You’ve heard about KPIs, or Key Performance Indicators, and you may even think that you already track them. After all, you have some business metrics you pay attention to, right? Maybe, maybe not. Let’s take a look at what KPIs actually are, why you should probably have them and some examples of KPIs for various business functions.
Metrics vs. Key Performance Indicators
According to BABOK, the purpose of metrics and key performance indicators is to measure the performance of solutions, solution components and other matters of interest to stake holders. First let us understand how similar or dissimilar the two terms are.
Metrics are used to measure different aspects of business activity at a specific point in time. KPIs, however, embody strategic objectives and measure performance against a specific target. These targets are defined in strategic, planning or budget sessions and have a range of performance. KPIs are the detailed specifications that are used to track business objectives.
So all KPIs are metrics, but not all metrics are KPIs.
Types of KPIs
There are many types of KPIs that you can use in your business. The common thread is that all of these are objectives and you should use the ones that make most sense for your business strategy. Types of KPIs include:
- Quantitative indicators that can be presented with a number.
- Qualitative indicators that can’t be presented as a number.
- Leading indicators that can predict the outcome of a process
- Lagging indicators that present the success or failure post hoc
- Input indicators that measure the amount of resources consumed during the generation of the outcome
- Process indicators that represent the efficiency or the productivity of the process
- Output indicators that reflect the outcome or results of the process activities
- Practical indicators that interface with existing company processes.
- Directional indicators specifying whether or not an organization is getting better.
- Actionable indicators are sufficiently in an organization’s control to effect change.
- Financial indicators used in performance measurement and when looking at an operating index.
Why it’s important to choose the right KPI
KPIs help an organization, department, team or manager react instantly to any events that might impact the business. In addition, these indicators can be used to set targets throughout the business to deliver the strategic goals. KPIs help businesses to focus on a common goal and ensure that it is aligned within the company. Hence it is very important that companies know what exactly to measure.
Examples of KPIs
KPIs differ across businesses, but here are some examples across business functions:
Project Management KPIs
- Actual cost of work done – It is the metric that helps a company identify the actual cost of activities performed up till completion.
- Percentage of milestones missed – It helps managers keep track of the percentage of projects that have missed milestones.
- Estimate at Completion – Sum total of the actual cost of completion and the estimated cost to complete the remaining work.
- Cost of managing processes – This is a measure of a periodic cost. It helps determine the cost of full time management function employees needed to man a project.
- Deviation of net present value -The difference in value between the planned baseline against the actual net present value. NPV is a method used in discounted cash flow analysis to find the sum of money representing the difference between the present value of all inflows and outflows of cash associated with the project by discounting each at a target yield.
- EV/EBITDA – The ratio between the Enterprise value vs the Earnings before Interest, taxes, depreciation and amortization. EV/EBITDA helps you analyze the debt value of a company
- Return on Investment – It’s considered as the most frequently used probability ratio. It is defined as a parameter that evaluates the performance of a business by dividing net profit by net worth.
- Debt-Equity ratio – Also known as risk ratio, it measures the proportion of shareholders equity to the debt used to finance the company’s assets.
- Operating margin – A measure of a company’s pricing strategy and its operating efficiency. It is calculated as the ratio between the operating income and net sales.
- Return on Assets/Return on Equity – ROE this is a measure of the money raised from shareholders. Comparisons of ROE must be done within the same industry. While ROA is an indicator is a measure of the company’s profitability to its assets.
Human Resources Performance
- Revenue per employee – An indicator of the productivity of the company’s workforce. It measures the amount of sales per employee and also measures the efficiency of utilization of human resources.
- Employee satisfaction index – Helps understand how satisfied employees of a firm/department are.
- Salary competitiveness ratio – This helps to gather data on competitor pay or industry average pay and allows you to compare this with your company’s own salary levels.
- Human Capital ROI – Measure of return on capital invested as pay and benefits.
Supply chain and operational performance
- Order fulfillment cycle time – Another metric to improve customer experience. It determines the time taken from ordering a product to manufacturing and finally delivering it to your customer. It is one of the metrics used to improve customer metrics and responsiveness. This helps companies measure the time taken to complete a manufacturing order.
- Yield – The percentage of correctly manufactured products without rework or scrap; quality is improved when the yield is measured.
- Throughput – Measure of movement of production process inputs and outputs.
- Earned value – Measures performance and can be used to schedule costs and control systems; measurement of work done in a project.
Consumer insights and marketing
- Market growth rate – Analyzes the change on size of a given consumer group in a particular market, over a period of time.
- Customer satisfaction index or NPS – Defined as a measure of how products and services meet or surpass customer expectation.
- Social networking footprint – Identifies the extent to which a company is present on social media.
- Brand equity – The value premium that a brand name provides to the product; this can be done by measuring loyalty, awareness, retention, etc.
- Customer life time value – The revenue expected to be generated from a customer throughout their entire relationship with the company; Revenue by customer minus the gross margin on revenue divided by probability of cancellation of customer gives you the CTV.
- Customer acquisition cost – The ratio between the sum of marketing and sales spend to the number of new customers in a particular period.
IT Operations and Project execution
- Mean time between failure – Tracks the time elapsed between two failure scenarios.
- Ratio of project overhead and ROI
- Estimate to complete – The amount still needed to complete a project.
- Dollars spent per month – As the name suggests, it calculates the amount spent per month on the current project.
- Average Initial Response Time – The average time taken for a service desk to respond to an incident reported by the user.
Take a look at more examples of KPIs recommended by Bernard Marr.
Tips for using KPIs in your business
- Focus on indicators/parameters that aid in improving results
- Understand the required metrics to enable better learning
- The KPIs need to be simple but be able to provide timely information
- Should be correlated and aligned with the objectives of the company
KPIs are not restricted for use by managers only – they are for everyone to use. Every single employee in a firm has goals to achieve and targets to meet, so KPIs can be utilized at every level.
What are the most important KPIs you track? Tell us in the comments.