. You’ll live with these KPIs for at least the quarter (preferably the year), so make sure they’re valuable!

Great strategies track the progress of core elements of the plan. Each key performance indicator needs to include the following elements:

• A Measure: Every KPI must have a measure. The best ones have more specific or expressive measures.
• A Target: Every KPI needs to have a target that matches your measure and the period of your goal. These are generally numeric values you’re seeking to achieve.
• A Data Source: Each of these needs to have a clearly defined data source so there is no gray area in measuring and tracking each.
• Reporting Frequency: Different measures may have different reporting needs, but a good rule to follow is to report on them at least monthly.
• Owner: While this isn’t a mandatory aspect of your KPI statement, setting expectations of who will take care of tracking, reporting, and refining specific KPIs is helpful to your overall organizational plan.
• Business-aligned: KPIs should be aligned with your overall business strategy and outcomes. For example, let's say your business has a goal to increase?monthly recurring revenue (MRR)?by 20% by the end of the fiscal year (a high-level KPI).
• Actionable: KPIs should be actionable. Once you’ve set your KPI, you need to outline the steps you’ll take to reach it and the metrics you’ll measure along the way.
• Realistic: KPIs should be realistic. Good advice is to start small. Big, lofty KPIs—while they might look good on paper—aren’t doing you or your team any favors if they’re unrealistic from the get-go.

Types of KPIs

There are various types of KPI that you can use to measure your organization’s performance in different categories, with each category having its own characteristics, time frame, and users.

Strategic KPIs

Strategic KPIs are usually the most high-level. These types of KPIs may indicate how a company is doing, although it doesn’t provide much information beyond a very high-level snapshot. Executives are most likely to use strategic KPIs, and examples of strategic KPIs include return on investment, profit margin, and total company revenue.

Sales KPIs

Sales KPIs are used to track the performance of your sales. They can include metrics such as revenue, customer acquisition cost, average purchase value, retention/churn rates, and more.

Marketing KPIs

As implied, Marketing KPIs focus more on assessing the effectiveness of your marketing campaigns. They can include metrics such as website visitors, conversion rate, social media engagement, and more. Insights gathered from Marketing KPIs are usually paired with those gathered from sales.

Financial KPIs

Financial KPIs focus on financial metrics such as revenue growth, profitability, return on investment (ROI), and cash flow. They provide insights into the financial well-being and stability of your organization.

Operational KPIs

Operational KPIs measure the efficiency of your operations and operational processes. They can include metrics related to production output, quality control, and inventory management.

Customer KPIs

Customer-centric KPIs focus on measuring your success in meeting your customer’s needs, expectations, and preferences. Some examples of customer performance indicators include customer retention rate, average customer lifetime value, and customer satisfaction index.

Leading/Lagging KPIs

Leading/lagging KPIs describe the nature of the data being analyzed and whether it is signaling something to come or something that has already occurred. Consider two different KPIs: the number of overtime hours worked and the profit margin for a flagship product. The number of overtime hours worked may be a leading KPI should the company begin to notice poorer manufacturing quality. Alternatively, profit margins are a result of operations and are considered a lagging indicator.

Key Performance Indicators (KPIs) are like the vital signs of a business.

They provide a clear picture of its health and progress.

Most common KPIs with measurement and importance:

1. Revenue

2. Net Profit Margin

3. Customer Acquisition Cost (CAC)

4. Customer Lifetime Value (CLV)

5. Conversion Rate

6. Employee Satisfaction

7. Inventory Turnover

8. Return on Investment (ROI)

9. Churn Rate

10. Social Media Engagement

11. Health, Safety, and Environment (HSE)

12. Cost Optimization

Here's a quick explanation:

1.?? Revenue:

This is the total amount of money brought in by your business.

It's straightforward but crucial.

You want to be monitoring trends in revenue to gauge business growth.

Investigate any dips or spikes to understand what's driving them.

2.?? Net Profit Margin:

This shows what percentage of your revenue is actual profit after expenses.

Use it to measure efficiency and identify areas of improvement.

