What Is The Meaning of KPIs? This Primer Explains What Makes A Good One And What Doesn’t
2 July 2021
KPIs (key performance indicators) are ubiquitous; companies that know how to choose them and use them correctly aren’t.
Consider this post a primer for understanding what KPIs are — and aren’t — and a very basic crash course in how to choose appropriate ones for your needs.
KPIs are data.
A key performance indicator is a set of data that measures how well something or someone is performing.
But it isn’t just any data. The important term here is “key,” meaning that the data is both relevant and important to measuring progress towards an outcome.
Think about your doctor measuring indicators of your health. When you go in for a checkup, your doctor might measure your blood pressure, cholesterol level, heart rate, weight, and so on to help her get a picture of your overall health.
But, if you go to the doctor with a sprained ankle, measuring your cholesterol level is NOT a good indicator of your progress toward healing your ankle. It’s a data point, but not a KPI.
KPIs should simplify the big picture, rather than confuse it.
KPIs serve to reduce the complex nature of organisational performance to a small, manageable number of key indicators that provide evidence that can in turn assist decision making and ultimately improve performance.
The trouble is that there are thousands of KPIs to chose from and companies often struggle to select the right ones for their business. The wrong KPIs bring the danger of pointing people into the wrong direction and even encouraging them to deliver the wrong things.
In our medical analogy, the doctor has thousands of data points she can collect, but she must select which KPIs will indicate if the patient is making progress toward recovery. In the case of a sprained ankle, she might choose range of motion, swelling, or a pain scale as relevant KPIs — but not cholesterol levels, brain activity, or, say, liver function.
KPIs are used to quantify any subjective opinions.
The old axiom, “What you measure, grows,” is apt here. When you choose the correct KPIs for a business or organisation, they make it easier to focus on the tasks, processes, and goals that will create real momentum and success.
A sales team that understands its close rate, for example, may see that they need to make an average of 100 calls to close 10 big sales. Knowing that, the salespeople can focus on making more calls, and the manager can focus on giving them more leads in order to close more sales.
Or, in a different scenario, perhaps they discover that they have a better close rate with current and former customers. In that case, the team can spend less time finding new leads, and more time nurturing existing ones.
The data makes it easier for the team to know how to best use their time.
KPIs can be anything that measures the difference between two things.
Too often, people assume that a KPI must be numerical or financial in nature — something you can easily quantify. But that’s not always the case.
If you can observe a move from one state, situation or element of performance to another that is strategically or operationally important to the success of your business then you can measure it. And that measurement can be a KPI.
Just because you can measure something doesn’t mean you should.
Many times companies make the mistake of looking at the data they already have or can easily get as their KPIs. But just because you can measure it doesn’t mean it’s the right thing to measure.
Just like a doctor, there are many things you can measure in any situation, but you have to determine which will tell you what you want to know. Measuring heart rate is very simple for a doctor to do, but probably isn’t going to tell her much about your sprained ankle.
When it comes to KPIs always figure out what it is you need to know first and then design the KPIs to deliver those answers.
KPIs work best with specific targets.
In order to be most effective KPIs need clear targets to accurately measure progress. Saying you want to “increase revenue” is not specific enough. Knowing that you want to “grow revenue by 5 percent in the next 12 months” is much easier to measure.
Targets also need to be realistic. You can set a target to double your revenue in a month, but it’s very unlikely that you will meet that goal — no matter what KPIs you choose.
Hopefully this helps demystify what is and isn’t a good KPI; of course, what makes a good KPI for one business may be a poor one for another business, which is why it’s always important to start by asking what you hope to achieve, and then designing ways to measure your progress toward that goal.
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