Key Performance Indicators: Ultimate Guide
According to Tristan Sherwin, author of the 2015 book, Love: Expressed:
“If at first you don’t succeed, then maybe you have the wrong idea of success, or you’re using the wrong standard of measuring it.”
Similarly, in project management, how can you tell if a project is even remotely successful if you have no way of measuring each component, and each stage of the project? Simply put, to measure a project effectively, you need to set out your Key Performance Indicators (KPIs). Only then can you start to plan and execute, and of course measure, your project.
What is a KPI?
A KPI is a value, usually numeric, that measures the extent to which a core objective has been, or is being, achieved.
They are ‘key’ because each indicator measures an aspect of performance that has been identified as most important for success. KPIs can be focused on individuals, teams, or processes to quantify performance or progress toward an organization’s goal.
A KPI consists of the following properties:
- Measure – the means of quantifying the KPI
- Target – the numeric value the team seeks to achieve
- Data source – where the data to measure is coming from (needs to be defined and agreed to avoid uncertainty about KPI tracking)
- Time period – the length of time for which the KPI is measured against the target
- Reporting frequency – how often the target is reviewed
The difference between KPIs and metrics
The terms KPI and metric are often used interchangeably, but their meanings don’t necessarily intersect.
A metric is simply a numerical measure of any aspect of operation, whereas a KPI is a specific metric that has been selected as strategically critical. Therefore, KPIs are a subset of metrics that you have identified as most important for success.
KPIs measure the aspects that have the most impact on your strategic outcomes and help retain focus on long-term objectives. On the other hand, metrics measure everyday activities which support KPIs. While they can have an effect, they’re not always the most critical aspects. Thus, not every metric is a KPI.
Rather, KPIs are metrics focused on those aspects which matter most to your goals. For example, a software company looking to grow could use a year-on-year revenue increase as a KPI, while a charity may use the total funds donated to scientific research.
The importance of KPIs
There are a number of reasons why KPIs are used. However, there are four main benefits:
1. Unification of direction
KPIs are common goals that keep everyone on the same page. Individuals or teams may have their own ideas about what success looks like, especially if the work is spread across two or more different departments of an organization. If left to work independently, their results are likely to diverge. KPIs are there to ensure teams are aligned, clarifying their communication and increasing efficiency.
2. Increased accountability
KPIs can help track the progress of both teams and individuals, showing relative inputs and whether they’ve hit their targets. This makes both departments and employees accountable for their contributions, or lack thereof, so you can identify where any problems lie.
3. Facilitating adaptability
Once you have accountability and the right information, you can make adjustments to deal with any issues which are preventing the achievement of your KPIs. For example, managers can help overwhelmed sales teams by providing guidance and training.
4. Status checkup
A diverse portfolio of KPIs, such as financial figures and risk factors, can give you a realistic overview of your organization. This enables you to assess the overall status and performance. For example, revenue and profit margins can measure the fiscal health of a business, while employee churn indicates the degree of staff engagement.
Types of KPIs
All KPIs are linked to strategic goals, but there are a number of different categories. They can vary in scope, or in time period. For example, some KPIs may deal with short-term goals in the order of weeks, while others may be long-term goals over a number of years. Organizations use a combination of these different KPIs to track progress. Here are the main types:
Strategic KPIs track progress toward long-term, big-picture objectives.
For example, revenue, ROI, and market share. Looking at one or two of these will show you how well your organization is performing overall.
You can use strategic KPIs to measure progress toward objectives defined in the four aspects of a balanced scorecard:
- Learning and growth
- Business processes
- Customer perspectives
- Financial data
Operational KPIs pertain to processes tied to short-term goals.
They are focused on organizational activities and usually measure performance over a shorter period of time.
These KPIs often deal with techniques designed to increase efficiency, providing information that informs better decisions about everyday functions such as service and delivery. Examples include accounts receivables turnover, and DSO (Days Sales Outstanding).
These are KPIs that apply to specific functional units or departments, such as IT or transportation. For example, IT could be tracking resolution time or downtime per month, while transportation may measure cost per mile or on-time performance. Functional unit KPIs can be further categorized as strategic or operational.
Lagging vs. Leading
Any given KPI can be classified as either leading or lagging.
