What are key performance indicators? - FourWeekMBA (2024)

Key performance indicators (KPIs) are measurable values that determine whether an organization is achieving key objectives. KPIs will depend upon a business-specific context, as each company and industry will have its own core metrics to track. Indeed, the choice of the right KPIs that can positively affect the business’s long-term perspective is critical.

Understanding key performance indicators

Key performance indicators are critical indicators of progress toward the desired result.

They also provide a focus for strategic development and create an analytical foundation for decision-making. Perhaps most importantly, KPIs help a business focus its resources on actions that matter most.

Key performance indicators are quantifiable, outcome-based statements. They are used to simplify the often complex process of performance tracking by reducing a large number of measures into a few select “key” indicators.

As a result, KPIs are used when the business needs to evaluate its performance. This usually includes the performance evaluation of projects, plans, people, or departments.

The anatomy of a key performance indicator

Each key performance indicator must contain the following elements:

A measure

What is being measured? Measures can be strategic or operational. They can also be associated with risk and project or employee performance.

A target

What is the business seeking to achieve? Targets are usually numerical values that are sensitive to time or other constraints.

A data source

The data that underpins the target must be robust. There must be no room for interpretation in how each KPI is tracked and measured.

Reporting frequency

To some extent, reporting frequency will depend on the particular needs of the organization. But it is good practice to report at least once a month.

Creating a key performance indicator

Creating a KPI takes some work.

Successful key performance indicators can only be created once a business has a clear and structured understanding of its aspirations.

After this has been determined, it is a matter of following these steps:

Establish a clear objective

For example, a business that wants to become a market leader must clearly define what it will take to get there.

It might involve a 5% increase in revenue each financial year or the expansion of a product range by 15 products.

Define the criteria for success

In other words, what will the target be? Is it attainable in the desired timeframe?

How will progress be monitored?

Early-stage KPI monitoring is most effective when decision-makers focus on long-term targets with midterm monitoring.

Collect data

Where is the data located? Are there previous KPIs that might hold relevant information?

Here, the business needs to collect and collate data into a central location.

Build the KPI formula

While some KPIs measure one metric, most will rely on a combination of metrics incorporated into a single calculation.

In any case, it is important to build and then test formulas to make sure the results are what the business expects.

Present KPIs

At some point, KPI data will need to be synthesized into a form that is easily understood by others.

A host of KPI software and applications can help the business create presentable graphs and charts from its results.

KPIs Per Vertical

Here are some common examples of KPIs grouped according to department:

Sales

Number of new contracts signed per period, average conversion time, number of qualified leads in a sales funnel.

Finance

Revenue growth, gross profit margin, operational cash flow, current accounts receivables.

Customer service

Net Promoter Score (NPS), average ticket resolution time, percentage of market share, average refund or return rate.

Operations

Time to market, employee churn rate, order fulfillment time.

Marketing

Monthly website traffic, blog particles published per month, landing page conversion rate.

Human Resources:

1. Employee Satisfaction Index: A measure of employee happiness and engagement within the organization.
2. Employee Turnover Rate: The percentage of employees who leave the company within a specified period.
3. Time-to-Fill: The average time it takes to fill a vacant position.
4. Training and Development ROI: The return on investment for employee training and development programs.
5. Diversity and Inclusion Index: A measure of diversity and inclusion efforts within the workplace.
6. HR Cost per Employee: The total HR expenses divided by the number of employees.

Manufacturing:

1. Overall Equipment Effectiveness (OEE): A measure of manufacturing efficiency that considers availability, performance, and quality.
2. Defect Rate: The percentage of defective products in a production run.
3. Cycle Time: The time it takes to complete one cycle of a manufacturing process.
4. Inventory Turnover: The number of times inventory is sold or used during a period.
5. Supplier Performance Score: A rating of supplier performance in terms of quality, delivery, and cost.
6. Scrap Rate: The percentage of materials that are discarded as waste during manufacturing.

Retail:

1. Sales per Square Foot: The average revenue generated for each square foot of retail space.
2. Customer Lifetime Value (CLV): The predicted value of a customer over their entire relationship with the business.
3. Inventory Shrinkage Rate: The percentage of inventory lost due to theft, damage, or other factors.
4. Average Transaction Value: The average amount customers spend per transaction.
5. Foot Traffic Conversion Rate: The percentage of in-store visitors who make a purchase.
6. Online Customer Acquisition Cost: The cost of acquiring a new online customer.

Healthcare:

1. Patient Satisfaction Score: A measure of patient satisfaction with the healthcare experience.
2. Readmission Rate: The percentage of patients who are readmitted to the hospital within a specified period.
3. Average Length of Stay (ALOS): The average number of days a patient stays in the hospital.
4. Physician Productivity: Measures of a physician’s patient load, billing, and patient outcomes.
5. Medication Error Rate: The percentage of medication errors in healthcare settings.
6. Emergency Room Wait Time: The average time patients spend waiting in the emergency room before receiving treatment.

