What is the importance of setting KPIs?

Too often I see leaders fail to get an understanding of how their business operates. Throughout the year, they fail to log any departmental metrics of their operations and they are stuck with an idling business wondering where the problems lie.

In steps a set of KPIs. A key performance indicator ( KPI) is a metric used to assess factors vital to an organization’s success. KPIs may be different for each company but they will be the most critical indicators that show an organization’s efficiency and safety. Often these KPIs are collected together in the form of a dashboard that is distributed to key stakeholders, using data visualization software. KPIs are normally tracked over time to observe trends and compare with an organization’s plan for expected performance.

KPIs can help you understand if your company is on the right track for success—and if it’s not, where to focus your attention. No matter what it measures, the aim of any KPI is to bring about improvement and identify areas where KPI goals are not being met.

In addition, today’s  leaders want to spend more time thinking about frameworks for measuring results in the form of KPIs and using these KPIs to guide course correction to drive business performance. More importantly, the KPIs’ benefits are:

  • To monitor company health. KPIs are a safety scorecard for businesses. You just need a handful of KPIs to track the vital signs of your business. Measure only what you want to move, so that you can put energy where you want to change. We have found that measuring a few KPIs in each of 4 categories is important: employees , customers, processes, and revenue. Such fall under the human resources areas, customer satisfaction, business processes, business strategy and many more. First make sure you choose the right KPIs for your business, then worry about who is accountable for them.
  • To measure progress over time. Track key metrics for performance such as Revenue, Gross Margin, # of locations, # of employees etc. Set targets at the start of each year and every quarter, and use KPIs weekly to calculate your progress towards those goals. Setting the right KPIs will help you measure your progress toward your business strategy and long-term goals.
  • To analyze patterns over time. If you calculate the same quarter-by-quarter KPIs you will start detecting trends in your numbers. Such trends will support you in your company in countless ways. You will be able to predict when your slowest quarter will be, and use that time to do a system upgrade or training initiative across the business. You might be able to say that your sales manager always predicts that you will come in 5 deals over or under where you usually end up at the end of the quarter. Maybe you can see that you’ve got some team members who are habitually under-performing or over-performing on their KPIs and can use this data to talk about consequences, bad or good.
  • To make adjustments & stay on track. You also need leading indicators, in addition to your results, to let you know when you are in danger of missing those targets before it is too late. Leading KPIs predictor help you predict what will happen in the future, as well as your potential outcomes. They let you know if you’re on track to achieve your desired performance. Leading indicators have two features: they are measurable, and you can do so directly influence them. They are good KPIs to have on your dashboard to keep your projects on track.
  • To solve problems or tackle opportunities. Using a mix of KPIs in a dashboard to get the right information to solve challenges or fix gaps at your disposal. Let’s presume you ‘re in a slump in sales. Identify a handful of KPIs that can help you turn the tide (maybe this is # of outbound calls, # of retained appointments, # of attended trade shows). Put them on a dashboard and monitor them regularly to see if the right lever has been found to help you produce more consistent sales. Or, let’s say you’ve got a brilliant idea about a new product. You can test it with a few customers and use KPIs to validate your business model before you launch it on a large scale; you might monitor # of customers interested, $ to support new product, NPS score, implementation time, # of defects, etc.

Key indicators can differ for multiple businesses; a distributor’s KPIs will differ from a manufacturer’s, and so on and so forth. Even like-companies can have varied KPIs as not every business share the same goals and metrics. However, KPIs have to be SMART:

  • Specific – Clearly explain why a certain KPI is used and what it measures. Moreover, the KPI should be specific to the individual department/job itself with focus on the exact behaviour.
  • Measurable – KPIs have to be measurable and based on clearly defined behaviour. It should be evaluated to provide feedback to the organization’s employees on their performance and help to compare the actual outcome with the set target.
  • Achievable – KPIs should be realistic. All employees within the organization have to have an aligned belief that the targets set are fair and can be reached easily.
  • Relevant – KPIs must be central to the operation of a business, and connected to the bottom line of the organization. If a shift in KPI does not impact the profitability / bottom line of an company, then the KPI is insufficient.
  • Timely – KPIs should be measured and adjusted within an appropriate time frame. Organization’s goals and objectives tend to vary over time; thus, KPIs must be adjusted accordingly to drive success.

A KPI is as strong as it is versatile. A KPI is a guide to help you achieve business success from calculating your income, and assessing employee productivity to the status of a job in progress. Your main performance metrics will change based on priorities, tasks, and deadlines depending on what you want to achieve within your company.

Check my related post: What are the key metrics in retail?


Interesting reads:

https://blog.adaptiveplanning.com/how-to/kpi-important/

https://www.klipfolio.com/blog/kpi-importance#:~:text=KPIs%20are%20important%20to%20business,goals%20are%20top%20of%20mind.

https://www.forbes.com/sites/louismosca/2019/06/18/key-performance-indicators-101-why-theyre-important/#6ec5ca2f2652

https://www.trindent.com/importance-setting-smart-kpis

https://www.rhythmsystems.com/blog/5-reasons-why-you-need-kpis-infographic

https://www.linkedin.com/pulse/5-reasons-why-kpis-important-your-companys-growth-louise-leith-/

https://strategiccfo.com/why-kpis-are-important/

 

5 thoughts on “What is the importance of setting KPIs?

  1. ◇ – Diamond Hard – ◇

    ◇ Perhaps “KPIs” ARE Stifling a Companys Co-Creativity and Innovation EveryOne; if I Was Ever to be Employed Again it would be by a Company like CI or Google et al who Actively Encourage Employee Creativity over Metrics and “KPIs”; so it’s Crystal Clear Clarity that Lumbering, Clumsy, Strict, Number Focused Dinosaur Corporations ARE Fast Fading as The Nimble Move Fast and Evolve Rapidly

    ◇ – Diamond Hard – ◇

    …◇◇◇…

    Liked by 1 person

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