What is a Key Performance Indicator (KPI)?
Have you heard, “what gets measured gets managed?”
The famous quote by Peter Drucker accurately describes the approach for many organizations. Successful organizations measure success by embedding metrics throughout the organization.
During a time where there is no shortage of metrics tracked, how do you eliminate some of the noise and focus on the metrics that matter the most?
To be able to quickly look at your organization’s vital signs, it’s important to distinguish between what is a KPI and what is simply a metric.
What is a KPI?
A KPI, or Key Performance Indicator, focuses on metrics that are ‘key’ in determining an organization’s success. More specifically, a KPI defines how an organization is performing across core business objectives. KPIs are a focused way to quantitatively monitor how well an organization achieves key goals.
Identify the critical metrics most aligned to your higher-level organizational objectives. These are likely the KPIs.
Metrics vs KPI’s
Metrics are quantifiable measures established to index progress and identify how an organization is performing.
KPIs are a subset of metrics that underscore the success of a business and highlight some of the most essential measures tracked.
Both metrics and KPIs are important and have their respective purpose. KPIs place an emphasis on what are the most important metrics.
In short, all KPIs are metrics, but not all metrics are KPIs.
Consider a list of 100 different metrics tracked across your entire organization. Only 20 of them can be discussed at the next board meeting to give board members the best idea of how the business is performing. In most cases, those 20 metrics will be the key performance indicators.
According to Tim Clairmont in Forbes’ article What Are Your KPIs, And Why Do They Matter?, setting just a few simple KPI’s is a good way to create a common goal for your company. It will also keep employees from guessing and making assumptions about what’s really important.
Just like metrics, not all KPIs are created equal. To set a good KPI, it needs to have the 3 following characteristics:
- Quantitative – All KPIs are metrics, which by definition, are quantitative. This gives you a way to measure success. The KPI either needs to be increased, decreased, or maintained.
- Well-Defined – Specificity creates clarity. The more defined your KPI is, the clearer the picture of success.
- Aligned – Your KPI needs to be aligned to a key goal or objective in the business that is mission-critical for organizational success.
Key Performance Indicator (KPI) Examples
KPIs, with an emphasis on the “key,” will vary across organizations and industries. As a starting point, let’s use Customer Satisfaction and Financial Growth as examples. In many orgnizations, these are important areas of focus for creating KPIs and associated goals.
- KPI: Customer Satisfaction Rate
- Goal: Achieve a Customer Satisfaction Rate of >95%
- KPI: Operating Margin
- Goal: Improve Operating Margin by 2% YOY
In both of these examples, you can see that the KPIs and their respective goals have all 3 characteristics listed above; they are quantitative, well-defined, and aligned to core organizational areas of focus.
Tracking Your KPIs
Once your metrics and KPIs are selected, having a proper mechanism in place to track them will be crucial.
In addition to the status of the KPI, it’s critical to understand how it’s trending. KPIs rarely improve on their own. Also, layer in what initiatives have been completed and will be completed towards improving the KPI.
Successful organizations pair the quantitative elements of KPIs with qualitative information. They combine the “what” with the “why”. The “why” provides the context on the trending of a KPI.
Having a tool and process that easily enables this will make your progress updates informative and actionable, improving the likelihood that you will reach your goals.
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