What is KPI: meaning, definition, metrics and examples

No one will argue that a powerful performance tracking system is a background for a long-lasting successful functioning of a company. Establish causation, detect performance deviations, and timely react to them with lessons for the future – these practices are what distinguish market leaders from outsiders, indeed. However, one may be surprised by the fact that as few as 6% of CEOs think the appraisal system they conduct really works out. And – there are several reasons for such a tiny percentage.

The first hardship lies in the complexity of decomposing strategic goals. “To become a market leader in the niche” intent sounds ambitious and good enough for being a slogan, but isn’t a measurable individual task, agree. The second performance tracking obstacle lies in time lags. Due to many reasons, from clumsy organizational structure to executives’ career ambitions, many companies aren’t agile enough to respond to changes quickly. As a result, plans development and review are usually too delayed. Finally, the appraisal presumes not only collecting and storing tons of information but, what is more important, – coming up with data-driven conclusions on how to increase the performance.

To overcome these challenges, many companies establish Key Performance Indicators (KPIs) for all-level business units – subsidiaries, departments, teams, and individual employees. Although such an approach is recurrently criticized for being too formulaic, obsolete, and even deterring, we impartially believe that outcomes depend on the quality of execution. In this article, we’ve prepared a few recommendations on how to create compelling evaluation metrics. But before the reader dives into them, let’s refresh on what a KPI stands for.

What is KPI?

A quantitative extent of particular goal achievement, compared to the expected value. Basically, that’s pretty much all for a KPI definition. Say, if you expected sales to amount to $1,000, and the salesman reported $800 at the end of a month, the KPI achievement would be 80%.

However, the KPI meaning is deeper than plain math. Whichever the exact set of assessment metrics one chooses to utilize, stick to 4 essential landmarks.

  1. Business objective

The KPI will only play out if it serves a defined objective. In this context, the worst thing a manager can do is to copy competitors or rely on market benchmarks blindly. Every company is unique – it owns an offbeat combination of human capital, intangible assets, processes, structure, life cycle, and experiences various operational and financial issues. To track the performance, a clear map of expectations is required – in the context of each specific goal and every single employee.

Say, the goal for Q1 and Q2 is to increase profit by 30%. This may be rethought through KPIs for the following departments:

  • Sales – “To increase revenue by 10%”
  • Procurement – “To reduce expenditures by 10%”
  • Finances – “To restructure external debt by 10%”
  1. Measurable value

The objective you plan to set must be either quantifiable or must not exist at all. Moreover, a clear scheme on how to measure progress must be developed. For example, if the KPI marketing outline presupposes increasing the company’s market share, one will need to prepare:

  • the figure for comparison – calculate the current value and build a reasonable forecast for the future one
  • market size – form the list of rivaling companies in the niche, from which you plan to win back the market share
  • estimate expansion costs – predict expenses, calculate potential commercial outcomes, and gauge ROI.

All these numbers can then lie in the base for individual marketers’ KPIs.

  1. Motivational component

Bear in mind that the KPIs principle is to provide an advantage for both sides. An employer should get better accountability and expectedness while the employee – with a tool to self-measure results and assure that the task is accomplishable. The balance ought to be observed strictly. A skewness or too inflated goals lead to lower engagement with tasks. Vice versa – too mild KPIs will deter employees’ career and professional growth.

  1. Time frames

After the purpose and workability are clear these shall be framed with the time. As such, you have to declare the predicted duration of a KPI’s achievement – a year, a quarter, or a month. Again, the balance between expectations and reality is crucial here. Excessively optimistic, uncertain, or unclear announced amounts of time inevitably turn into hundreds of hours of overtime, hasty decisions, shortcomings, conflicts, and failures of plans.

The KPI is hence a metric that was thought out along these four lines.

Common KPI metrics

A bad idea is to google for KPIs and include them in the workflow untouched. A good idea is to study a little what metrics do companies use and think which ones can be adjusted and further used to track the exact company’s performance. Have a look at some of the blue-eyed performance metrics that are applied for different departments.

SalesRevenue – in currency equivalent or percentage increase;
Signed contracts for a period – in physical or money dimensions.
Engaged leads – total, cold vs. hot, qualified vs. unqualified, etc.
Average conversion time.
Average duration of a single pipeline.
Net sales, etc.
MarketingReturns on efforts – CPA, CPC, CPI, CPM, ROI.
Success in search engines – website traffic, keywords growth, bounce rate, depth of interaction, GEO distribution of visitors.
Social media success – the number of followers, likes, shares, comments.
Number of publications in media, etc.
FinancesNet profit margin EBIT, EBITDA.
Cash flowLiabilities structure.
Accumulated accounts receivables.
Saved costs, e.g. taxes or loans interests.
Accumulated deferred payments, etc.
Customer SupportTime to resolve the incoming ticket.
Customers’ average level of satisfaction with support provided.
The number of answered calls, etc.
HRAverage employees’ retention and flow.
Number of successfully closed vacancies.
Average time to complete the hiring.

The list of KPI examples may go on and on. And here’s the main trap – in an attempt to work to the fullest with appraisal the management may choose to set dozens of individual performance metrics. As a result – overloaded accomplishment plans that, in most cases, remain on paper. To turn KPIs into an impactful instrument, always be guided by the first word from the acronym, which is – “Key”. Don’t overdo with the call of duty – focus on up to 7 core metrics. And try to keep the performance assessment horizon within a one-year perspective.

How to develop KPIs that work?

No external party knows your company’s essence as thoroughly as you do. To drive employees’ performance, stick to 3 principal rules to bring on KPIs.

