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KPI Essentials
Tracking business success is hard. Really hard. Using key performance indicators (KPIs) to track success is common, but too often, the indicators are incorrectly implemented and offer little or no insight as to how a goal was achieved – or not.
KPIs are Metrics, not measures
Measures are values found in reports that, on their own, aren’t very insightful. Instead, Metrics are calculations from Measures. And Key Performance Indicators are simply important Metrics that help you and your company stay on track. Ideally, metrics should be described as ratios, percentages, rates or averages. And they should be evaluated over time.
For example, knowing that you converted 50 visitors to customers on your site this month isn’t on its own helpful. Because it doesn’t compare to anything else. But knowing that you converted 50 visitors to customers out of a total of 500 visitors, tells you that 10% converted. That’s a value we want to track and keep our eyes on. We can then also ask for the conversion rate to be compared to next period to see if we are improving. That means we could set a KPI to be “conversion rate to customers”, with a Target of 10% or “conversion rate improvement month over month”, with a target of 5% increase. Both are worth tracking.
Another item to track could be sales calls. Once again, we need to consider it as a calculation. 50 sales calls is a measure but 50 sales calls per day is a metric. Our KPI might then be to make a certain number of sales calls per day, week or month.
Example 1:
Measure
extracted value (number of sales calls)
Metric
calculation of Measure (number of sales calls per day)
Target
value we want to attain (50)
Example 2:
Measure
extracted value (number of sales calls)
Metric
calculation of Measure (number of leads as ratio of website visitors)
Target
value we want to attain (10%)
Why is Revenue not a KPI, but rather a KRI
For a KPI to be effective, it needs to be actionable. That is, if the value changes, we know exactly what to do differently. Obviously, Revenue is important to track, but it if changes, we don’t know what specifically changed. The amount of revenue—good or bad—is the result of many factors. For example, it could be due to price changes, market forces, a new product launch, the closing of an office or region, or hiring of more salespeople and so on. You can’t just look at a change in the revenue number and know what to do. For that, you must drill down further into the activities and processes that cause revenue to change. Setting KPIs against those individual activities allow you to know what to change. Those are the valuable and meaningful KPIs.
Because revenue, gross margin, manufacturing output, and so on are the results of many factors, we will instead call them KRI (Key Results Indicators).
Select KPIs based on your goals, nothing else
Don’t fall into the trap of picking KPIs because others are using them or because they are on a list of popular KPIs. KPIs from top-10 lists are doomed to fail because they are mostly KRIs incorrectly identified as KPIs. Your KPIs are unique to your business. Your KPIs must be consistent with your particular needs—and they must always be driven by your business goals.
Your day-to-day activities are driven by what your company wants to accomplish. And your KPIs should reflect and track that. Figure our what your company, team or personal goal is. From there, drill down into increasingly detailed functions and activities you need to perform to accomplish your goal. Use the KPI Karta methodology to help you visualize those activities.
Each KPI has a single owner
For a KPI to be effective, it needs to be actionable. That is, if the value changes, we know exactly what to do differently. Obviously, Revenue is important to track, but it if changes, we don’t know what specifically changed. The amount of revenue—good or bad—is the result of many factors. For example, it could be due to price changes, market forces, a new product launch, the closing of an office or region, or hiring of more salespeople and so on. You can’t just look at a change in the revenue number and know what to do. For that, you must drill down further into the activities and processes that cause revenue to change. Setting KPIs against those individual activities allow you to know what to change. Those are the valuable and meaningful KPIs.
Because revenue, gross margin, manufacturing output, and so on are the results of many factors, we will instead call them KRI (Key Results Indicators).
Share your KPIs enterprise-wide
Sharing KPIs throughout the organization gets everyone engaged in the process. It’s important for others to know what you are working on and what you are responsible for and how your work affects the overall goal for the company. KPIs require nurturing and nourishment. An isolated KPI will wither and die on the vine.
Knowing everyone else’s KPIs is also motivational. It encourages employees to take the initiative and gives everyone a sense of pride in their accomplishments.
KPI Karta can help
KPI Karta helps you design actionable metrics and puts them all in one easy-to-understand, cloud-based and interactive graphic illustration. With all your KPIs in one place, you can see how they relate to each other and how they are connected to your organizational goals.
