Key Performance Indicators (KPIs)

KPIs vary from one organization to another based on business priorities. For example, the share price is likely to be a KPI for a public company, while the number of new customers added every three months might be a KPI for a private startup. Even direct competitors in an industry are likely to monitor different sets of KPIs designed according to their individual business strategies and management philosophies.

The KPIs that different people in the same organization follow closely can differ depending on their roles. For example, a CEO may consider profitability the most important performance measure for the company, while a vice president of sales may view the ratio of sales to losses as the highest-priority KPI.

Furthermore, different business units and departments are usually measured on their own KPIs, leading to a mix of performance indicators throughout the organization, some at the company level and others oriented toward specific processes.

They are used to evaluate and measure the success of an organization, business or commercial activity in reaching its desired goals.

The importance of KPIs

KPIs highlight the level of business performance. Without KPIs, it would be hard for company leaders to assess the strength and effectiveness of the company and the business, including its operations and marketing, in a meaningful way. Based on the results, decisions are made to introduce operational changes or the changes needed to address performance problems.

Also, keeping employees focused on business initiatives and tasks central to organizational success can be difficult without specific KPIs defined to reinforce the importance and value of those activities.

In addition to highlighting business successes or issues based on current and past performance measurements, KPIs can point to future results, giving company heads and executives early warnings about potential business problems, or advance guidance on opportunities to get the maximum return on investment.

Armed with such information, they can manage business operations more proactively, with the potential to gain competitive advantages over competitors who value data less.

Types of KPIs

1 Lagging indicators

Performance indicators that measure the results of business activities, such as profit growth and quarterly revenue, are called lagging indicators because they track things that have already happened. Yes, they are performance indicators, but they are not key performance indicators.

2 Leading indicators

By comparison, KPIs that herald coming business developments, for example sales bookings that will generate revenue in future quarters, are known as leading indicators.

3 Quantitative indicators

There is also a difference with quantitative indicators, which have a numerical basis, such as inventory movement, customer orders and the like.

4 Qualitative indicators

These are the most abstract and open to interpretation, such as rating a user's experience with a product or on a website.

With qualitative indicators, identifying useful KPIs can be hard. Their selection depends on the organization's ability to actually measure them in some way. For example, the percentage of abandoned transactions in online shopping carts might be an indicator of customer experience on a retail website.

Are there other KPIs?!

Yes, there are many, and they differ according to the type of the business's commercial or industrial activity. Examples include:

• Input indicators, which measure the amount of resources consumed while generating the result.
• Process indicators, which represent the efficiency or productivity of processes.
• Output indicators, which reflect the results or outcomes of process activities.
• Practical indicators, which interact with the company's current processes.
• Directional indicators, which determine whether the business is improving or not.
• Actionable indicators, which are under the business's control enough to bring about change.
• Financial indicators, used in measuring performance and when considering an operating indicator.

From my own professional point of view, KPIs cover a wide range of financial, marketing, sales, customer service, manufacturing and supply chain metrics.

KPIs can also be used to track performance metrics related to internal operations such as human resources and information technology.

How are KPIs measured?

Having too many KPIs can dilute the attention of key employees pursuing results.

Once KPIs are defined, they should be communicated and explained clearly to employees so that all levels of the organization or business understand the most important work criteria and what constitutes successful performance.

KPI communication can, and preferably should, include the entire workforce, or smaller groups of employees for the KPIs that apply to particular departments, each department separately.

In most businesses, KPIs are tracked automatically through business analytics and reporting tools that collect relevant data from operating systems and then generate separate reports on the measured performance levels.

KPI results are presented to executives or owners and decision-makers to make decisions that raise the standing of the business, and to submit recommendations and proposals for its development.

In an attempt to provide a broader view of the business's performance, KPIs may go beyond operating revenue and financial, marketing and sales measures and all the other common indicators we discussed before, as KPIs include (multiple) key performance indicators within (integrated) scorecard frameworks that may combine groups of other measures, with the ability to drill into performance data for further analysis.

One of the challenges in defining KPIs is deciding how many tracks to follow to determine organizational success and the desired goals.

There is no set rule for the number of KPIs per business. But in my view and personal experience, having too many KPIs may dilute the attention of key employees in pursuing results. As a result, the business becomes more effective when the scope is narrowed to small sets of KPIs.

Managers or owners should evaluate KPIs continuously to make sure they are still relevant and aligned with the priorities in the business's operations. If individual KPIs no longer serve a useful purpose, they should be refined or replaced entirely.

Examples of KPIs

Besides revenue, expenses and profit, commonly used financial KPIs include gross and net profit margin, which measures how much money the business or institution earns from product sales.

Inventory turnover, which tracks how quickly products held in inventory are sold. Cost of goods sold, a measure of the materials and labor costs incurred in making products.

Accounts receivable turnover, a ratio that determines how quickly payments from customer credit sales are collected.

And days sales outstanding, a measure of the number of receivable days not yet collected.

For marketing and sales, KPIs include the lead conversion rate, which measures the percentage of prospects converted to customers.

Customer acquisition cost, which calculates the average cost of acquiring new customers in marketing and sales expenses.

Marketing return on investment, to determine how much financial return marketing campaigns and programs bring back. Customer lifetime value, which predicts the total profit the business might make from sales to individual customers.

And customer churn rate, a measure of how many customers stop buying the business's products or dealing with it.

Customer service call-center KPIs include the first-call resolution rate, which tracks the percentage of customer inquiries handled without needing additional calls.

Cost per call, to determine the average cost of handling calls. Call volume, which measures the total number of calls handled in a given period.

Wait time, a measure of the average time customers spend waiting during calls.

KPIs for manufacturing and supply chain operations include the percentage of defective products the company makes. Manufacturing cycle time, which measures how long it takes to make products.

Carrying cost, which puts a value on the cost of keeping products in inventory.

The percentage of out-of-stock items, to track how many products are unavailable when customers order them. Backorder rate, a related measure that determines how many orders cannot be delivered from inventory or by ordinary means.

And return rate, which assesses the percentage of items and products that are returned.

Human resources departments track KPIs such as employee satisfaction levels.

While KPIs that IT managers look at include system uptime, compliance with service-level agreements, and on-time project completion rates.

Industry-specific KPIs have also been created in retail, healthcare, financial services and other markets.

For example, a retailer might track things like the average purchase value of sales transactions, and sales per square foot of brick-and-mortar retail space.

While a healthcare organization might measure emergency-room wait times, average length of hospital stay, and the speed of diagnosing and treating patients.

We have reached the end of this topic, and I hope I have clarified everything related to key performance indicators, and that I have not forgotten anything or left out any information.