Set SMART goals

The concept of measurable goals arose far back in the 1940s. The “S.M.A.R.T.” acronym appeared 50 years later – when George T. Doran has outlined the scheme of a compound task setting. The approach was simple yet constructive, so, not surprisingly, it became widely cited in subsequent management theories.

“A SMART way to set goals – for either personal or business purposes”, source

Today, the ability to implement SMART objectives is one of the major managers’ competency benchmarks. Let’s break down the acronym in relation to KPIs:

  1. S = Specific

A goal shall be clear and perceived the same way by both the one who sets and executes it. It bears underlining that if a KPI isn’t in the form of a number, it is no longer a SMART goal. Set real numbers only. And try to avoid relative descriptions, like “more revenue”, “higher traffic”, “better quality”, etc.

  1. M = Measurable

During the KPIs’ preparation stage, along with the goal’s wording, think over and write down possible ways for measuring its completion. Do you have a respective data management system to refer to? Is your staff equipped with devices, software, and instructions – to report on individual progress correctly and on schedule? Do you know what information will be needed to conclude the performance results? And – what will it cost to collect data regularly? Before communicating the goal to employees, make sure it’s trackable.

  1. A = Attainable or Actionable

Consider an example. Say, the board of directors decided to expand the geography of sales. They’ve chosen the North Korean market – due to its volume, mild competitive environment, and the fact that lower transportation costs from the company’s factories in China will allow earning higher net profits. Despite all possible outcomes and no matter how hard employees try, because the country is isolated and the local political system is almost extremist, such a goal is apparently utopian.

This is a bit naive case, however, it demonstrates the “A” principle. Goals shall drive exact actions. Before setting KPIs, evaluate resources you own and judge what steps you can truly take.

  1. R = Realistic

Ambitiousness drives business, but some expectations are frankly impossible to meet. A good manager is the one who finds the correct combination of “Want” and “Can do” and sets harmonized KPIs. The goal should be challenging but possible – and no other way. Neglecting this axiom can result in various troubles for the company:

  • phased down employees motivation
  • groundworks out of touch with reality
  • lower credibility of the management
  • poorer work-life balance
  • reduced satisfaction with the job
  • professionals’ outflow, etc.
  1. T = Time Bound or Time-Based

There shall be a visible horizon for achievements. A task without a deadline isn’t a task. It is a recommendation, dream, suggestion, vision, or belief – but not a KPI if truth be told.

Share & discuss with stakeholders

An all-embracing set of KPIs is only half of the deal. Another 50% of success is communicating indicators to all decision-makers in a due manner. Avoid being too “tone-of-the-top” – take into account objections and recommendations. If you develop performance metrics for different departments within an organization, take care to consult with representatives from each – to create applicable indicators. Sequential strategic sessions, team leads’ surveys, joint mind maps, even brainstorms – there are many “how-to” to collect individual opinions.

Also made sure to share the whole scope of objective-related information, including risks. A recommendable way to manage individual indicators is to assemble a KPI dashboard.

“Strategic KPI dashboard”, source

This is a high-level tool for reviewing the progress that typically consists of several dynamical charts with aggregated metrics. The KPI dashboard can be:

  • strategic – the one demonstrating the progression towards strategic long-term goals
  • tactical – displays goals’ completion by the company’s inner divisions or in relation to subgoals.

Although it may be laborious to design the dashboard, once created, it will simplify performance measuring by an order of magnitude. Here are just a few dashboards’ advantages:

  • the information is updated in a real-time mode
  • lower information asymmetry among decision-makers
  • evidence for accrual of performance-based bonuses
  • faster data-transferring between departments.

To ensure the information will be easy to access and share, use cloud-based storage systems or online whiteboards.

Review & adjust goals

A KPI is not something set once and for all. To keep relevance, revise metrics at regular intervals. These may be neither too short nor too long-lasting. Don’t forget that innovations take time to show results. For tactical KPIs, try to stick to semi-annual and annual reviewing intervals.

To reconsider the initial approach for performance assessment, follow the next steps:

  • calculate the completion percentage – either for individuals or exact goals
  • review resources – e.g. money, time, information, and others. Are they still adequate?
  • review the action plan – was the goal achieved to the estimated date? If not, what were the reasons for delays?
  • motivate employees – praise the work done and encourage progress in the future
  • study failures and “bottlenecks” – examine issues that occurred during the reporting period; develop preventive maintenance

Consider the aforementioned to create more relevant goals for the future. You can also launch anonymous questionnaires to learn about employees’ attitudes to the appraisal system.

13 things to avoid when bringing KPIs into being

As in any kind of putting theory into practice, implementing KPIs is full of twists and turns. To prevent failures, keep clear of the following pitfalls:

  1. Not linking KPIs to the strategy
  2. Developing metrics hoping to learn how to measure them along the way
  3. The too mutable appraisal process
  4. Scattering measuring efforts
  5. Lapsing into micromanagement
  6. Mess strategic indicators with tactical
  7. Ill-conceived linking of monetary incentives with KPIs
  8. Disconnection between C-level management and mid-level executives
  9. Failure to extract insights from performance data
  10. Not updating metrics on time
  11. No one to endorse goals’ accomplishment
  12. No responsible ones for the appraisal process
  13. The input from the team is permanently missed.

So, what does KPI stand for? The indicator’s most central ideas are – the relevance to business objectives and timely readjustment. If you want to experience all benefits of a well-done performance appraisal promise, ensure KPIs you settle remain SMART and have a finger on the pulse to any evident operational changes.