KPI Meaning – What does KPI mean?
KPI stands for Key Performance Indicators. KPIs are the elements of your organization’s business or strategic plan that express what outcomes you are seeking and how you will measure their success. They express what you need to achieve by when. KPIs are always quantifiable, outcome-based statements to measure if you’re on track to meet your goals and objectives.
What Do KPIs Do?
Key Performance Indicators are intended to create a holistic picture of how your organization is performing against its intended targets or objectives. Great KPIs should accomplish all the following:
- Outline and measure your organization’s most important set of outputs.
- Work as the heartbeat of your performance management process and confirm whether progress is being made against your strategy.
- Represent the key elements of your strategic plan that express what you want to achieve by when.
- Measure the quantifiable components of your goals and objectives.
- Measure the most important leading and lagging measures in your organization.
What are the Elements of a Key Performance Indicator
The whole meaning of KPIs is to create the heartbeat of your performance management process, and they need to work well! 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.
Great strategic plans have 5-7 KPIs to measure and track the progress of core elements of the plan. Each Key Performance Indicator needs to include the following elements:
- Measure: How will you measure success? Every KPI must have a measure. The best KPIs have more expressive measures.
- Target: What is the target you want to achieve? Every KPI needs to have a target that matches your measure and the time period of your goal. These are generally numeric values you’re seeking to achieve.
- Data Source: Where is the data coming from? Every KPI needs to have a clearly defined data source, so there is no gray area in how each is being measured and tracked.
- Reporting Frequency: How often do you need to report on the performance of your KPIs? Different KPIs may have a different cadence, but a good rule to follow is to report on KPIs at least monthly.
- Owner: Just like any great goal, it needs to have an owner.
What are the 3 types of KPIs?
Key Performance Indicators answer the quantifiable piece of your goals and objectives. They come in three different flavors. Now that you 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.
Broad Number KPIs
The first type of KPI is what we like to call broad number KPIs. These are the KPIs that essentially count something. An example is counting the number of products sold or the number of visits to a webpage.
There is nothing wrong with these types of KPIs, but they don’t tell a story. Great KPIs help you create a clear picture of what is going on in your organization. So, using only broad-KPIs won’t help create a narrative.
Progress KPIs are used to help measure the progress of outcomes. This is most commonly known as the “percent complete” KPI, which is helpful in measuring the progress of completing a goal or project. This is best for KPIs where quantifiable outcomes are difficult to track or you can’t get specific data.
Progress KPIs are great, but your KPI stack does need to include some easily quantifiable KPIs. We recommend using a mixture of progress KPIs, and other KPIs that have clear targets and data sources.
The final type of KPI is a change indicator. These are used to measure the quantifiable change in a metric or measure. An example would be, “X% increase in sales.” It adds a change measure to a quantifiable target.
The more specific change KPIs are, the easier they are to understand. A better iteration of the example above would be “22% increase in sales over last year, which represents an XXXXXXX life in net-new business.” More expressive measures are better.
Change measures are good for helping create a clear narrative. It helps explain where you’re going instead of just a simple target.
Leading KPIs vs Lagging KPIs
The meaning of KPIs is to create a holistic picture of your organization’s performance. That requires using a combination of leading and lagging indicators for your KPIs. Using a mixture of both allows you to monitor early warning signs closely when your plan is under or overperforming (leading) and you have a good hold on how that performance will impact your business down the road (lagging).
Here’s a deep dive on leading versus lagging indicators:
We often refer to these types of metrics as the measures that tell you how your business might/will perform in the future. They are the warning buoys you put out in the water to let you know when something is going well, and when something isn’t.
For example, a leading KPI for an organization might be the cost to deliver a good/service. If the cost of labor increases, it will give you a leading indicator that you will see an impact on net profit or the cost of inventory.
Another example of a leading indicator might be how well your website is ranking or how well your advertising is performing. If your website is performing well, it might be a leading indicator that your sales team will have an increase in qualified leads and contracts signed.
A lagging indicator refers to past developments and effects. This reflects the past outcomes of your measure. So, it lags behind the performance of your leading indicators.
An example of a lagging indicator is EBITA. It reflects your earnings for a past date. That lagging indicator may have been influenced by leading indicators like the cost of labor/materials.
Balancing Leading and Lagging Indicators
If you want to make sure that you’re on track, you might have a KPI in place telling you whether you’re going to hit that increase, such as your lead pipeline. We don’t want to over-rotate on this, but as part of a holistic, agile plan, we recommend outlining 5-7 Key Performance Indicators as part of your plan that are a mix of leading and lagging indicators when looking at performance monthly.
Having a mixture of both gives you both a look-back and a look-forward as you measure the success of your plan and business health. We also recommend identifying and committing to tracking and managing the same KPIs for about a year so you can create consistency in data and reporting.