How well do you understand KPIs?
A Key Performance Indicator (KPI) is a measurable unit of an organization that demonstrates how efficiently the company is achieving key business goals. It is basically the measurement of progress. The key indicators are agreed upon by an organization and are indicators which can be measured at multiple levels that will reflect success factors. The KPIs can be of high and low level. High levels KPIs target the overall performance of the business whereas low level KPIs focus departments such as sales, marketing etc. Key performance indicators usually are long-term considerations for an organization. KPIs are also referred to as ‘Key Success Indicators’ (KSI).
KPIs – A Deeper look
The tactic of choosing KPIs is that an organization should first lay its strategic and operational goals and then after choose the most appropriate KPIs that exemplify those goals. Also, a company’s KPIs are mentioned in its annual report. For example, if a software company’s goal is to have the fastest growth in its industry, its main performance indicator may be the measure of revenue growth year-on-year.
KPIs also play an important role in the point of performance comparison between companies by offering investors’ good information to them. This results to display the weakness of the company that is not monitoring its KPIs or that chooses not to monitor the KPIs reported by its primary competitors.
One of the best strength of KPIs is their objectivity due to which its integrity is kept intact. KPIs should be simple and direct, easy to calculate and should be able to denote the goals of the company numeric wise. It is of utmost importance to keep the KPIs stable as a measure is only as good as the quality of its data.
The trick to make KPIs effective
Each organisation knows that KPI is beneficial by the action it inspires. But again, there are exceptions here too, few companies randomly adopt industry-recognized KPIs and then frantically wonder why those KPIs don’t cause any positive change or growth in their business. What they forget is the motive of KPIs, they overlook the fact that KPIs are formulated on the basis of each company’s goals. They are individualistic and often differ company to company. Communication plays a very important role in framing KPIs, they abide by the same rules and best-practices as any other form of communication. Crisp and clear information is much more likely to be absorbed and acted upon.
Because KPIs are company centric, in order to develop a strategy for framing KPIs, your team should start with the little steps and understand what your organizational objectives are, how you plan on achieving them, and which is the appropriate team to act on this information. There has to be continuous flow involving people at stages – the process involves feedback from analysts, department heads and managers. As you proceed further with this process, it will be more comprehensive for you as to which business processes need to be measured with KPIs and with whom that information should be discussed.
Benefits of using KPIs
- KPIs strictly define the company’s goals in terms of performance. They are profitable because they are crisp and clear.
- KPIs can also be represented graphically (called scorecard) so we can consider them when required to share a pictorial representation of the current status of a company.
- KPIs also enhance the adaptability and responsiveness of a business.
- Bearing the characteristic of comparing current and past performance against that of competitors or forecasts, the business is able to respond and adapt in a better way with the help of KPIs.