How to Develop and Use Key Performance Indicators (KPIs)
Erica Olsen, COO and Co-Founder of OnStrategy, breaks down how to develop key performance indicators and identifies the different types of KPIs your organization can use to measure your performance.
Hi, my name is Erica Olsen. Today’s whiteboard video is on Key Performance Indicators, or KPIs for short. KPIs are those things that are associated with either goals or objectives, whatever you’re calling them. These elements of your plan are the expressions of what you want to achieve by when. They are quantifiable, outcome-based statements.
So, Key Performance Indicators answer the quantifiable piece of your goals and objectives. They come in three different flavors, so we’ll talk about that in just a minute. Before we do put great KPIs together and make sure they work well for you, you need to have these four attributes.
Before we talk about those four attributes, I want to mention the reason they need to work well for you is because KPIs are the heartbeat of your performance management process. They tell you whether you’re making progress, and ultimately you want to make progress against your strategy. So KPIs are the things that do that. You’re going to live with them, so make sure they’re valuable.
The four things you need to have to make sure your KPIs work for you are:
Measure – measure is the simple verbal expression of what you are. Be as expressive as you can with your measures. In this example, we see “number of new customers” – that’s fine. There’s nothing wrong with it, but it can be advanced to be more expressive. A more descriptive measure would be “number of new customers this year” or “number of new customers for a certain product or a certain service”. So let’s call this “number of new customers this year.”
Target – target is the numeric value that we want to achieve. The target needs to be apples-to-apples when a goal date is set or the due date is set. We want to achieve a thousand new customers by the end of the year, so the due date and the target work hand-in-hand. Measuring the target needs to work together. So it’s a number, so this is a number. This is a percentage, this is the percentage.
Data source – where is it coming from? Be clear about what the source is. Most organizations have all sorts of data sources and fragmented systems. Make sure you identify where this data is coming and you’ll save a lot of time.
Frequency – how often are you going to be reporting on this KPI? Ideally, you’re running monthly strategy reviews to report on the progress of your plan, in which case we’d like to see monthly KPIs. So you’ve got to be able to pull the data monthly to make that happen. That’s not always possible, but try to get there. Some organizations have some that are weekly and others that are daily. Monthly is a good place to start.
Now that know the components of great Key Performance Indicators, here are some different types of KPIs that you might think about as you’re putting your plan together.
The first type of indicators is broad numbers. I call these widgets counting. There’s nothing wrong with widget counting, but don’t necessarily tell a story.
The second type is progress. This is to expressed as “percent complete” – percent complete of the goal, percent complete of a project wherever it might be. It’s a project type measure. It’s a good measure if you don’t have quantifiable measures or you can’t get the specific data and you just want to track the performance of the goal as it relates to the actions
The third type of indicator is the change-type indicator. An example is “percent increase in sales”. A better example would be “percent increase in sales compared to last year and the ideal is 22%”. You can see how that starts to be more expressive and work with the target.
So this tells us a little bit more of a story than this one does, right. And if you want to make your widget counting measures tell more of a story, you might change it to read something like “percentage of new customers acquired compared to same time last year”.
Okay, so now we know what we have to have in place and kind of different types of measures to get our ideas flowing. Let’s talk about one thing that you might take your measure right to a next level and that is, think about a fact that there are leading and lagging measures. So leading and lagging indicators. So percent increase in sales or sales is a lagging indicator. It occurred. It’s an outcome.
If you want to make sure that you’re on track, you might have a KPI in place telling you whether we’re going to hit that increase, such as your lead pipeline. You don’t want to over-rotate on this, but you do want to make sure you have a combination of leading and lagging measures when looking at a performance monthly.
Hopefully you have what you need to write great KPIs for your organization. Happy strategizing and don’t forget to subscribe to our channel!