Article by Matt Smith as posted on Bellingham Wallace
A good KPI should act as a compass: a measurement of where your business is, relative to where it has come from and where it is going. KPIs translate your business strategy into manageable, operational actions, based on the data you collect and monitor. They are an important component of the information needed to understand a company’s progress. However, many businesses aren’t leveraging the power that comes from understanding their data.
Failing to invest in compiling accurate business data, beyond the usual financial statements and reports, means business owners will continue to rely on “gut feelings” and assumptions when it comes to making decisions. But there is no substitute for concrete numbers when it comes to measuring the health and understanding the direction of your business.
The old saying, “What gets measured gets done” rings true.
With the wealth of data and insights available to businesses in the digital age, CEOs and managers should be honing in on this valuable resource. Now more than ever, businesses need to be collecting forward-looking insights that shape overall strategy and inform daily decision-making.
What is a KPI?
A KPI (key performance indicator) is a quantifiable measure that can be used to determine how well company goals are being met.
Leading KPIs are generally “input” oriented and signal future results. They normally measure intermediate processes and activities, which affect the performance of lag indicators.
- Number of leads created
- Customer satisfaction
- Contracts in negotiation
- Sales closing ratio
- Brand recognition
Lagging KPIs are typically “output” oriented, easier to measure but harder to improve or influence. Lagging indicators trail behind your goals, capturing data that directly relates to your activities.
- Sales volume
- Net profit
- Return on investment
- Sick days taken
- New customers
Financial and non-financial indicators
KPIs are often skewed towards financial measures, but non-financial indicators are just as important. Typical non-financial KPIs include measures that relate to customer satisfaction, health and safety, quality and a company’s supply chain. They can also include web analytics, such as traffic, time on site, and click-through rate.
KPIs support strategy execution
Think of a sailing trip from Auckland to Sydney. The skipper aims for the journey to take two weeks. Once they’ve set sail, the skipper and crew rely on data to navigate. The most useful KPIs might include the GPS location, weather information, heading, and speed. These KPIs allow the skipper to understand whether he is on course for Sydney or veering off course. Without those important KPIs, the skipper would have to rely on his instincts and past experiences at sea.
It’s possible that the journey will be delayed, or they could run into serious trouble, putting the boat and its crew in danger.
The analogy helps to illustrate how businesses can have a strategy (get from Auckland to Sydney in two weeks on a sailboat), and how specific KPIs support managers and staff (the skipper and crew) to execute that strategy, both in real-time and in the future.
Implementing KPIs for your business
Always select KPIs that are aligned to your strategy and have clear links to the overall performance of your business. Having too many KPIs can actually be harmful to a business, as it weakens focus and makes it difficult to communicate the plan to staff. Businesses should look to implement no more than five key KPIs, although it is common for different departments to have their own specific KPIs. It’s better to keep them simple so that they’re easier to measure and communicate to the wider team.
Why KPIs are important
Not only are company key performance indicators critical for monitoring financial performance, they can also help to improve employee morale, customer satisfaction and other, more personal objectives important to the growth and success of your business.
The reasons why KPIs are important:
- Goal measurement: KPIs are the measurements by which you know if your business is achieving its strategic goals or not.
- Providing information and feedback: They provide a simple, insightful snapshot of a company’s overall performance, as well as reliable, real-time information for effective decision-making.
- Education: KPIs create an atmosphere of learning in an organisation as they generate conversations between staff that can lead to innovation and a better understanding of the business strategy.
- Staff morale: Receiving positive feedback or incentives for meeting KPIs can be rewarding and motivating for staff. Without measuring outcomes, quality work can easily be overlooked.
- Consistency and continuity: People, priorities, and goals in a business may change over time, but the measurement of a KPI should remain consistent. This is essential for monitoring long-term strategic goals.