- Leading KPIs are used as predictors of future outcomes, such as the percentage of customers who sign up for an annual subscription.
- Lagging KPIs provide information about past performance, such as net profit. A blend of both will give you a complete picture of performance.
Types of measure
Another way of categorizing KPIs is by the type of measure:
- Inputs – resources consumed in activities, such as working hours or electricity usage
- Process/activity – the efficiency, quality or consistency of processes, or aspects of methodology, such as training or equipment used
- Outputs – the results of activities, such as profit or units produced
- Outcomes – specific accomplishments of activities, classified as ‘intermediate’ (e.g. email engagement), or ‘end outcomes’ (e.g. sales uplift driven by increased engagement).
- Risk – factors that are a threat to success, such as customer satisfaction rating
- Employee – Staff behavior, skills, or performance, such as employee churn
- Project – Progress toward deliverables or milestones, such as on-time completion percentage
High-level vs. low-level KPIs
KPIs can be classified as either high-level or low-level.
High-level KPIs look at the broad strokes and deal with an organization’s overall performance, such as percentage year-on-year growth and market share. They are the result of the work of multiple departments and do not measure individual contributions.
Low-level KPIs deal with departments or individual employees. Examples include sales per month and average support ticket resolution time. By their everyday nature, low-level KPIs are more actionable and therefore contribute to high-level KPIs.
Some have expanded this two-level conceptualization to a three-level structure according to different organizational strata:
Organization-level (or company-level) KPIs are the equivalent of the high-level KPIs described above. They are tied to the overall health and performance of the whole organization. Although organization-level KPIs are high-level, they may still relate to specific aspects of performance, such as revenue or percentage growth in the customer base.
These KPIs are specific to a department, such as finance or HR. These teams naturally have very distinctive KPI structures, owing to their vastly different activities. For example, your marketing department probably has the most (and most quantitative) KPIs, such as lead-to-customer ratio and digital channel ROI. However, the HR department would have fewer KPIs, which are more qualitative, such as employee engagement and productivity. Typically, these departments need specialized techniques and tools to track their particular KPIs accurately.
Project-level KPIs are more specific than those at the organization or department level. In order for the success of a project to be measured, you must set goals and deliverables. Creating and defining these KPIs is usually part of a project’s planning phase, and they are used to evaluate performance both during project monitoring and upon its completion. Examples include estimated time to completion and current resource allocation.
Examples of KPIs
Many KPIs can be split across functions such as business, finance, marketing, sales, operational, and project management. Naturally, some fall under more than one category.
It’s essential to limit your KPIs to only the most useful when working toward your goals. While there is no set number, usually two or three per objective is optimum.
1. Gross Profit Margin
The Gross Profit Margin measures the proportion of money left over from revenue after accounting for the cost of goods sold. This metric is a great indicator of a company’s financial health, indicating whether a business is capable of paying its operating expenses while having funds left for growth.
2. Operating Cash Flow (OCF)
Operating Cash Flow is the daily amount of cash generated by a company, and it is calculated by adjusting net income by depreciation, inventory changes, and incoming accounts receivable.
3. Current ratio
The current ratio is used as an indication of whether a company has a healthy operating cycle. It’s the value of a company’s current assets divided by the value of its current liabilities. A ratio of more than one indicates that your business will be able to fulfill all of its financial obligations, while a ratio of less than one suggests that it won’t.
Other financial KPIs include:
- Burn rate
- Net profit margin
- Working capital
- Inventory turnover
Take a look at our comprehensive list of financial KPIs.
1. Cost per Lead (CPL)
Cost per Lead is the total amount your company needs to expend to generate one new lead. This can be categorized according to a marketing channel, enabling attribution measurement and insights into ROI. It is commonly used in paid social media advertising.
2. Cost per Acquisition (CPA)
Cost per Acquisition is the cost required to generate a new customer. It varies between marketing channels, so it can be a series of numbers rather than a single figure. CPA is used as a snapshot of the revenue produced by all marketing efforts and requires long-term tracking for accurate evaluation.
3. Customer Lifetime Value (CLV)
Customer Lifetime Value is a prediction of the total sales value of each customer, based on average spend and frequency of purchase. By comparing this to CPA, companies can calculate the ROI of marketing campaigns.
