Defining KPIs that are truly effective is one of the main concerns of every company. But what indicators should be put in place? How to orient yourself among the mountains of available data?
KPIs are useful for all lines of business of a company. They are the first step to control your activity, analyze your positioning in relation to the competition and identify what needs to be improved.
Let’s learn more about the importance of KPIs and how to define them correctly. Let’s start with the basics of what a KPI is .
What are KPIs?
A KPI is a performance indicator for your company. This indicator is, therefore, quantified and allows controlling the effectiveness of an action in relation to the defined objectives.
A KPI can take different forms: turnover growth, absenteeism rate or penetration rate in your market.
In general, there are two types of indicators in equipment. The first are closely related to the activity of the department or company: activity metrics.
Some examples: The number of employees trained in new work methodologies, the number of products launched by the Research and Development department in the first six months of the year.
The second category of indicators refers to the impact of your actions on your market: impact metrics.
Some examples: your market share in a product category, product sales in ecommerce or the abandonment rate of your service.
Steps to define KPIs
When writing or defining KPIs , you should analyze how this KPI relates to a specific business outcome or objective.
KPIs should be customized based on your business situation and developed to help you meet your objectives. Follow these steps when defining a KPI:
1. Write a clear objective when defining KPIs
Writing a clear goal for your KPI is one of the most important, if not the most important, parts of developing a KPI.
At TuDashboard, we define a KPI as follows:
“A key performance indicator is a measurable value that demonstrates how effectively a company is achieving its key business objectives.”
Let’s break this down a bit because there are a lot of elements here that connect to how we write and develop our KPIs.
The important thing, for our purposes, is to remember to define KPIs that are closely related to a key business objective. Not with any business objective or with anything that anyone in your organization considers important. This objective must be fundamental to the success of the organization.
Otherwise, you are focusing on a goal that is not capable of addressing a business outcome.
That means, at best, you’re working toward a goal that will have no impact on your organization.
In the worst case, your company will waste time, money and other resources that would have been better spent elsewhere.
The key takeaway is this: KPIs need to be more than just arbitrary numbers. They should express something strategic about what your organization is trying to do. You can (or should be able to) know a lot about a company’s business model just by looking at its KPIs.
If you don’t write down a clear goal, none of this will be possible .
2. Share your KPIs with interested parties
It is not enough to define KPIs, you have to communicate them properly. How are your employees, the people charged with executing your vision for the organization, supposed to meet goals if they don’t know what they are?
Or perhaps worse: By not sharing your KPIs you risk isolating and frustrating your employees and other stakeholders who cannot see the direction your organization is headed.
But, in addition to defining KPIs and sharing them, they need to be communicated immediately.
KPIs need context to be effective . This can only be achieved if you explain not only what you are measuring, but why you are measuring it. Otherwise, they’re just numbers on a screen that have no meaning to you or your employees.
Explain to your workforce why you are measuring what you are measuring. Answer questions about why you chose to define KPIs as those the company has and not others. And most important of all, listen! KPIs are not infallible.
Nor will they necessarily be obvious to everyone involved. Listening to your employees will help you identify places where your organization’s latent goals are not being adequately communicated.
Let’s say you’re being asked a lot of questions about why profit isn’t a KPI for your company. It’s a reasonable question your employees may have.
After all, making money is an essential part of any business. But maybe revenue isn’t the priority for your organization at the moment.
Maybe you intend to invest heavily in research and development or are pursuing a major acquisition. Getting a lot of questions like this is a sign that you need to do a better job of communicating the types of KPIs you’re going to measure and the strategic objectives behind them.
And who knows, your employees might give you some ideas on how to improve your KPIs.
3. Review the KPI every week or month
Periodically reviewing your KPIs is essential for their maintenance and development . Obviously, it’s important to compare your progress with your KPI (otherwise, what would be the point of setting one?).
However, monitoring your progress is just as important as defining KPIs, so you can evaluate the success you had in choosing it.
Not all KPIs are successful. Some have goals that are unattainable. Others fail to follow through on the underlying business goal they were meant to achieve. Only by regularly reviewing your KPIs can you decide if it is time to change them.
4. Make sure you choose viable KPIs
Make sure you follow these steps when choosing KPIs to do it correctly:
- Review business objectives
- Analyze your current performance
- Set short and long term KPI goals
- Review objectives with your team
- Review progress and readjust
We’ve already talked about most of this, but it’s worth focusing on the need to develop both short-term and long-term goals .
Once you’ve set a future goal (for example, for the next quarters or fiscal year), you can step back and identify milestones you’ll need to achieve along the way.
For example, let’s say you want to get 1,500 subscribers to your newsletter in the first quarter of the year. You’re going to want to set monthly, biweekly, or even weekly goals to achieve this.
This way, you can continually reevaluate and change course as necessary to achieve the longer-term goal.
You could divide the objectives equally according to the months. In this case, there would be 500 subscriptions in January, 500 in February and 500 in March. However, you might want to be more specific.
There are more days in January and March than in February, so you may want to set a goal of 600 for those months. Or maybe you usually have more traffic to your website in February (maybe your company has a presence at a major trade show) and you decide to set a goal of 800 for that month.
Whatever the case, in addition to defining KPIs you should make sure to break down your objectives to establish short-term goals.
5. Transform your KPIs to adapt to the changing needs of the company
KPIs that are not updated can quickly become obsolete .
For example, let’s say your organization recently launched a new product line or expanded overseas. If you don’t update your KPIs, your team will continue to pursue goals that don’t necessarily encompass the change in tactical or strategic direction.
You might think, based on your results, that you are still performing successfully. However, in reality you may be focusing on KPIs that fail to capture the impact your efforts are having on the implicit strategic objectives.
Reviewing your KPIs every month (or, ideally, every week) will give you the opportunity to adjust or change course entirely.
6. Verify that the KPI is achievable
Setting achievable goals for your team is essential when choosing KPIs. A goal that’s too high can cause your team to give up before you even get started.
If you set your goal too low, you’ll probably wonder what to do after you’ve met your annual goals in the first two months of the year.
Analyzing your current performance is essential. Without this analysis, you will blindly search for numbers that have no real origin. Your current performance is also a good starting point for deciding which areas you need to improve.
Managing KPIs also involves analyzing the data you already have collected to establish a baseline with what you have achieved in the past. Tools like Google Analytics are great for this, as are more traditional accounting tools that monitor revenue and gross margin.
7. Update your KPIs as necessary
KPIs are not static. They need to evolve, update and change as necessary. If you set and forget your KPIs, you run the risk of chasing goals that are no longer relevant to your business.
When choosing KPIs, consider that they can change. Get in the habit of reviewing them regularly not only to see how you are performing against your KPIs, but also to monitor which KPIs need to be changed or scrapped entirely.
But here’s the good news: once you’ve done this process a few times, it will be much easier to do it again in the future.
Generally, KPIs are an essential tool to measure the success of your company and to make the necessary adjustments for it to be successful. However, when defining individual KPIs keep in mind that their usefulness has limits.
The most important part of any KPI is its usefulness . Once it has outlived its usefulness, don’t hesitate to throw it away and start using new ones that better align with your business goals.