Key Performance Indicator

What are KPIs (Key Performance Indicators)?

 

KPIs or “Key Performance Indicators” are quantifiable metrics used to measure the ongoing progress of an organization, team or individual toward specific goals.

 

These goals can be related to any aspect of the business, including sales, marketing, customer service, and operations. KPIs help businesses track performance over time and identify areas for improvement.

 

Though most companies track similar KPIs, these are flexible metrics that ladder up to goals decided at the organizational level and broken down by business unit, team, and individual to achieve the larger company goal.

OKRs or Objectives and Key Results are often used interchangeably with KPIs, because they both measure progress towards goals, but there are some important differences.

 

OKRs are a goal-setting framework used to define and track progress towards achieving specific objectives. They're typically set on a quarterly or annual basis and are designed to align an organization, team or individual towards a common goal. The objectives are qualitative and aspirational, while the key results are specific, measurable, and time-bound milestones that help to track progress towards achieving the objective.

KPIs are quantitative measures used to evaluate the success of an organization, team or individual in meeting specific performance targets. KPIs are typically set on a regular basis and are used to measure ongoing performance.

 

In other words, KPIs are more focused on measuring and improving ongoing performance, while OKRs are focused on setting and achieving the broader objectives.

1. Define the business’ strategic objectives.

 

Clearly define the organization's strategic objectives and priorities. It’s important to understand the mission, vision, and long-term goals to make sure the selected KPIs align with and support these objectives.

 

Our fictional ecommerce company has a mission to build a strong customer brand with a diversified product portfolio. The company identifies the following strategic objectives to support its long term goals: launch successful new product lines, increase customer loyalty, and build a strong team culture with low employee turnover. 

 

One of the most important benefits is that it allows marketers to understand their customers better. This information helps executives and business leaders build strategies that prioritize the highest-impact customer segments, allowing business units to operate more efficiently.

2. Identify key performance areas.

With objectives defined, the next step is to match strategic objectives to key performance areas (KPAs) or focus areas that contribute to the achievement of those goals. KPAs provide a framework to understand the critical aspects of the organization's performance that need to be measured and monitored.

Our ecommerce company identifies its primary KPAs as customer satisfaction, product development, and employee engagement.

3. Select relevant KPIs.

For each key performance area, identify the most relevant and meaningful KPIs that will provide insights into the organization's performance. Remember to consider the key characteristics of a good KPI, such as alignment with objectives, specificity, measurability, relevance, simplicity, and comparability.

They identify the following KPIs to measure ‌progress in each KPA. For customer satisfaction, the two primary KPIs selected are Net Promoter Score (NPS) and Customer Retention Rate. For product development, the two primary KPIs selected are New Product Lines Launched and Revenue Concentration Ratio. For employee engagement, the two primary KPIs selected are Employee Engagement Scores and Employee Turnover Rate.

4. Set targets and benchmarks.

For each KPI, establish a target or benchmark that represents the desired level of performance. Targets can be based on historical performance data, industry benchmarks, or aspirational goals that challenge the organization to improve.

Net Promoter Score (NPS):
Target: Achieve and maintain an NPS of 60 or higher.
Benchmark: Compare against the ecommerce industry average of 50.

Customer Retention Rate:
Target: Maintain a customer retention rate of 50% or higher.
Benchmark: Compare against the ecommerce industry average of 20-40%.

New Product Lines Launched:
Target: Launch one new product line per year.
Benchmark: This is a measured, conservative goal based on the business’ existing product line, customers, and branding goals.

Revenue Concentration Ratio:
Target: Make sure no single product line accounts for more than 30% of total revenue.
Benchmark: New product lines will need to receive heavy marketing focus.

Employee Engagement Scores:
Target: Achieve and maintain an average employee engagement score of 80% or higher.
Benchmark: Compare against the global average of 20%.

Employee Turnover Rate:
Target: Maintain an employee turnover rate below 10% annually.
Benchmark: Compare against the ecommerce industry average of 20-30%.

5. Collect and analyze data.

 

Establish a system to collect, store, and analyze the data needed to track KPIs. This may involve using software tools, databases, or spreadsheets to gather and process the data, as well as setting up a reporting structure to communicate the results to stakeholders.

Our ecommerce company sets up a company-wide portal to track KPIs and assigns input management to department heads, with reports being automatically generated and distributed to the company and key stakeholders monthly.

6. Monitor and review KPIs regularly.

Regularly track and review KPIs to track progress towards strategic objectives and identify areas for improvement. This may involve monthly, quarterly, or annual performance reviews, depending on the KPIs and the organization's needs.

They opt to do quarterly performance reviews with KPIs being a central component of performance assessment and feedback.

7. Communicate to and engage stakeholders.

Make sure that relevant stakeholders, including employees, management, and external partners, are aware of the KPIs and their importance to the organization's success. Encourage engagement and buy-in by communicating the purpose and benefits of the KPIs and involving stakeholders in setting and reviewing KPIs.

Our ecommerce company meets with department heads to have them updated on the finalized company KPIs.

Department heads are instructed to further define employee-specific targets and get ready to present them to their teams. The company holds an all-hands meeting to present broad KPIs, followed immediately by department breakouts, where the department heads share individual targets with their staff.

8. Adjust and refine KPIs as needed.

Continuously evaluate the effectiveness of KPIs and make adjustments as needed to ensure they remain relevant, meaningful, and aligned with strategic objectives. This may include adding new KPIs, removing outdated or less relevant KPIs, or modifying existing KPIs based on changes in the organization's goals or industry context.

As part of the quarterly performance reviews, their executive team fields feedback from department heads on their KPIs and adjusts KPIs, targets, and benchmarks based on their feedback and overall company performance.