“Selecting the right measure and measuring things right are both art and science. And KPIs influence management behavior as well as business culture.” ― Pearl Zhu
KPIs or key performance indicators are financial or non-financial measurements used to measure the degree of compliance with previously established objectives; they are generally contained in the organization's strategic plan and reflect its performance in a given period; KPIs are used in various areas of a company, including purchasing, sales, logistics, and customer service and attention.
KPIs are used to determine the current state of a business or project and allow defining a future line of action; they express the variables to be taken into account to increase favorable performance in order to achieve progress, positioning and significant profits for the company. The KPI measures the conditions for performance and key performance.
It is unavoidable to take them into account to study how a company's work is produced and how it influences its results, so the company's main objective must be defined beforehand and expressed in percentage figures.
Key performance indicators can be created for different aspects of the business activity, as long as they are measurable, among them we have:
- Economic indicators, they allow to measure revenues, costs, profitability, expenses, profits, etc.
- Financial indicators, allow measuring debt levels, debt capacity, liquidity, solvency, payback, among others.
- Production indicators allow the evaluation of production levels, process efficiency, materials used in the production process, etc.
- Quality indicators allow measuring the percentage of defects in the production process, product quality level, number of failures in equipment and processes, unexpected or forced interruptions, etc.
- Logistics indicators, which can be used to measure the number of orders, deliveries, stock, inventory turnover, delivery times and replenishment times.
- Attention and service indicators, they can measure average personal or telephone attention times, unattended orders, number or percentage of returns, number of complaints, number of new customers, etc.
KPIs must be measured during previously defined periods of time and must be associated with specific units of measurement; it is normal in companies for each of the core units or departments to create their own key performance indicators; in many companies there are areas or departments that provide specialized support for this process.
It is important to consider a series of parameters that must be set for each KPI to be created, among them:
- Definition.
- Activity that evaluates.
- Measurement units.
- Periodicity
How to choose your KPI?
Now that we understand what a KPI is, we will pose a series of questions to create that will help us to establish with more criteria what KPI we should choose.
What goals and objectives do we pursue? We must be clear about the objectives pursued by the company, as it will be a fundamental point in our strategy.
How often are we going to show progress? Monitoring should be in most cases daily, but we must know what periods we will evaluate in our final reports that we will deliver to our superiors. This may define a bit more what kind of KPIs will be more relevant than others.
Who will measure the KPIs and with which tools? It seems obvious but it is essential to know what professional level and resources the person responsible for measuring them has. It makes no sense to design a KPI table for someone who either does not know what they are measuring or does not have the means to do so.
Steps to define KPIs
When writing or defining KPIs, you should analyze how this KPI relates to a specific business outcome or objective.
KPIs should be customized based on the stages of development of your project and developed to help you meet your objectives.
Define
- Write a clear objective when defining KPIs
- Writing a clear objective for your KPI is one of the most important, if not the most important, part of developing a KPI.
A key performance indicator is a measurable value that demonstrates how effectively a company is achieving its key business objectives.
There are many elements that connect to how we write and develop our KPIs.
The important thing to remember is to define KPIs that are closely related to a key objective. Not just any objective or something that someone in your organization considers important. This objective must be fundamental to the success of the organization.
Otherwise, you are focusing on an objective that is not capable of addressing a business outcome or that will not have an impact for your organization.
At worst, your company will waste time, money and other resources that would have been better spent elsewhere.
KPIs need to be more than just arbitrary numbers. They need to express something strategic about what your organization is trying to do. You can (or should be able to) know a lot about a company's business model just by looking at its KPIs.
Communicate
It's not enough to define KPIs, you have to communicate them properly. How are your team or your allies supposed to meet the objectives if they don't know what they are?
KPIs need context to be effective. This can only be achieved if you explain not only what you are measuring, but why you are measuring it. Otherwise, they are just numbers on a screen that have no meaning to you or your team.
Review
Periodically reviewing your KPIs is essential to their maintenance and development. It is important to compare your progress against your KPI (otherwise, what would be the point of setting one?).
However, monitoring your progress is just as important as defining KPIs, so you can evaluate how successful you were in choosing them.
Break them in parts
Not all KPIs are successful. Some have targets that are unachievable. Others fail to track the underlying business objective they were intended to achieve. Only by regularly reviewing your KPIs can you decide if it's time to change them.
For example, let's say you want to get 1,500 subscribers to your newsletter in the first quarter of the year. You'll want to set monthly, bi-weekly or even weekly goals to achieve this.
This way, you can continually reevaluate and change course as needed to achieve the longer-term goal.
You could divide the goals equally by month. In this case, it would be 500 subscriptions in January, 500 in February, and 500 in March. However, you might want to be more specific.
There are more days in January and March than in February, so you might want to set a goal of 600 for those months. Or maybe you generally have more traffic to your website in February (maybe your company has a presence at a major trade show) and you decide to set a target of 800 for that month.
Whatever the case may be, in addition to defining KPIs you should make sure to break down your objectives to set short-term goals.
To use another example, let's say your organization recently launched a new product line or expanded overseas. If you don't update your KPIs, your team will continue to pursue objectives that don't necessarily include changing tactical or strategic direction.
Reviewing your KPIs every month (or, ideally, every week) will give you the opportunity to adjust or change course entirely.
Verify
Setting achievable targets for your team is essential when choosing KPIs. A target that is too high may cause you or your team to give up before you even start.
If you set a target that is too low, you will probably wonder what to do after you have reached your annual targets in the first two months of the year.
Analyzing your current performance is paramount. Without this analysis, you will blindly chase numbers that don't actually have a source. Your current performance is also a good starting point for deciding where you need to improve.
Managing KPIs also involves analyzing the data you already have collected to establish a baseline with what you have achieved in the past.
Update
KPIs are not static. They need to evolve, update and change as needed. If you set and forget your KPIs, you run the risk of pursuing objectives that are no longer relevant.
These are some questions we should ask ourselves to start developing and creating KPIs. Each project, each company and each objective pursued will have totally different KPIs, from here we intend to give you some small guidelines to start thinking about how to develop them.
Practice Time
Use these worksheets to define your objectives
Worksheet
Verbs for your objectives
Use these worksheets to collect your data
Worksheets
Worksheets to collect your data