Technology:

1. Software Development Velocity: The rate at which software development teams deliver features or user stories.
2. Customer Churn Rate: The percentage of customers who stop using a product or service.
3. Customer Acquisition Cost (CAC): The cost of acquiring a new customer.
4. SaaS Monthly Recurring Revenue (MRR): The total monthly revenue generated from subscription-based services.
5. Bug or Issue Resolution Time: The average time it takes to resolve reported software bugs or issues.
6. User Engagement Metrics: Includes metrics like daily active users (DAU), monthly active users (MAU), and user retention rate.

Hospitality:

1. Occupancy Rate: The percentage of hotel rooms occupied during a specific period.
2. RevPAR (Revenue per Available Room): A measure of hotel revenue that considers both occupancy and room rates.
3. Average Daily Rate (ADR): The average price charged for a hotel room.
4. Customer Review Scores: Ratings and reviews from guests on platforms like TripAdvisor or Yelp.
5. Restaurant Table Turnover Rate: The number of times tables are occupied by diners in a restaurant during a meal service.
6. Spa or Wellness Center Utilization Rate: The percentage of guests who use spa or wellness services during their stay.

KPIs vs. Metrics

KPIs are metrics an organization uses to track and measure progress toward business critical objectives.

The operative word here is “key” since the metrics chosen are the most important ones at hand and serve as measurable benchmarks.

Metrics measure organizational performance and health in the context of specific activities and processes. While metrics may be related to organizational objectives, they provide less clarity on whether the company is making suitable progress.

To understand the main difference between each measure, first consider that KPIs are a subset of metrics.

In other words, all KPIs are metrics, but not all metrics are KPIs.

Other differences relate to communication, intention, and focus.

KPIs vs. OKRs

While KPIs are metrics that any business can use to track its short, and long-term progress.

OKRs is a goal-setting method for organizations, which helps them set aggressive yet achievable goals shared across the company to make them visible, clear, and shared.

Thus, while KPIs are more generic, OKRs, need to be very specific, addressable, and achievable while also aggressive.

KPIs, on the other hand, can be picked based on the company’s structure, and it often helps to have a North Star, which is a focused KPI that helps steer the business in a given direction in the short term.

Both tools are extremely important for companies, and especially startups, to reach their goals and move fast.

Key takeaways:

• Key performance indicators are measurable values that help an organization determine whether it is meeting stated objectives.
• Key performance indicators are comprised of four elements: a measure, a target, a data source, and a defined reporting frequency.
• Key performance indicators can be used to track performance across a range of departments, including sales, finance, customer service, operations, and marketing.

Key Highlights

• Definition and Significance:
  • Key Performance Indicators (KPIs) are measurable values used to assess whether an organization is achieving its key objectives.
  • KPIs vary based on business-specific contexts and industry requirements, playing a critical role in long-term business success.
• Understanding KPIs:
  • KPIs indicate progress towards desired outcomes and serve as a foundation for strategic development and decision-making.
  • They focus resources on actions that are most impactful and relevant.
  • KPIs simplify performance tracking by condensing numerous measures into a select few key indicators.
• Anatomy of a KPI:
  • A KPI comprises four elements: a measure (what is being assessed), a target (desired achievement), a data source (robust data to support measurement), and a reporting frequency (regular reporting).
• Creating a KPI:
  • Establish a clear objective aligned with business aspirations.
  • Define success criteria and target attainment in a feasible timeframe.
  • Collect relevant data from dependable sources.
  • Formulate a KPI formula that often involves multiple metrics in a single calculation.
  • Present KPIs effectively using visualization tools and software.
• Common KPI Examples:
  • Sales: New contracts signed, average conversion time, qualified leads in the sales funnel.
  • Finance: Revenue growth, gross profit margin, operational cash flow, accounts receivables.
  • Customer Service: Net Promoter Score (NPS), ticket resolution time, market share percentage, refund/return rate.
  • Operations: Time to market, employee churn rate, order fulfillment time.
  • Marketing: Monthly website traffic, published blog articles, landing page conversion rate.
• KPIs vs. Metrics:
  • KPIs are specific, vital metrics used to track progress toward business-critical objectives.
  • Metrics measure performance in various activities and processes, but not all metrics are KPIs.
• KPIs vs. OKRs:
  • KPIs are generic metrics for tracking short- and long-term progress.
  • OKRs (Objectives and Key Results) are a goal-setting method that sets specific, challenging, and achievable goals shared across an organization.
  • KPIs can be selected based on a company’s structure, while OKRs demand specific and aggressive goal-setting.
• North Star Metric (NSM):
  • A North Star Metric is a key focus metric that drives growth for a business.
  • It simplifies the growth strategy and helps steer the company in a desired direction.

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