Key Performance Indicator (KPI)

What is a KPI?

A Key Performance Indicator is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs at multiple levels to evaluate their success at reaching targets. High-level KPIs may focus on the overall performance of the business, while low-level KPIs may focus on processes in departments such as sales, marketing, HR, support and others.

So what is the definition of KPI? What does KPI mean? What does KPI stand for? Here are a couple other definitions:

• Oxford’s Dictionary definition of KPI: A quantifiable measure used to evaluate the success of an organization, employee, etc. in meeting objectives for performance.
• Investopedia’s definition of KPI: A set of quantifiable measures that a company uses to gauge its performance over time.
• Macmillan’s Dictionary definition of KPI: A way of measuring the effectiveness of an organization and its progress towards achieving its goals.

What makes a KPI effective?

Now that we know KPI stands for key performance indicator it is only as valuable as the action it inspires. Too often, organizations blindly adopt industry-recognized KPIs and then wonder why that KPI doesn’t reflect their own business and fails to affect any positive change. One of the most important, but often overlooked, aspects of KPIs is that they are a form of communication. As such, they abide by the same rules and best-practices as any other form of communication. Succinct, clear and relevant information is much more likely to be absorbed and acted upon.

In terms of developing a strategy for formulating KPIs, your team should start with the basics and understand what your product objectives are, how you plan on achieving them, and who can act on this information. This should be an iterative process that involves feedback from analysts, users, and business. As this fact-finding mission unfolds, you will gain a better understanding of which business processes need to be measured with a KPI dashboard and with whom that information should be shared.

What is a SMART KPI?

One way to evaluate the relevance of a performance indicator is to use the SMART criteria. The letters are typically taken to stand for Specific, Measurable, Attainable, Relevant, Time-bound. In other words:

• Is your objective Specific?
• Can you Measure progress towards that goal?
• Is the goal realistically Attainable?
• How Relevant is the goal to your organization?
• What is the Time-frame for achieving this goal?

How to define a KPI

Defining key performance indicators can be a tricky business. The operative word in KPI is “key” because every KPI should be related to a specific business outcome with a performance measure. KPIs are often confused with business metrics. Although often used in the same spirit, KPIs need to be defined according to critical or core product objectives. Follow these steps when defining a KPI:

• What is your desired outcome?
• Why does this outcome matter?
• How are you going to measure progress?
• How can you influence the outcome?
• Who is responsible for the business outcome?
• How will you know you’ve achieved your outcome?
• How often will you review progress towards the outcome?

How to write and develop KPIs

When writing or developing a KPI, you need to consider how that KPI relates to a specific business outcome or objective. KPIs need to be customized to your business situation and should be developed to help you achieve your goals. Follow these steps when writing a KPI:

1. Write a clear objective for your KPI

Writing a clear objective for your KPI is one of the most important – if not THE most important – part of developing KPIs.

A KPI needs to be intimately connected with a key business objective. Not just a product/user objective.

Otherwise, you are aiming for a target that fails to address a business outcome. That means that, at best, you’re working towards a goal that has no impact for your organization. At worst, it will result in your business wasting time, money and other resources that would have best been directed elsewhere.

2. Share your KPI with stakeholders

Your KPI is useless if it doesn’t get communicated properly. How are your team – the people tasked with carrying out your vision for the product – supposed to follow through on your goals if they don’t know what they are? Or perhaps worse: Not sharing your KPI risks alienating and frustrating your employees and other stakeholders who are unable to see the direction in which your organization is heading.

But sharing your KPIs with your stakeholders is one thing (though even this is something that too many organizations fail to do). More than that, though, they need to be communicated in the right away.

KPIs need context to be effective. This can only be accomplished if you explain not just what you’re measuring, but why you’re measuring it. Otherwise they are just numbers on a screen that have no meaning to you or your employees.

3. Review the KPI on a weekly or monthly basis

Checking in on your KPIs regularly is essential to their maintenance and development. Obviously tracking your progress against the KPI is important (what else would be the point of setting it in the first place?) But equally essential is tracking your progress so you can assess how successful you were in developing the KPI in the first place.

Not all KPIs are successful. Some have objectives that are unachievable. Some fail to track the underlying business goal they were supposed to achieve. Only by checking in regularly can you decide if it’s time to change your KPIs.

Make sure the KPI is actionable

Making your KPIs actionable is a five-step process:

1. Review business objectives
2. Analyze your current performance
3. Set short and long term KPI targets
4. Review targets with your team
5. Review progress and readjust

Most of this we’ve already gone over, but it’s worth focusing on the need to develop targets for both the short- and long-term. Once you’ve set a goal with a timeline that’s farther into the future (say the next few quarters, or your fiscal year) you can then work backwards and identify the milestones you’ll need to hit on the way there.