A low margin could for example indicate high costs or pricing issues.

3.?? Customer Acquisition Cost (CAC):

The average cost to acquire a new customer.

Keep an eye on this in relation to the lifetime value of a customer.

It’s mainly important to understand if you’re spending too much to attract customers.

4.?? Customer Lifetime Value (CLV):

This is the total revenue you can expect from a single customer over the duration of their relationship with your business.

Your goal should be to maximize this value.

Higher CLV means more value per customer.

5.?? Conversion Rate:

The percentage of visitors to your website or store who make a purchase.

Use this to assess the effectiveness of your sales funnel and marketing efforts.

6.?? Employee Satisfaction:

This one is harder to quantify.

But it's crucial for long-term success.

One way is to conduct regular surveys and act on the feedback to improve employee morale and productivity.

Or asking them directly, especially if it's smaller teams.

7.?? Inventory Turnover:

Measures how often inventory is sold and replaced over a period.

A low turnover might indicate overstocking or out-of-date stock.

While a high turnover could mean strong sales or potentially stock shortages.

8.?? Return on Investment (ROI):

Calculates the profitability of an investment.

You can use it to evaluate the effectiveness of different business investments and decisions.

9.?? Churn Rate:

The rate at which you lose customers over a given period.

A high churn rate can indicate dissatisfaction with your product or service.

Aim to reduce this through customer retention strategies.

10.??????????? Social Media Engagement:

Tracks like, shares, and comments on your social media channels.

It's significantly gaining in importance.

The idea is to measure the extent of your brand awareness and customer engagement.

Aim for higher interaction rates.

11.??????????? Health, Safety, and Environment (HSE)

Health, Environment, and Safety KPIs are quantifiable measures used to evaluate an organization’s performance in terms of measurement of maintaining a safe and healthy workplace.

Safety KPIs are performance indicators that serve as metrics for specific company efforts in health and safety.

Aim to have zero injustice, zero contamination, zero harm, zero damage to assets, environment, human, and ecological system.

To ensure organization operation is within regulatory compliance from organizations such as OSHA or any local regulations.

Several HSE parameters to ensure the highest level of organizational safety.

12.??????????? Cost Optimization

Help organizations track their progress toward cost optimization goals.

Gartner recommends assessing the level of impact of cost plans across key decision factors/criteria, evaluating the trade-offs between the benefits, costs, risks, and viability of different cost control initiatives, and mapping cost reductions on a simple grid to show the trade-offs and help build buy-in for your cost reduction strategy.

How to Create a KPI Report

With companies seemingly collecting more data every day, it can become overwhelming to sort through the information and determine what KPIs are most useful and impactful for decision-making. When beginning the process of pulling together KPI dashboards or reports, consider the following steps:

1. Discuss goals and intentions with business partners. KPIs are only as useful as the users make them. Before pulling together any KPI reports, understand what you or your business partner are attempting to achieve.
2. Draft SMART KPI requirements. KPIs should have restrictions and be tied to SMART (specific, measurable, attainable, realistic, and time-bound) metrics. Vague, hard-to-ascertain, and unrealistic KPIs serve little to no value. Instead, focus on what information you have that is available and meeting the SMART acronym requirements.
3. Be adaptable. As you pull together KPI reports, be prepared for new business problems to appear and for further attention to be given to other areas. As business and customer needs change, KPIs should also adapt with certain numbers, metrics, and goals changing in line with operational evolutions.
4. Avoid overwhelming users. It may be tempting to overload report users with as many KPIs as you can fit on a report. At a certain point, KPIs start to become difficult to comprehend, and it may become more difficult to determine which metrics are important to focus on.

How to create a KPI Dashboard

Creating a KPI dashboard involves a systematic approach to ensure its effectiveness in monitoring and analyzing critical metrics.

