What is a KPI?
A Key Performance Indicator (KPI) is a type of measure that is used to evaluate the performance of an organization against its strategic objectives. KPIs help to cut the complexity associated with performance tracking by reducing a large amount of measures into a practical number of 'key' indicators.
KPIs can be used to track the operational performance of departments, projects or individuals against targets or goals. They can provide a management tool for gaining insight and decision making.
What do KPIs look like?
Unlike simple Metrics that are used to monitor and present values, such as the number of visitors to a website. KPIs may incorporate one or many different metrics to track a business objective. For example, a KPI aligned to a strategic marketing objective may look like this:
- Objective: Increase the website conversion rate to 20%.
- Description: The current conversion rate has stalled at 12%. To be competitive the conversion rate needs to increase in line with our competitors.
- Completion: By the End of the year.
- Reporting Frequency: Monthly.
- Data Source: Number of Trials / Number of conversions.
- Owner: Product Manager.
A well-constructed KPI helps organizations translate visions into strategies, and tracks the impact of initiatives. Companies benefit from a host of advantages, such as greater insight and real time information to make informed decisions.
For more detailed explanations, take a look at the following resources:
How to create KPIs in 5 simple steps
Developing meaningful KPIs that track, and clearly visualize performance takes some planning. Each KPI needs to address a specific business objective, and provide timely, accurate information to assess progress towards goals.
Essentially, creating successful KPIs comes down to understanding the aspirations of the business using a clear, structured process for crafting KPIs.
Here's how to create a KPI:
Establish a clear objective.
If a goal of the business is to be the 'market leader', then a KPI objective maybe to 'increase revenue by 10% this financial year' or 'Expand our product lines to 20'. State clearly, and in simple terms the purpose of the KPI. This provides guidance for anyone viewing the KPI to interpret the data in the correct context.
Outline the criteria for success.
What will the target be? Is it attainable? when should it be accomplished? and how will progress be monitored? Targets should be realistic, changes to business processes take time to implement. In the initial stages of KPI monitoring it's best to focus on long-term targets with midterm monitoring.
Collect the data.
Investigate the availability and accuracy of the data. Data may be available automatically from existing systems or hidden in reports and databases. This data will all need to be pulled together at regular intervals for reporting in one central place.
Build the KPI formula.
Some KPIs contain but a single metric or measure. However most rely on a combination brought together under a single calculated formula. For example, a KPI that measures productivity in revenue by machine would look like this: Total Revenue divided by the total number of machines. Build formulas and create calculations with test data to see if the results are what you would expect.
Present your KPIs.
To efficiently communicate your KPIs you'll need to translate the data into understandable visuals such as graphs and charts. Dashboards for Operational KPIs, or Reports for Strategic KPIs offer a convenient way to create, track and distribute your KPIs.
Additionally, as business objectives change, it will be necessary to revisit your KPIs periodically to tweak, adjust or replace as needed.
How to develop Key Performance Indicators
What are Leading and Lagging KPIs
When you're looking to implement KPIs to improve a business process, you will often hear the terms “leading” or “lagging” indicators. But what do these terms mean? – and how can you implement them as part of your strategy?
Lagging KPIs are used to determine the result of past performance, such as production, volume or a result. They are easy to measure as they are typically a simple value that is used to understand how well a process is performing. For example, the 'number of units produced' in a manufacturing process or 'revenue this month' are lagging KPIs.
Leading KPIs are used to predict or influence future performance. They are more difficult to set up as they rely more on external actions to impact outcomes, such as changes in process or investments in infrastructure. For example, increasing the number of 'routine maintenance checks' in a production line may highlight faults that were causing defects. This would then lead to a higher overall unit production rate.
What are Organizational and Operational KPIs?
Across different business functions KPIs have a wide range of practical applications. From daily indicators that provide real time management information to more long-term organization objectives.
Typically, KPIs fall into two main categories:
Operational KPIs clearly articulate detailed and timely information that is used to make day to day decisions, or take corrective actions on performance or a process. These KPIs are usually complex in nature as they use formulas with data from multiple sources.
Strategic KPIs are focused on long term objectives derived from an organizations goals. They help identify if a strategy is working and if it is on target. As such these KPIs are sometimes referred to as High Level KPIs.
Presenting Key Performance Indicators
When it comes to Key Performance Indicators, Presentation Is Everything. Even the best planning, knowledge and methodology can render your hard efforts obsolete if the KPIs fail to communicate effectively.
Luckily, there are a couple of tried and tested solutions that will help you measure and report on your KPIs, while achieving communication excellence:
Dashboards are highly flexible tools that allow you consume data into graphs and charts quickly. They are orientated towards presenting real time operational KPIs that should be seen at a glance, such as 'Number of sales this month' or KPIs associated with Marketing Campaigns. Most dashboards incorporate sharing functionality, so they can be conveniently distributed among team's departments and users.
Reports offer an in-depth or analytically focused platform for presenting KPIs. They typically incorporate drill down and analytics features to interrogate the trend data behind the KPIs. This makes reports a good fit for long-term strategically focused objectives such as increasing market share.
20 Working KPI Examples and Definitions
Actual Productive Time
The productive time of the factory, machinery, production line or plant. Taking the maximum available production time and the actual time, the plant is operational within this period.
