As the famous business quote says, “what you can’t measure, you can’t control.” In organizations, performance is measured by Key Performance Indicators or KPIs. KPIs are essential in any organization as it helps evaluate if business objectives and targets are being met. However, KPIs are only beneficial if they are defined correctly. It needs to be the right one for the business, whether for a traditional company or an e-commerce industry KPIs.
Why are Key Performance Indicators important?
- It keeps teams aligned: KPIs help your team move in the same direction, whether for a project or employee performance.
- It provides a big picture: It also helps provide a health check and a realistic look at your organization, like how effectively the company has managed business finances or reduced risk factors.
- It helps you pivot: KPIs make you adjust based on successes and failures. It helps you continue best practices, stop doing what doesn’t work, and start new strategies.
- It holds everyone accountable: It makes everyone responsible for the company’s success by ensuring that all employees add value to their work.
Common types of KPIs
- Strategic: These KPIs monitor organizational goals. Examples are returns on investment, market share, and revenue.
- Operational: this type of KPIs measures performance but in a shorter time frame. It is also focused on organizational processes and efficiencies. Examples are sales by region or area, cost per acquisition, and productivity.
- Functional Unit: these KPIs are tied to specific functions, like Finance, IT, or Customer Service. IT team can track the average time for a concern to be fully resolved, Finance can measure gross profit margin, and the Customer Service team can look at how they are able to maintain customer satisfaction.
So how can leaders craft effective KPIs for their respective teams? Here are some tips on how to do it.
Make sure it is aligned.
KPIs should always be aligned with the company’s strategy and direction. If it is not clear what the business is trying to achieve, you might be developing KPIs that are not relevant. The company strategy will be the starting point and true north in designing appropriate KPIs. It will help you define your objectives and see what needs to be in place to achieve them.
Keep it simple.
A KPI should be simple, straightforward, and easy to understand and measure. It is essential that all employees understand the KPIs- whether the top executives down to any level. Every employee needs to understand their role in enacting a KPI to meet business goals. By keeping it simple, everyone should be able to answer the question, “how will what I am doing today affect our KPIs?” Simple and easily understood KPIs can also increase employees’ buy-in and involvement in achieving the KPIs as well.
Ensure that it is actionable and realistic.
Why make a KPI if it is not attainable? Not only are you setting yourself up for failure, but it can also demotivate your employees. The more realistic the goal of a KPI is, the more likely it is that teams will work to achieve it.
Identify the data you will need.
In crafting KPIs, make sure to identify the data you will need to measure this. Since companies have a lot of data, determine what you need so you can check its availability. If not, think of ways on how you can gather the necessary data to support the KPIs.
Define the proper measures.
An effective KPI is easily measured and avoids generalized goals. For example, instead of writing ”improvement in warehouse department,” you can use “decrease aging stocks by 20% by 3rd quarter.” An effective KPI should be based on a tangible goal that can produce both quantitative and qualitative measures.
Communicate and cascade your KPIs.
Find out the best way to communicate your KPIs to the team. Keep it clear yet engaging and insightful. While you cannot go away with numbers and charts, finding the right way to cascade your KPIs can make it chewable, accessible, and actionable.
Review your KPIs regularly.
Ensure that your KPIs are still relevant, especially if there are changes in strategy, priorities, market, customer, and organizational behavior. Define a regular schedule to review your KPIs and tweak them if necessary. Meet regularly to examine performance if adjustments need to be made, and publish any changes to update your teams.
Avoid having KPI overloads.
Make sure not to come up with too many KPIs. Focus on which ones will make the most impact. Remember that KPIs refer to the most important targets.
Make sure that there are leading and lagging measures.
You may use both leading and lagging measures for your KPIs. A leading indicator is a predictive measurement or actions, while a lagging indicator is an output measurement or metrics. Thinking in terms of actions and not just the output can help management redirect strategies if needed.
Make it visual.
It will be helpful to have a KPI dashboard to have an at-the-glance view of the business performance. This technique can help you get a better picture of how the organization is doing. KPI dashboards also translate the data of the organization to data-driven decisions that can improve the business.
As simple as this may be, ensure that your performance indicators are SMARTER: specific, measurable, attainable, relevant, timely, explainable, and relative (now and as your company grows). There are times wherein leaders get carried away in developing KPIs. This framework can make you go back to the basics.
Effectively track your KPIs as well. Ensure that employees are given frequent feedback in terms of how close or far they are in achieving their KPIs. Do not wait until the submission of the performance rating form before you talk to them about their performance.
Any organization needs the right Key Performance Indicators. It will not only boost employee morale, productivity, and performance, but it can also help the organization reach its goals. All leaders need to collaborate in developing effective KPIs to benefit from it entirely.