KPIs, like so many acronyms, are passed around organizations like birthday cards gathering signatures. But what is a Key Performance Indicator? Should you have them? Or perhaps you think you have them, but you aren’t quite sure. Sure you have things that you monitor but are they “key” and do they really indicate performance?
It’s not always so easy to know. But here’s a quick test for you. There are three attributes that distinguish KPIs from other measures like key performance questions (KPQs), performance indicators (PIs), facts, or metrics.
A KPI is tied to business strategyThere are hundreds (probably thousands) of things you could monitor or measure in your business. But, a real KPI should have a direct correlation to one or more strategic business objectives. How would a high/low/moderate result on a KPI positively or negatively represent your progress toward this strategy? Need an example? Your strategic goal might be to “increase customer loyalty”. In this case, measuring number of customers would not be a KPI. Having more or less customers provides no insight into customer loyalty. However, measuring customer renewals or customer to customer references would be related.
A KPI must be measurableWhile strategy might be more philosophical (e.g. increase customer loyalty), KPIs should be clear and quantitative. True KPIs are not subject to interpretation. Bob might think we are doing okay, but Mary might not. There must be one true, reliable and objective measure that everyone in the organization can monitor and consistently interpret. This measurement should also include a target or success marker. Just monitoring customer renewals tells you nothing about how you are performing toward your business strategy. But, if you were to say that customer renewals should be higher than the previous year, or that they should be at least 98%, then you can clearly see if you are successful.
A KPI is actionableKPIs are what you monitor to determine if your business is performing well. They should be the indicators that a change of course is needed. Having a negative result means that something can, and should, be done. Carrying on with the customer loyalty example, if your KPI was “customer renewals > 98%” and you saw that you were actually only at 90%, then what would you do? You’d likely have a set of follow-up indicators that you’d check to see if you could spot a reason for the poor performance. Depending on the result, you’d adjust course. In this situation, that might mean creating an education campaign about renewal benefits or applying an incentive program for account managers that secures renewals.
I know what you're thinking; you have hundreds of KPIs and it would be impossible to define this for all of them. My two cents? You don’t really have hundreds of KPIs. As a rule of thumb, I suggest that a single person can truly only monitor about 10 KPIs. In the same way that a business should have only a few strategic initiatives at one time to keep the business laser-focused, you should only have a handful of KPIs. It is better to have a few, powerful KPIs than a whole library full of them. This doesn’t preclude you from monitoring and measuring other things in the business, they just aren’t key performance indicators.
Still need more on KPIs? We've put together an eBook on them for you. Check out A Modern CFOs Guide to the Right KPIs and start measuring what matters most in no time.
Or, request a meeting with a Hubble team member to learn more about how Hubble can help you reach your target KPIs.