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All about Key Performance Indicators (KPI)

If you cannot measure it you cannot improve it”- – Peter Drucker

Key performance indicators (KPIs) measure a company’s success versus a set of targets, objectives, vision and strategy.

What is KPI

A Key Performance Indicator (KPI) is a metric that measures the performance of a particular activity or process.

Organizations use KPIs at multiple levels to evaluate their success in reaching targets.

High-level KPIs may focus on the overall performance of the enterprise, while low-level KPIs may focus on processes in departments such as sales, marketing, or a call center. 

Therefore, the KPI helps determine whether the organization has accomplished its goal. This insight facilitates better decision-making and problem-solving.

Metrics-KPIs-KRIs-Analytics Relationship

Key Result Areas (KRAs) and how it is connected to KPIs.

Key Result Areas (KRAs) and Key Performance Indicators (KPIs) are closely related but different concepts in the context of performance management.

KRAs refer to the main areas or functions of an organization where results should be achieved. They are the broad, strategic areas that define the overall purpose of an organization. KRAs are usually identified during the strategic planning process, and they provide a framework for setting goals and objectives for the organization as a whole.

KPIs, on the other hand, are specific, measurable indicators that are used to track progress toward achieving goals and objectives within the identified KRAs. They are typically developed based on the specific objectives of an organization and are used to assess the performance of individuals, teams, or the organization as a whole. KPIs provide a means of quantifying progress, identifying areas for improvement, and measuring the success of initiatives.

KRAs and KPIs are connected in that KRAs provide the context for developing KPIs. The KRAs of an organization serve as the broad categories or themes for setting KPIs. For example, if one of the KRAs for a sales organization is to increase revenue, then a KPI that could be used to measure progress toward this goal is the percentage increase in revenue over a specific period of time.

In summary, KRAs are the broad, strategic areas that define the overall purpose of an organization, while KPIs are specific, measurable indicators that are used to track progress toward achieving goals and objectives within the identified KRAs. By setting KPIs that are aligned with the KRAs of an organization, businesses can ensure that they are focusing on the areas that are most important for achieving their strategic objectives.

How to choose the right KPIs to monitor?

The metrics that we measure and track depend completely on our organization’s goals and objectives. First, we should ask ourselves what it is that we want to achieve. Next, consider how we can measure the progress towards our goals. A key performance indicator is a number that shows whether we are getting closer to our goal or if there’s a lag in progress.

There are two rules for selecting the right KPIs:

KISS: We have likely heard the acronym, “Keep it simple, stupid.” This phrase rings true for KPIs. Make it as easy to understand as possible, so employees will be clear about what they need to do.

SMART KPIs: SMART stands for specific, measurable, attainable, realistic, and timely.

Why Are KPIs Important?

The business environment has changed throughout the years and is more competitive than ever. To be a successful company in today’s modern society it is important to have different performance indicators that capture important competitive factors. Examples of competitive factors are; high quality, good service, fast deliveries, and so on. In RMG Company good service is a competitive factor.

KPIs are an important way to ensure teams are supporting the overall goals of the organization. Here are some of the biggest reasons why need key performance indicators.

To keep teams aligned: Whether measuring project success or employee performance, KPIs keep teams moving in the same direction.

Provide a health check: Key performance indicators give a realistic look at the health of the organization, from risk factors to financial indicators.

Make adjustments: KPIs help us to clearly see organizational successes and failures so we can do more of what’s working and less of what’s not.

Hold teams accountable: Make sure everyone provides value with key performance indicators that help employees track their progress and help managers move things along.

Types of Key Performance Indicators

Quantitative indicators: Quantitative indicators are represented by continuous or discrete numbers, which can be ratios, percentages, or whole numbers that represent values like rating scales, dollars, or weight. These indicators are the most straightforward quantifiable measures of performance, as they present direct numerical values.

Qualitative indicators: These indicators are not expressed numerically but through feelings or opinions. An employee satisfaction survey can be an example of qualitative data where performance is based on feedback.

Leading indicators: Leading indicators are variables that can help identify long-term trends and possibly predict successful future outcomes of your business processes.

Lagging indicators: Lagging KPIs compare a business’ current performance in a particular field with its past performance in the same field.

Input indicators: Input indicators are a type of KPI that track the resources necessary to produce the intended outcome, such as funding or extra staff. Input indicators can help companies keep track of how efficiently they are using their resources.

Output indicators: Output indicators measure the success or failure of your business activities, like the number of goods or services created through a particular process. Revenue growth and new customer acquisition also indicate how well your business is performing.

Process indicators: Process indicators represent the efficiency of a business’s process and how effectively it is functioning.

Practical indicators: Practical indicators explore the function of an existing process at a company, usually involving observation or feedback on that process.

Directional indicators: Directional indicators help determine the company’s success in comparison with competitors, while practical indicators are specific to the company’s process within itself.

Actionable indicators: Actionable KPIs measure a company’s ability to enact change whether through political action or a shift in company culture.

Financial indicators: Financial indicators are a marker of a business’s monetary growth and stability. When paired with other KPIs, this indicator can help paint a more complete picture of your company’s financial viability.

Outcome indicators: These indicators are a marker of whether the program is meeting its goals in the short or long term.

How to Define Key Performance Indicators

How often will you review progress toward the outcome?Increase revenue by 20% this year.
Why does this outcome matter?The business will become more profitable.
How are you going to measure progress?The increase in monthly revenue, measured in dollars.
Who is responsible for the business outcome?Director of Sales.
How will you know you’ve achieved your outcome?               Revenue will increase by 20.
How often will you review progress towards the outcome?On a monthly basis.

What do KPIs look like?

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 market share

KPI         : % Market share

Target: 28%

Time: By the end of the financial year

Owner: Marketing Director

Using the SMART framework to define company KPIs

You might be asking yourself: “How do I measure my company KPIs?” One way to measure the performance of your KPIs is by using the SMART framework.

What is the SMART framework?

Specific, Measure, Attainable, Relevant, Timeframe = SMART.

Let’s break down the SMART acronym:

Is your objective specific?

Can you measure progress toward your goal?

Is the goal realistically attainable?

How relevant is the goal to your organization?

What is the timeframe for achieving this goal?

If you want to expand the SMART framework, you can make it SMARTER by adding evaluation and re-evaluate to your measurement steps. KPIs shouldn’t be one-and-done—you should constantly evaluate your KPIs to ensure they are attainable and on track.

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 may be 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
What will the target be? Is it attainable? when should it be accomplished? and how will progress be monitored? Targets should be realistic, and 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 formulas

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 KPIs.

To efficiently communicate KPIs we 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.

In conclusion, Key Performance Indicators (KPIs) are critical for organizations to measure their progress toward achieving their goals and objectives. By providing a clear and concise way to measure performance, KPIs allow organizations to focus on the most important metrics that drive success. KPIs help organizations stay on track, make data-driven decisions, and improve their overall performance. By setting KPIs, monitoring progress, and continuously adjusting targets, organizations can ensure they are moving in the right direction and achieving their desired outcomes.

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