All You Need to Know About Key Performance Indicators (KPIs)
Key performance indicators (KPIs) are measures that can be related to a team working for a common purpose. The KPIs are current and future-oriented measurements. KPIs must be settled for specific areas that are considered vital for the growth of the company.
The key performance indicators indicate to a company what profit it makes in terms of money, customers, leadership, teams, project management, professionalism etc.
In this article you can find out more about the key performance indicators. The source of information was mainly the book written by David Parmenter—Key performance indicators.
Every company seeks to be on the top of the competition. Not only the goal of surviving on the market but also the goal of being among the top players.
And every industry has its top players. In todays’ interconnected economy some companies are pulling each inch of the screen while the small companies still struggle to adjust to the common and uncommon challenges. One important aspect is represented by the performance achieved by a company.
The differences are striking: some businesses want to achieve a high performance such as dominating an entire industry while other businesses want to achieve relative stability in order to pay its current employees while avoiding the job loss.
The KPIs (key performance indicators) are connected with other types of indicators as seen in the table below.
|Results indicators||Key results indicators||Performance indicators||Key performance indicators|
|How teams are combining to produce results?||Summary of how the company is performing||What teams are delivering?||How the company is performing in their critical success factors and?|
By monitoring them, the CEO is able to increase performance.
Contents of the whole article:
- The Relation Between KPIs and OKRs
- Fields of Analysis Using the Key Performance Indicators
- The Foundation of KPIs: Critical Success Factors
- Characteristics of KPIs
- The Role of KPIs in Various Management Style
- Quantitative and Qualitative KPIs
- How to Set KPIs for Things That Seem Impossible to be Measured?
- KPIs for Project Management
- How can Lumeer Help?
The Relation Between KPIs and OKRs
The Key Performance Indicators are measurements related to the work of a team, while the Objectives and Key Results (OKRs) are the strategic objectives and key results that need to be achieved by that particular team.
Let’s take a simple example in order to understand the difference. The OKRs are like a general survey for the employees while the KPIs are the questions of that survey.
Let’s take another example. Let’s imagine a live streaming company that has an objective to grow the number of customers from the Millennials Generation. The key result is 45% of the purchases are made by customers between the age of 18-26 years old. A key performance indicator will be the average number of millennial buyers per week.
The OKRs are selected by the CEO/management team and alongside with the critical success factors for the company, will be shaping the upcoming KPIs.
A company must always settle the clear objectives and then proceed to the rest of the elements.
Knowing what are the main objectives will be useful for understanding where to place the biggest amount of resources, how to attract the customers and where to improve the work done by the employees.
Fields of Analysis Using the Key Performance Indicators
In general, we can talk about 6 fields which can be analysed in every company using the KPIs: financial results, customers, internal process, human resources, environment and community, innovation and learning.
A company survives only if it gains. The key performance indicators related to the financial results reflect
- a financial profit done by a company,
- a necessary amount of investments etc.
Each aspect can be measured and turned into data which can be used later on. For example, the number of future investments planned for the next 90 days is 3. That means 3 investments are necessary for the months to come in order to maintain the normal productivity of the company.
A company sells a product to the customers. The key performance indicators from the field of customers reflect
- how many customers a company has on a rolling basis,
- how many key customers are important for the growth of the company,
- what kind of customers buy the top products,
- a level of trust in the company brand,
- how many followers a company has on social media platforms,
- a relation with the customers etc.
For building a realistic KPI in this area, the company must know very well the needs, desires and the psychology of its usual customers.
Internal Business Processes
The companies are micro-universes because they incorporate a wide range of interesting and complex phenomena. The internal process is the daily engine that sustains the business. If this process is smooth, the company is strong.
The key performance indicators related to the field of internal process reflect:
- a raw statistics of the business itself,
- a number of products sold each day/week,
- a supply chain,
- a relation between the CEO, employees and shareholders,
- a number of physical assets owned by the company,
- software used in the daily activities,
- machines and robots used for manufacturing the products,
- working hours,
- a level of usual productivity etc.
The companies rely on the human resources to run. The personnel is one of the key factors that sustain the internal process, the production and the selling processes in normal parameters.
The key performance indicators in this field reflect:
- a level of attrition and retention of the staff,
- a strategy for salaries and bonuses,
- a level of technical and non-technical skills owned by employees,
- a ratio between senior and entry levels,
- hiring and onboarding strategies etc.