Supplier Performance Score
The total supplier performance score reflects the punctuality and cost competitiveness of all suppliers.
Tracking the amount of material that is wasted during the normal course of production. This KPI offers both an environmental and efficiency focused measurement.
Supply Chain Distance
The number of combined miles or kilometers traveled by a product from production to delivery. This KPI highlights a metric that can be monitored to cut costs and manage delivery SLAs.
The volume of waste recycled by the organization for a defined period. This KPI helps the company meet their green strategy.
The re-letting time normally tracked in days show the average re-letting time of all the properties in the management portfolio.
Average tenure of property
How long a tenant rents a property for, calculated as an average across all properties.
The number of property viewings as a total this period, also used in conjunction with individual property viewings to show average number of views before lettings.
How many defects have been reported across all managed properties. This KPI can be used for monitoring and pro-actively reducing the number of defects across all properties.
The number of early terminations across all properties. Used primarily to identify properties with external issues that may need addressing.
Delivered on time %
Tracking the percentage of all orders over time can help introduce efficiencies that improve this measure.
The total running costs for the entire fleet over time.
Canceled Pick-ups or Orders
The number of pick-ups or cancellations can highlight potential quoting or lead generation issues.
Unable to deliver
The number of attempted deliveries over a specific time. This KPI can highlight issues with either operators or booking slots.
This operational real time KPI addresses the available current warehouse space available for stored deliveries prior to being loaded.
Construction Schedule Variance
The discrepancy between the actual construction to date against the construction schedule.
SQM Construction Cost
The average cost of construction per SQM can help with costing's and monitoring escalating supplier costs.
Safety: Reportable Incidents
Keeping a tab of safety related incidents can highlight dangerous working conditions and training issues.
Projected Construction Hours
The projected construction hours against the actual construction hours to date.
The number of discovered defects detected at various stages in the construction process.
Deploying KPI Templates
Templates can provide a good starting point when beginning to implement KPIs. As they show a collection of working examples they offer inspiration and a base on which to build, customize and deploy. Here are some examples of some commonly used templates:
A set of 18 KPIs aimed at the manufacturing and engineering industries. These Manufacturing KPIs help track and monitor performance such as production costs, Labor costs, production losses and cycle times. These KPIs offer a best practice approach to manufacturing process tracking.
- Actual Production Cost
- Actual Production Time
- Availability OEE
- Average cycle time – ACT
- Cycle Time Ratio – CTR
- Labor cost per unit
- Labor Costs
- Number of Days
- Number of units unfinished
- Potential Production Time
A selection of 11 financially focused KPIs. This template is designed to track financial KPIs such as Disputed Invoices, Net Profit Margin, EBIT, Revenue and working capital. This template offers a base set of financial metrics and KPIs commonly used in organizations to help with the bottom line and drive sales growth.
- Cost of goods / Services
- Disputed Invoices
- Gross Profit Margin
- Net Profit
- Net Profit Margin
- Number of Employees
- Overdue Invoices
- Revenue per employee
Human Resources Template
16 Human Resource focused KPIs designed to assist with various aspects of managing employees such as Cost per hire, Health Care Costs and HR Expenses.
- Absence Rate
- Agency Fees
- Average number of employees this month.
- Days taken to hire
- HR Advertising Costs
- HR Expense Factor
- HR Expenses
- Number of days absent in a month
- Number of Hires
- Number of Workdays
16 Retail focused KPIs to help all facets of retail outlet performance across multiple industries. This template assists in monitoring Retail KPIs and business metrics such as cost of goods, Gross Margin, Retail Price and Net Sales.
- Average Basket Spend
- Average Shopping Time
- Cost of Goods
- Customer Retention
- Fixed Cost Per period
- Gross Margin
- Gross Sales
- Net Sales
- Offline Sales
- Online Purchases
Key Performance Indicator Best Practice
What makes Key Performance Indicators so effective? What sets them apart from just plain old data measurements. Here are 5 factors that can be the difference between mediocre data recording and a truly effective business improvement exercise:
- Keep Aligned. KPIs should track the performance of a specific business objective to help achieve the larger goals of the company. Being closely aligned to key measurements will ultimately help you focus on influencing factors to reach these goals. If a KPI is neither aligned or specific, is it really needed?
- Less is more. In a world full of data is far too easy to track the too much and too often. It's a common mistake to measure everything connected to the business. Starting with a small number of specific KPIs will not only be easier to implement, but will help with the adoption of KPIs with the organization.
- Actionable and accountable. KPIs without clear and relevant targets are simply measurements that are limited in how you can influence their performance. Short and long-term targets should be set for KPIs, along with owners who are responsible and able to influence business processes.
- Attainable. Can we realistically achieve this objective? Do we have the capacity to change or amend processes that will influence the performance? KPIs should be realistic and proportionate to the resource of a business. Nothing will stop a well-intentioned performance improvement process that an over ambitious and unattainable objective.
- Review and tweak. As with any business process, KPIs also need timely scrutiny or maintenance to keep them performing at their best. Setting regular review periods will keep them relevant and providing optimum benefit.
A complete guide to KPI Reports
Key Performance Indicator (KPI) Reports Explained
A comprehensive guide to KPI Dashboards
How to create and visualize your Key Performance Indicators (KPI) and metrics on a Dashboard
What is a KPI? - Investopedia
Breaking Down Key Performance Indicators