Key Performance Indicators, or KPIs, are a much-discussed but generally underutilized business tool; few businesses use them with the discipline required to achieve good results. Choosing the correct KPIs and creating a KPI tracking methodology necessitates dedication and commitment from everyone involved.

We created this guide to assist firms like yours get more out of their KPIs. Here you’ll learn the best techniques to establish and track them, as well as how to assess their long-term significance. By following the advice provided here, you can be confident that you are measuring and tracking the correct things for your business—and doing so in the most effective manner possible.

Key Performance Indicator (KPI) Definition

The phrase “What gets measured gets managed” is probably familiar to you. In an attempt to monitor everything, businesses may now measure practically anything. However, the majority can’t see the forest for the trees because they are so overwhelmed with information on their business operations and performance.

Although every data point describes your company, only a select handful are essential to comprehending performance. The key performance indicators, or KPIs, that are connected to your strategic company goals are the ones you should focus on.

This is our definition of a KPI:

The subset of performance indicators that are most important to your company at the top level of your organization are called key performance indicators, or KPIs. They assist you in tracking your progress toward accomplishing your goals.

What distinguishes KPIs from traditional business indicators?

You can collect data on almost every element of your organization, but not everything you measure counts as a key performance indicator. KPIs have several significant features that distinguish them from other metrics:

• They demonstrate whether the company is meeting its aims. KPIs track metrics that represent your organization’s performance, particularly in relation to a strategic aim. Not all metrics improve corporate performance.
• They are aligned with certain corporate objectives. The primary purpose of employing KPIs is to ensure that your firm meets its highest-level objectives; thus, KPIs should be linked directly to strategic goals.

Some metrics are simply that: metrics. Consider them as supporting characters in a drama. They may track improvement in a certain area—for example, your product return rate. Those measurements provide useful information, and improving in one area could help you attain a wider goal. However, measurements alone are insufficient to drive company performance.

Despite their differences, KPIs and metrics are inextricably linked. Consider a KPI to be your company’s early warning system. If you are not meeting a key performance indicator target, it means there is a strategic or operational issue that is preventing you from accomplishing your goal. To analyze the problem, delve further into other related indicators to identify the issue and determine where you may need to change course.

When used correctly, KPIs may be an extremely effective tool for measuring performance. If you’re not seeing any benefit from them, it’s possible that the metrics you’ve picked are irrelevant to business performance or aren’t clearly tied to your plan. The abundance of data accessible today makes it more challenging to select the appropriate KPIs. It may require some experimentation, but as you continue to work with KPIs, keep these two ideas in mind:

#1: If a KPI isn’t effective for decision-making, consider replacing it with a better option. KPIs should provide insights that form the foundation of strategy meeting discussions. If this is not the case, you may not be measuring the correct quantity.

‍#2: Understand the factors influencing your KPIs and maintain control over those levers. You may be doing several things that affect the KPI; you must understand which actions will have an impact.

Now that you’ve learned what a KPI is, let’s go over how to create key performance indicators that correspond with your business objectives.

How to Set up Key Performance Indicators

Follow the steps below to build KPIs that will clearly indicate whether or not your performance is increasing.

1. Begin by defining your business objectives.

Creating KPIs is an important aspect of the strategic planning process, along with identifying the organization’s goals and objectives. However, you can’t develop meaningful performance measures until you know what you’re aiming to achieve. So, first and foremost, develop a precise set of objectives that describe the ambitions your organization hopes to attain in the future.

2. Ask: Do we know which action will help us achieve this goal?

This stage addresses the most common challenge that most organizations face: defining key performance indicators. To begin, ask yourself the question above.

If the answer is no, then choose a lagging indicator. Lagging indicators do not forecast what will happen, but they do tell you what has happened. So, if you want to raise sales but don’t know which action will make it happen, just measure “sales.” This KPI will inform you what happened with your aim in the last quarter or year by analyzing your outputs and outcomes. Meanwhile, you’ll want to experiment with different activities to see what works best for sales.

If the answer is affirmative, then choose a leading indicator. When you’ve determined which action will produce the best results, make that activity your key performance indicator. For example, if you know that increasing the number of outbound calls by your sales staff increases sales, use “# of outbound calls” as your KPI. You’ll know that if you meet or surpass your outbound call objective, your sales figures will rise. If both are strong leading indicators, you may have many KPIs.

Ensure each KPI adheres to the SMART framework.