Innovation and Learning
A company has to innovate and learn in order to remain relevant on the market. The key performance indicators for this area reflect elements such as
- a number of brainstorm sessions led by the management board,
- a number of training courses for new employees,
- a level of office experimenting,
- a number of productivity apps used by the staff,
- risk management strategies,
- a level of communication between teams,
- new features of a product,
- innovative forms of communicating with the audience of the company on social media platforms,
- a number of innovative growth channels etc.
Environment and Community
In the 21st century, the idea that a company has to be aware of the social environment in which it operates and to give back to the community has reached new heights.
Companies that respect the environment and the community are more likely to attract clients, followers and people in general.
The key performance indicators from this category reflect themes such as:
- a number of green volunteering activities done by employees,
- social initiatives in which the company is involved,
- scholarships offered by the company,
- an attitude towards community,
- a level of trust in the company brand,
- communication between the company and local authorities etc.
The Foundation of KPIs: Critical Success Factors
The critical success factors are factors that will be the foundation for creating the KPIs. Daily activities are linked to the organisation’s critical success factors. Each company is unique in its own way and the critical success factors depend on this uniqueness. The company must bring its people at the table of negotiation to establish what factors can lead to the success of the business. These factors need to reevaluated at least yearly, if not quarterly.
Let’s take an example. A tourism agency can set the following critical success factors for 2021:
- an average of 3 full packages for exotic destinations each week,
- an average of 7 full packages for internal destinations each week,
- a level of employee retention of 70%,
- a level of 90% of customer satisfaction,
- a good communication between the CEO and the workers,
- a high visibility on social media, which means at least 5k followers for the official Facebook page of the company etc.
At the heart of the critical success factors lie the daily activities. For example, the management of the shipping schedule is maintained with the use of professional time tracking and schedule software. Employees must update a schedule, verify departures and arrivals, a check list of the commodities shipped each day, the chat communication with drivers etc.
Characteristics of KPIs
The businesses must know exactly what they measure, how they measure it and how they use the results of the measurement for increasing the performance of the company.
The key performance indicator are unique for each organisation, but they can be characterized by few common elements:
A KPI must be verified regularly (weekly, monthly…). Of course, with the help of automation, Big Data or AI.
The monitoring can be done even daily. Each period of time brings its own data and that data describes how the business is evolving.
The measurements must be used according to a specific calendar in order to improve the elements that don’t work properly.
A KPI should be established in the first place by the CEO/management board that has the ability to integrate a long term vision into the internal processes of the company.
The leaders have the delicate tasks to determine which factors are critical for success, to link these factors to the daily activities, and in the end to establish the key performance indicators.
Of course, this endeavour can become successful only if the leaders cooperate with the teams.
A KPI is not rocket science. It must be simple to understand and applied on a solid ground.
The employees have to know from their onboarding what performance is expected from them and how to achieve this performance by doing their daily tasks in a professional manner.
More than this, when creating a KPI, it should be taken into consideration the simplest way of measuring a certain element.
If kept clear, the entire measurement process can be done in a smooth way, avoiding the burden of fuzzy indicators.
A KPI is made for each specific activity. Let’s give an example: posting company news on social media is linked to the next KPI – an average of 300 likes for each post.
Of course, the companies have the freedom to select certain clusters of activities or the hierarchy inside the clusters.
There are companies that establish KPIs for the actual content posted on the company blog.
There are companies that don’t even have a blog, therefore they don’t need such KPIs.
Or companies that propose KPIs only for the overall marketing strategy.
A KPI should be based on the team that works closely for a common purpose. Each team will have a set of KPI that reflect the work of that specific department.
The Marketing and PR team will have a different set of KPIs from the team of Human Resources or the team of IT maintenance.
The team is the key for building key performance indicators because it makes those activities on a rolling basis and knows what can be improved or not.
A KPI is related to facts and activities that have a major impact on the company. The leaders and the teams will decide which KPIs are integrated in various fields.
It also depends on a type of the company, traits of the usual customers, a risk and innovation management, projects done by the company, a type of leadership etc.
Coping with the flaws of KPIs
Nevertheless, a key performance indicator should encourage a professional and proper behavior from the staff. It is said that markets can’t be judged based on their morality but a clean and professional behavior is essential for building a trustworthy company.
No one wants to buy a product from a company that is exploiting its workers until they burn out.
Or from a company that is prohibiting the free speech among the workers, that allows racial discrimination etc.
The Role of KPIs in Various Management Style
The key performance indicators are designed, in most of the cases, by the leadership or the top management team. This means that a top-bottom methodology is used and that the leaders impose their working vision upon the performance of the company.
