Why are Key Performance Indicators Important? Find yours

Why are Key Performance Indicators Important? Find yours

We all have dreams. All actions begin with a rough idea on how things ought to be. But yet it goes without saying that having dreams or even goals is simply not enough to realize a vision. Constant action needs to be taken in order to reach them. How exactly is an organization supposed to know whether they are on track to achieve their goals?

In corporate parlance, the phrase KPI, or Key Performance Indicator is thrown around a lot and for good reason. KPIs help companies turn vague ideas into concrete, actionable plans with definitive values. Let’s take a closer look into what KPIs are, why they matter so much and how you can use them to take productivity to new heights.

What are the Key Performance Indicators?

Investopedia defines KPI as “a set of quantifiable measures that a company uses to gauge its performance over time. These metrics are used to determine a company’s progress in achieving its strategic goals as well as comparing their finances to performance both within and without.” Simply put, KPI is a scorecard which tells you just how well you are doing.

Broadly speaking, there are four types of KPIs that can be used to measure performance of all the parts of a company:

  • Quantitative KPIs: Specific measurable facts recorded against a standard or value. These are presented with a number.
  • Qualitative KPIs: Values that are based on feelings, tastes and opinions. These cannot be presented with a number.
  • Lagging Indicators: Presents past results as successes or failures.
  • Leading Indicators: Attempts to predict the success (rate) of a process using lagging indicators. In this measure, leading indicators are enablers that help the management to use past experience to achieve future results.

 

Some examples of popular KPIs include:

  • Marketing KPIs: Marketing Qualified Leads (MQL), Sales Qualified Leads (SQL), conversion rates, opt-in rates, lifetime value of a customer etc are popular KPIs used by marketers to measure how successful their campaigns are. Check out our Marketing Analytics entries for more on how measuring marketing performance can help.
  • Financial KPIs: gross profit margin, net earnings, accounts payable turnover are some KPIs among others that can help you ascertain whether your organization is making good on its financial goals.
  • Supply Chain Metrics: On-time delivery, stock rotation, inventory to sales ratio can help you understand your logistics better.
  • Human Resources Metrics: Absence rate, absence cost, satisfaction index, employee productivity rate, quality of hire are some KPIs used by organization to gauge how well they are doing vis-a-vis manpower.

These are merely the most common KPIs you can use to ascertain the more common business functions. As we drill deeper, sub-functions within each department can have their own KPIs as well. But finding the right KPIs for your organization’s working style and goals is easier said than done. Simply going with the most popular options may or may not work if management doesn’t have a clear idea on what they mean.

Finding KPIs Fit For Your Company’s Unique Culture and Goals

The problem with KPIs is that they are defined by a company’s goal. So, even though there are some commonly accepted KPIs, whether or not they are relevant to your company depends entirely on what goals you wish to achieve. Here are a few tips to help you make sure you find and use the right KPIs…

Less is more: Each of a company’s functions can have multiple KPIs all of which may seem relevant at first glance. However, as tracking KPIs is a laborious affair, consider focussing on only the most relevant indicators.

For example, in e-commerce it is easy to find indicators like click through rate (CTR), opt-in rate, conversion rate etc. While all of these are no doubt important, which KPI you should focus on will depend on where you need improvement.

So, let’s say your website is getting a steady stream of quality traffic, but you’re having trouble converting subscribers to paying customers. In such a case, conversion rate will be a better KPI to focus on rather than CTR.

Use KPIs better suited to your company’s stage: Different KPIs will become relevant as a company moves through its growth cycle. Early stage companies will focus on KPIs that measure business model validation as opposed to post-startup phase companies that will find customer acquisition costs, customer satisfaction and revenue more important. Here are a few KPIs to watch out for as per each stage of the growth cycle…

  • Startup: Burn rate or negative cash flow, activation rate, or how many people are engaging with your website/app, daily or monthly active users, customer churn rate or number of customers lost in a defined period of time.
  • Growth: Monthly revenue, consumer perception, renewed subscription.
  • Expansion: Cost per lead, gross and net profit, inventory turn-over rate, lifetime value of a customer and payback period.

Use industry specific KPIs: Like your company’s growth stage, your chosen industry will have a lot to do with which KPIs will be relevant to you. For example, a manufacturing company will find KPIs like backlog, turnover and total cycle time more interesting, while a SaaS company will consider average revenue per account, unique visitors, customer acquisition cost, lead velocity and subscriber to customer conversion rate more relevant.

Create SMART KPIs: No not just intelligently thought-out indicators. SMART stands for Specific Measurable Attainable Relevant and Time-bound.

  • Specific: Are the objectives clearly defined?
  • Measurable: Can we peg a number to this KPI?
  • Attainable: Are our expectations realistic?
  • Relevant: Will this KPI actually help our company achieve the targeted goal?
  • Time-bound: Does the KPI adhere to a time limit?

By asking the right questions, you can ensure that your KPIs remain relevant to your organization and goals. Additionally, consider adding review to the creation process to ensure the KPI meets the SMART criteria at all times.

Common Mistakes Companies Make When Selecting KPIs

As stated earlier, one of the bigger problems with KPIs is that it’s very easy to set on the wrong ones. Here are a few things to look out for…

1. Only measuring things that are easy to measure: Not that there’s anything wrong with it, but many a times management will consciously or unconsciously opt for measuring only those KPIs they think are easy. Some KPIs will require more legwork than others, however, the amount of effort required should not be considered over its relevance to company objectives.

2. Establishing KPIs that aren’t KPIs at all: Often times, management will start measuring aspects that really are not as relevant as some of the other aspects. Working your way backwards from the goal is your best bet to ensure that you do not miss a step and end up with the wrong indicators in place.

3. Using KPIs to measure tasks rather than results: The objective of a KPI is to ensure an objective is achieved. However, this directive can easily be confused with the need to measure actions rather than the outcome itself. So, metrics like number of hours worked, number of customer interactions etc are best not used as key measures, even if they must be recorded.

4. Creating KPIs without management/staff support: Oftentimes, key stakeholders will become so engrossed in their quest for achieving their goals that they will end up setting KPIs without the knowledge of their peers. Staff buy-in is just as (if not more) important than setting the right KPIs as they will be the ones who will act on them. A great way to getting the staff on-board is to get them involved in the KPI setting process. This way they will be in the know right from the get go and will also be aware of what is expected of them.

5. Looking for the elusive perfect indicators: Like most things in life, KPIs are rarely perfect measures and the best we can hope for is a close enough answer. The objective of a KPI is to let you know whether you are on the right track or tell you how far you’ve wondered. Your chosen indicators only need to have enough accurate data to let you make informed decisions. No one gets it right on the first attempt anyways so it’s best to use KPIs as part of an overarching, continuously improving strategy.

Conclusion

As the old saying goes – what gets measured gets improved. With the sheer wealth of data that modern organizations have access to today, they have unprecedented opportunities to improve and deliver ever more amazing products and services. But as a consequence of all the data, As analysis paralysis is at an all time high, which is why smartly establishing the right KPIs becomes all the more crucial as they will help you select the right data sets to focus on.

Another key aspect is that while establishing the right KPIs is critical, they should never become the holy grail of all things productivity. In assigning excessive importance to KPIs, management may refrain from changing or even replacing them if necessary. Your KPIs are tools, use them to achieve whatever results they were created for and discard them should they outgrow their utility or prove themselves useless.

As Runrun.it provides powerful task tracking features, we can help you establish and measure your team’s KPIs with incredible ease. Feel free to check out more on how online collaboration software can help you create, track and achieve KPIs. Also, feel free to comment or reach out to us with questions or feedback. We will be glad to help!

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