Identifying the actions that have an impact on your objectives brings you closer to identifying your KPIs; nevertheless, a good KPI must also be SMART:

• Specific: It should be clearly defined and not overly broad.
• Measurable: It should be easy to quantify.
• Attainable: It should be possible to attain.
• Realistic: It must be practical and pragmatic.
• Timely: It should be measured on a regular—and relatively frequent—basis, such as monthly or quarterly rather than annually.

Other measures are not required to be SMART, but KPIs should be. These criteria assist you in better defining your KPIs, resulting in a more effective measure of performance.

Clearly specify every aspect of each KPI.

You have a good KPI in mind, which is wonderful! Before you begin utilizing it, you must first clear the following important information. This will allow you to introduce and explain each KPI to the appropriate stakeholders, as well as track its progress. We recommend utilizing a template like the one given below to ensure you’ve covered everything.

• Description: Provide a brief overview of the metric and what it should disclose.
• Formula: Is a computation required to report the measurement? If this is the case, make a clear recording.
• Reporting Frequency: Determine how frequently to report the KPI—monthly, quarterly, etc.
• Owner: Who is the person or department responsible for reporting on the measure and performance? Accountability is critical for following through.
• Target: Take note of the level of performance you want to accomplish. The aim should be numerical (quantitative).

Get input from your team on each KPI.

We’ve seen it too many times: when attendees are provided with KPI data in strategy meetings, they spend too much time trying to figure out what the data means and why they’re collecting it, rather than making data-driven decisions. What should have been a fruitful strategy meeting becomes an information session on KPIs.

All it takes is a little planning to avoid this situation. Inform your staff about each KPI ahead of time. Determine what questions people have regarding the data, and provide the solutions in the KPI descriptions. If a formula is involved, write it out clearly. Incorporate any suggestions they have into the defining list as appropriate. Then, at the meeting, you can discuss strategy instead. Do you believe you’ve produced some significant measures? Great! Now it’s time to assess how well your organization—and your KPIs—are doing.

Key Performance Indicators (KPI) Measurement and Tracking

Once you’ve established the KPIs, you must then assess their performance. That requires excellent tracking and knowing when to replace them.

Tracking KPIs in the Right Way

It is critical to regularly assess and track your KPIs and their performance on a monthly, quarterly, or other predetermined reporting interval. Regular monitoring allows you to easily observe when anything underperformed or overperformed, as well as what transpired during that time to produce the change.

Here are the stages needed in establishing a reporting system.

1. Identify the data source(s). Where does the KPI data come from? For example, Google Analytics and/or HubSpot could be used on the X Company website. Salesforce could be used to manage customer data. Your company’s accounting software handles revenue data. The source will be critical to the KPI tracking process.
2. Determine your reporting frequency. Decide how frequently you should monitor your KPIs. It is determined by the availability and frequency with which the data is made public. It’s also worth considering how data might help you make judgments.

For example, X Company may want to track website visits on a monthly basis to determine whether there are enough visitors to the site from whom the sales staff may generate leads. If the KPI objective is not met, the organization will have to find another strategy to send leads to the sales staff for that month. On the other hand, it may be beneficial to track the KPI quarterly because the amount of website visits can fluctuate greatly depending on the month. As long as the KPI increases quarter after quarter, there is probably no need for a strategy adjustment.

3. Create your calculations. Create your calculations on the system you’ll be using to monitor KPIs. Some firms utilize spreadsheets to measure KPIs, while others employ strategy reporting software to reduce reporting burdens and improve data insights.
4. Decide on your evaluations. You need a technique to swiftly and expertly assess whether you’re accomplishing your objectives, which is where evaluation status signals come in handy. RAG—or red, amber, green—statuses function as a KPI traffic light. Red is an alert, amber is a warning, and green indicates that you are on track. Consider what levels you desire for your KPIs. An example scenario: If a KPI falls within 20% of your target, it may be regarded as yellow; below 20%, it is red; and over 20%, it is green. Regardless of your decision, you should consider if your target will fluctuate from quarter to quarter or remain constant.
5. Create your chart. Charts are useful for visualizing data, allowing you to easily examine patterns, progression over time, target vs. actual performance, industry benchmarking, and so on. Determine the best visualization for your data and how to build it to highlight the information you want to communicate.

KPI Tracking with Dashboards

A KPI dashboard collects all of your KPIs into one location for simple viewing and decision-making. A KPI dashboard allows you to rapidly determine which measures have dropped below target and which are heading upwards. It gives you a comprehensive perspective of all of your KPIs, allowing you to make decisions based on quantitative data. You can design any type of KPI dashboard to meet your needs; three particularly useful examples are provided below.