1. Define the objective of your dashboard: Is it to share insights with people who find raw data challenging to read? To convince management to take action?
2. Identify who the dashboard will be for: Is it stakeholders? Marketing? Knowing what exactly your dashboard will be used for helps determine what KPIs you’ll be using, how you’ll be presenting them when it will be monitored, and more.
3. Select the right KPIs: Focus on a concise set of metrics that provide a clear and meaningful picture of your organization's progress. You don’t need all of them to make a comprehensive report.
4. Choose the proper visuals: What visuals will help you effectively convey the information you have with a glance? Some examples include charts, graphs, gauges, and tables.
5. Design your layout: Organize the KPIs in a logical manner, considering factors such as hierarchy, grouping, and visual flow. Keep the design clean, uncluttered, and easy to navigate.
6. Gather feedback: Before sharing your KPI dashboard with the rest of your team, test its usability and functionality with a small group of users. Make the necessary adjustments based on user insights to improve the overall user experience.

Knowing what exactly your dashboard will be used for helps determine what KPIs you will be using, how you will be presenting them, when it will be monitored, and more. Remember to?regularly maintain and update your dashboard?as well to ensure real-time or near-real-time monitoring.

Difference between KPIs and Matrics

Advantages of KPIs

A company may wish to analyze KPIs for several reasons. KPIs help inform management of specific problems; the data-driven approach provides quantifiable information useful in strategic planning and ensuring operational excellence.

KPIs help hold employees accountable. Instead of relying on feelings or emotions, KPIs are statistically supported and cannot discriminate across employees. When used appropriately, KPIs may help encourage employees as they realize their numbers are being closely monitored.

KPIs are also the bridge that connects actual business operations and goals. A company may set targets, but without the ability to track progress toward those goals, there is little to no purpose in those plans. Instead, KPIs allow companies to set objectives, and then monitor progress toward those objectives.

Limitations of KPIs

There are some downsides to consider when working with KPIs. There may be a long time frame required for KPIs to provide meaningful data. For example, a company may need to collect annual data from employees for years to better understand trends in satisfaction rates over long periods of time.

KPIs require constant monitoring and close follow-up to be useful. A KPI report that is prepared but never analyzed serves no purpose. In addition, KPIs that are not continuously monitored for accuracy and reasonableness do not encourage beneficial decision-making.

KPIs open up the possibility for managers to “game” KPIs. Instead of focusing on actually improving processes or results, managers may feel incentivized to focus on improving KPIs tied to performance bonuses. In addition, quality may decrease if managers are hyper-focused on productivity KPIs, and employees may feel pushed too hard to meet specific KPI measurements that may simply not be reasonable.

Key Performance Indicators (KPIs) are like the vital signs of a business.

They provide a clear picture of its health and progress.

ref: investorpedia.com , onstrategyhq.com , klipfolio.com , qlik.com , clearstrategy.com , google.com .

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About Author:

Manojkumar Pipaliya is a result-oriented Business and Operational Professional, holding exposure with Oil and Gas and world-class refiners such as KNPC, Saudi Aramco, Essar Oil, Reliance Industries Ltd, Hindalco, Vedanta, and specialty chemicals like Epsilon Carbon Pvt Ltd, with intensive exposure in Site Operations, Operations and Maintenance Management, Process Engineering, Process Improvement, Project Management, EHS, and Sustainability in various units of distinct technologies. He holds degrees in Chemical Engineering and Operations Management and Master's in Business Strategy, and a PG Diploma in Industrial Safety. In addition, he is a Certified Energy Manager from BEE-(India), PMP, Lead Auditor (ISO- EnMS & QHSE), Six Sigma Black Belt, and GRI Lead Assessor. He possesses several achievements and ongoing successes by providing effective leadership in the area of operation and maintenance management, developing business strategy, identifying new product and market development, statutory compliance, setting up and driving business and sustainability KPIs, ensuring safe, reliable, and cost-effective plant operations, focusing on continual improvement, cost optimization, and troubleshooting, directing and enforcing Safety Programs, leading and flawless commissioning of new projects, leading audits and committees for operational excellence, team leading and competent team development, ensuring sustainable supply chain management and inventory management, measuring and mitigating gaps by auditing; in a multicultural, pressurizing and challenging environment.

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