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Glossary

KPI – Key Performance Indicator

A key performance indicator (KPI) is a quantifiable metric that uses data to measure the effectiveness of an action or objective.

If you can’t measure it, you can’t manage it.” This statement, attributed to management guru Peter Drucker demonstrates why you need to deploy key performance indicators (KPIs) to monitor and judge the success of activities. This article explains more about what KPIs are, how they can be implemented and why you should use them.

What is a key performance indicator (KPI)?

A key performance indicator (KPI) is a quantifiable metric that uses data to measure the effectiveness of an action or objective. Examples of KPIs could be sales growth, conversion rates, bounce rates, number of visits to a site, cart abandonment rates, email open rates, employee absenteeism or products manufactured per hour.

To gain full benefit from KPIs they should be measures that support a business objective, such as improving the organization’s processes or its competitive advantage.

Why use key performance indicators (KPIs)?

To measure organizational performance

The primary objective of a KPI is to measure the effectiveness of the actions implemented by an organization, department, or individual employee. They demonstrate performance at a given moment, which can be compared over time. This shows progress towards achieving objectives and highlights when they are achieved.

To make better decisions

Key performance indicators are an extremely valuable decision-making tool. They provide concrete results on the progress of corporate strategy, employee efficiency and what an organization can realistically achieve. By identifying what is working and what is not, it is possible to define an action plan in order to improve and hit set objectives.
Organizations can then prioritize those actions that deliver the greatest return on investment, optimizing and measuring processes to achieve success.

To align management and vision

All departments within an organization can implement specific KPIs: such as time spent on a task, number of calls made, customer churn, click-through rates, number and volume of sales, gross margins. These operational KPIs should be aligned with overall objectives so that all activities support achieving the company vision.

To empower teams

No matter how relevant your KPIs are, they will not be effective if they are not communicated to employees. By engaging them around KPIs, and making them a central part of how they are managed and evaluated the organization will be more likely to achieve its overall objectives. KPIs help guide employees on the general direction of their work, while providing them with autonomy and responsibility.

How do you create effective key performance indicators (KPIs)?

In today’s data-driven world, organizations have a wide choice of indicators to monitor and measure. Therefore one of the main difficulties is to identify the most relevant indicators for their objectives. Here are a few tips:

Define your strategic objectives

Every key performance indicator must be linked to a wider strategic objective. So before setting KPIs, first define your objectives, such as increasing sales, entering a new market, improving customer satisfaction, or decreasing churn.

Aim to align KPIs with the company’s business strategy in order to guarantee its success. For example, if your objective is to improve customer loyalty, you can use indicators such as attrition rate, customer satisfaction, or number of negative comments shared on social networks, etc.

Only select relevant KPIs

Don’t create too many KPIs, as this could cause you to lose sight of your objectives and focus solely on measurement, rather than taking action. However, if you have multiple objectives with sub-objectives you may need to create further KPIs to measure them. In this case it is important to establish a clear and precise reporting hierarchy so that everyone understands which KPIs take precedence.

Involve your teams

All departments, including sales, marketing, human resources, customer service and product development have a part to play in achieving your overall objectives. To ensure that they are engaged in and involved, include them in the process of setting KPIs. This will also allow you to tap into their specific business expertise and help in selecting the most relevant KPIs.

Use the right tools to communicate KPIs

Key indicators have to be measured using reliable data. It is therefore important to collect high-quality, trustworthy information to measure business performance. This then needs to be shared and visualized in ways that are easy to understand by the entire business, such as through dashboards which provide a unified view of the organization’s KPIs and allow all employees to see progress over time.

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