• Red Measures Dashboard

A red measures dashboard focuses on low-performing indicators, making it simple to detect and solve lagging KPIs.

• KPI Dashboard Template

A KPI dashboard template displays the performance of an organization’s measurements across time. These dashboards often have indications that indicate whether each measure is red, yellow, or green; adding qualitative fields to your KPI dashboards is an excellent approach to provide more insight alongside these indicators.

• Trend Dashboard Template

Trend dashboard designs clearly display metrics across time, making it simple to detect troublesome periods and investigate probable causes.

Conducting Your First Strategy Review Meeting

The most crucial aspect of the KPI process is using them as intended—to assist drive business decisions. The strategy meeting is where your team will examine these key performance indicators to determine how well your organization is accomplishing its objectives.

To hold a productive strategy meeting that fosters debate about KPI progress:

• Have your staff incorporate qualitative analysis into all of your key performance indicators. Numerical data can be difficult to interpret when given alone. Present qualitative data as well to provide more context. Ideas, explanations, and hypotheses assist readers gain a thorough knowledge of the variables that may be influencing the data.
• Send a report with key performance indicators ahead of time so that your team can review it. If everyone arrives at the meeting prepared, time can be used more efficiently.
• If anyone has questions about the KPI, alter the definition and formula to make it apparent to everyone. This will assist to prevent the same questions from coming up again at the next meeting.
• Update the chart to reflect the information you require. Make sure it emphasizes the information guests need to know and contains the most recent statistics accessible.
• Question: Do these KPIs assist us identify whether we’re making progress toward our objectives? Use the meeting to examine your performance metrics. Which steps are effective and should continue to be implemented? Which ones should you remove or replace since they do not provide accurate information about the objective’s progress? If the KPI does not appear to be a reliable indicator, it may be time to start over.

When is it appropriate to retire or change a KPI?

Because your company’s goals and circumstances are constantly changing, your KPIs should be adjusted accordingly. How do you know when it’s time for a change? Things that should trigger a reevaluation of your KPIs:

• When you’ve accomplished a mission
• When you have additional KPI for your target that allows you to make better judgments
• When your key performance indicators do not lead to decisions
• When your efforts evolve, so should the method you track progress toward your goal.

Key Performance Indicators (KPI) Best Practices

Organizations that are serious about using KPIs to achieve their strategic goals tend to outperform. If you want to be a part of that group, remember these three best practices when designing and deploying your own KPI framework:

1. Choose the lowest possible number of KPIs required to meet your goals.

Few measures have the ability to significantly improve performance, but the amount of data might lead to overzealousness. In one MIT study, executives were asked how many of the KPIs they supervise needed the most attention; the majority of respondents responded only two or three. Many firms set too many KPIs and then spend resources trying to meet them. Be frugal and stick to the most effective measures—those that directly contribute to your goals. We propose merely tracking one to two KPIs per aim.

You can (and should) track more data, but keep it distinct from your key performance indicators. That information will be useful if you need to go into the fundamental components that comprise a KPI.

2. Use a tool that does the majority of the work for you.

There is no longer a need to spend time cutting and pasting data from numerous sources into Excel or creating KPI reports in PowerPoint for a full week each month. When organizations have to devote so much work tracking KPIs, they finally give up. Technology has made it easier to manage KPIs at every stage of the process, from data collection to analysis and display. Automation not only saves time but also improves the accuracy and usefulness of your reports to your audience.

3. Develop a culture of KPI monitoring and improvement.

If you want to adopt KPI monitoring, reporting, and improvement, your employees must also embrace it. There is no “right” method to get people on board, but if you’re honest about your activities and keep lines of communication open, your efforts will be more successful. Engage your team in the KPI process by soliciting feedback and answering their questions. Establish clear accountability for certain data points, such as how data is collected, reported, and who can testify to what happened during the reporting period. Also, ensure that the levers that drive each KPI are totally controllable by your team; otherwise, there will be no reason to improve.

Make the most of your KPIs.

There is little doubt that KPIs may benefit your organization, but using them successfully requires effort and dedication. And, while we’ve emphasized the significance of selecting the “right” KPIs, remember that, no matter how long you’ve been doing it, this is an experimental process. With expertise and practice, you’ll be able to obtain a deeper understanding of performance and make smart decisions that will propel your company forward.