Here the management style starts to play a bigger role. There are 5 classical management styles:
- Authoritarian style
- Procedural style
- Transformational style
- Participative style
- Laissez-faire style
Depending on the business and a leadership philosophy of each company, the managers will design indicators that emphasize a typical status-quo. A model of performance and success that is desired by them.
In the authoritarian management style, the KPIs will become a rigid evaluation tool that can be improved only by the leader.
In the procedural style, the KPIs will be designed in a very detailed manner, with focus on all the aspects required by the company policies.
In the transformational style, the KPIs will not only evaluate the quantitative elements but also the qualitative ones, with emphasis on how the performance is produced and not neglecting both the staff and customer satisfaction.
In the participative style, the KPIs will reflect the work of the entire team. The indicators will be designed after consulting all the employees, managers and stakeholders involved.
Finally, in the laissez-faire style, the KPIs will become an evaluation tool linked to the context and not necessarily to a certain business and leadership philosophy. The indicators will be improved on the run and often changed when the teams discover that something is not going right.
Pretty much all the companies incorporate these management styles into one kind of a hybrid leadership.
Typically the management team will have traits related to all of the 5 classical management styles and the key performance indicators designed by them will play different roles according to the wider context and trends.
Some KPIs will be modified only by the CEO, other KPIs will integrate the feedback of the employees or the customers, while few KPIs will evaluate the general atmosphere inside the company.
Quantitative and Qualitative KPIs
It is said very often: “Not everything that counts, can be measured and not everything that can be measured counts”.
In other words, there are types of performance which can be measured using quantitative KPIs (a retention rate of the employees, a number of unique visitors on the company website, an average number of training hour per employee etc.), and there are also types of performance which can be measured using qualitative methods (an integration rate of the new employees, an average number of new things learned by the team, a collaboration score between senior and junior levels etc.).
Sometimes, it is important to have a lot of accomplished tasks while sometimes it is important how you handled those tasks. Sometimes it is important to measure the number of purchases per week and sometimes it is far more important to establish connections with the potential buyers.
The raw data can be made available with the help of digital solutions, business intelligence and artificial intelligence. The qualitative data can be made available with the help of surveys, focus-groups, observation tools, recordings, collaborative and visualization tools, comments etc.
How to Set KPIs for Things That Seem Impossible to be Measured?
Sometimes we might struggle finding the right indicator. We understand what the goal is. Our intuition or gut feeling leads us in the right direction, yet we are unable to explicitly describe a quantitative or qualitative metric.
How to deal with that? What we typically recommend is using the technique of 5 Whys. This means asking Why? five times in a row.
For example, a goal can be “Increase the added value of our product”. Do we know how to measure added value? Probably not straight away.
So here comes the first why: Why is increased value important? Because it will convince more customers to buy our product. Now, we could already measure the number of customers. However, this is rather a broad metric influenced by many factors. We can keep asking…
Why do we want to have more customers convinced? Because we are wasting our efforts (time, money) on customers who in the end won’t buy our product.
Why do we want to avoid wasting our efforts? Because we want to learn to focus better on those who will buy.
Does that ring the bell? The metric we are looking for is conversion rate. We want to increase our customer conversion rate. This leads to more closed deals with the same team and same amount of prospects (i.e. same resources and efforts).
Using this technique, we can easily fall into the simple trap of ending up with a revenue, cost, customer count based metrics.
Try to avoid these and seek a higher purpose. That way you will discover more directly connected indicators.
KPIs for Project Management
As Lumeer is a project management tool, we feel obliged to give you examples of typical Project Management KPIs.
We can group the indicators according to PMBOK standards: Scope, Cost, Time, Risk, Quality, Resources.
For the levels of KPIs, we will use the levels discussed above: Finance, Customers, Internal Business Processes, Innovation and Learning.
For the result, see the picture above.
How can Lumeer Help?
Lumeer is a flexible project management and work tracking software which provides templates for different elements necessary for every business. In Lumeer, you can create a key performance indicators strategy using the Gantt tool. And the observe the results and trends in charts. Like this (hint – try to drag the datapoints):
This strategy is based on the model of the author David Parmenter, a model described in his book from 2015, “Key Performance Indicators – Developing, Implementing, and Using Winning KPIs”.
Create your KPIs, set measurements, track them in Lumeer, regularly update them and observe the company progress in charts, pivot tables etc.
It is important to create a package of solid, realistic and correct key performance indicators based on the profile of the company and the economical trends of today in order to improve the productivity and the performance of the business.