Key Performance Indicators, also known as KPIs, are core measurements that businesses use to monitor progress toward achieving goals and targets. KPIs, which vary widely by industry and entity structure, can be used to monitor and track all aspects of a business. Management teams pay close attention to KPIs, looking for anything out of line that indicates action is required. In this two-part series on KPIs, we’ll look at the difference between KPIs and metrics, methods for choosing KPIs, how to define KPIs and the best ways to track and communicate findings.
Metrics versus KPIs: What’s what?
KPIs and metrics are often conflated because all KPIs are metrics, but not all metrics can (or should) be considered KPIs.
Metrics are data driven, quantifiable measures that track performance. Created from data compiled periodically (such as accounting-based metrics) or continually from a live data source, metrics allow businesses to monitor progress toward achieving goals and objectives.
How to determine which metrics qualify as KPIs?
Peter Drucker, one of the most widely influential thinkers on the subject of management theory and practice, wrote “What gets measured gets managed.” As such, not every metric is truly “key” for your business. If you treat all metrics as equal and don’t differentiate between what really matters, then nothing will stand out and you’ll manage everything equally. This is why it is critical to select the metrics most important to you and your business and designate those as your KPIs.
Metrics Still Matter
Your KPIs might be your most important metrics, but this doesn’t mean the other metrics don’t matter. When something goes awry with one of your KPIs, you’ll need to dig into other metrics to understand the problem, identify the root cause and correct course.
Mirror, Mirror on the Wall: Who’s Performing Best of All?
Not everything your business gauges will be an accurate measure of performance. Metrics that feel good to track but don’t have much impact on progress are often called “vanity metrics.” Vanity metrics are fun to get excited about, but they don’t actually provide much value or insight.
The entire point of carefully selecting KPIs is so that you focus on what really matters to your bottom line.
How to choose KPIs that matter
Delivering the right metrics to the right people at the right time allows you and your team to collaborate, make decisions and take actions based on data. KPIs can go beyond just providing focus to create a cohesive unity among your team in working toward a common objective, but only if they are well defined and easy to comprehend. Next month we’ll look at how to transform a bunch of numbers into something actionable and meaningful.
Before we get into the specifics, the simple way to drill down and select a handful of metrics is by asking two central questions. First, what are you trying to achieve and, second, how will you know if you’ve achieved it?
Defining KPIs
Here are a few guidelines you can use to focus your efforts in defining your KPIs.
KPIs vary: Every company and industry is different. This means not everyone will have the exact same KPIs. Even companies within the same industry, geography and size group might have some different KPIs; for example, results will vary if the businesses are at different life cycle phases. A family-owned company looking to be in business for the next 100 years is going to have different KPIs than the same business bought out by a private equity firm that is planning to resell in a few years.
There are three main categories of KPIs: overall business, departmental/team and individual. Remember to separate supporting metrics from true KPIs across all three types.
Limit the number of KPIs you track: Measuring everything is as good as measuring nothing. Keep the “K” of KPIs in mind at all times; ensure you distill your KPIs to what are truly “key” for your business. Too many measures mean you’ll dilute your focus and may become diverted from what really matters.
Make Your KPIs Accessible
Mushroom management is an opaque management style where employees are not privy to the company’s performance and have little connection to their work and the purpose behind it. The name comes from how mushrooms are farmed—by being kept in the dark. This style of management can be very discouraging and disengaging to employees, with a recent report finding that:
- About 80 percent of employees want more data about the company they work for to be shared with them;
- Approximately 25 percent of employees either left or know someone who exited a company because of inadequate transparency on business direction and performance; and
- More than half of employees say that sharing of company data positively impacts their performance and productivity.
Effective use of KPIs can dramatically increase the visibility of a company’s goals and performance, making employees feel like they are in the know, keeping them engaged, and connecting their work to the company’s mission. Coupled with effective communication, the right KPIs are part of the solution to mushroom management.
Effective Communication and Consumption of KPIs
Unless you’re an analyst, you probably have little desire to paw through spreadsheets identifying KPIs and making sense of the numbers. In order to be accessible to a broad audience across your organization, KPIs need to be easily understood. One effective way to communicate the most actionable metrics is to display them on a large monitor in the office or factory floor.
Another strategy is to manage your metrics and KPIs with a dashboard. Building a business KPI dashboard can bring your metrics to life through visualization, allowing everyone easy access to the data. Dashboards are an effective way to track key objectives, drive your business decisions and accelerate growth.
KPI Examples
Not sure where to start? A great place to visit is this KPI Library, which provides an exhaustive list of metrics. Remember that everything included in the link above are metrics and should only be considered KPIs if you meet the right criteria given the context of your company and its objectives. The list of possible KPIs from the link above can be overwhelming, so if you need assistance picking and measuring the right KPIs, contact a Blackman & Sloop advisor.