Other marketing KPIs include:
- Website conversion rate
- Time spent on page/site
- Bounce rate
- Customer churn
Find out the key marketing metrics you need to report on in 2022!
1. Monthly sales
As the name suggests, monthly sales shows the increase or decrease of your sales revenue monthly. It can also be formulated as the percentage of the monthly sales quota. Naturally, to understand why monthly sales are increasing or decreasing, you need to track other metrics, too.
2. Monthly new leads
What qualifies as a ‘lead’ depends on the nature of your business. Some examples include those who sign up for a free trial or visitors to your website. You can use monthly new leads to calculate other metrics, such as comparing it to monthly conversions to obtain the average lead-to-sales ratio.
3. Lead-to-sales conversion rate
This is the percentage of new customers compared to new leads and indicates how effectively your sales team converts prospects into purchases. Lead-to-sales conversion rate can be improved by more effective sales materials, promotional offers, or improved buying experiences.
There are many other sales KPIs to consider, including:
- Monthly new customers
- Net promoter score
- Average conversion time
- Monthly sales demos
- New contracts signed
Project management KPIs
1. Planned Value (PV)
The planned value is the estimated cost of project activities to date. It can be calculated in two different ways:
- Scheduled hours remaining x average worker’s hourly rate.
- Planned percent of tasks remaining x project budget.
PV can be compared with other project KPIs to determine whether you are behind schedule or over budget.
2. Actual Cost (AC)
This is the financial spend on the project to date. AC is equal to all of the project-related costs spent to date.
3. Earned Value (EV)
Earned value is the proportion of the budget approved for the project activities so far. It indicates how much work has been completed compared to the budget assigned to these activities.
Other project management KPIs include:
- Planned hours of work vs. actual
- Missed milestones and deadlines
- Projects on budget
- Project ROI
How to choose the right KPIs
Many organizations adopt industry-standard KPIs and then fail to produce any significant benefits because these KPIs don’t reflect their business model. It’s important to understand that KPIs differ according to industry, growth stage, and project phase. As such, think carefully about what you want to achieve and incorporate those which fit the best.
A KPI is only as valuable as the outcome it generates.
It’s also vital to avoid KPI overload. Although business intelligence has given organizations access to vast amounts of data and ways to visualize that data, remember that KPIs refer to the most important objectives.
Steer clear of overload by focusing on the most important measures. Each KPI you use should relate to the achievement of a key objective, not simply any business goal someone thinks is vaguely important. These should be strategic and integral to your organization’s success.
Otherwise, in the best case, your organization is working toward an objective that has no benefit, which could waste time and resources better spent elsewhere.
Defining your KPIs
When developing a KPI, it’s best to start with the end goal – what are your organizational objectives? Then work backward from there and create a plan for achieving them. Steps to defining a KPI:
- Define the desired outcome
- Determine how to measure progress
- Determine which factors will produce the result
- Decide who is responsible for the result
- Define the threshold for success
- Decide how frequently to review progress
SMART KPIs and SMARTER KPIs
It’s essential to ensure that every KPI meets the SMART criteria:
- Specific – ensure your KPI is well-defined
- Measurable – ensure progress toward the objective can be easily assessed
- Attainable – ensure the objective is attainable
- Relevant – ensure the KPI is relevant to your organization’s objective
- Time-Bound – ensure there is a definite timeframe for achieving the objective
The ‘SMART’ criteria can be expanded to ‘SMARTER’ with two additions: Evaluate and Re-evaluate. These steps emphasize that you should continually assess your KPIs to ensure they remain relevant over time.
Adjust KPIs as needed
KPIs aren’t static – they evolve as the organization changes. Without continual review, you risk chasing objectives that are no longer relevant. Therefore, you should regularly check not only how your organization is performing against its KPIs but which KPIs need to be changed, added, or removed.
How often should you review your KPIs? A good rule of thumb is that if your KPIs aren’t consistently producing the expected outcomes, it’s time to rethink them. Iteration is crucial, so meet regularly to revise your KPIs based on market, client, and organizational changes, and be sure to update teams with the new information.
Learn more on how to define and set the most appropriate KPIs.
What is a KPI report?
A KPI report combines multiple KPIs into a summary overview, enabling stakeholders to see, at a glance, how well the organization is performing. They can take different forms, such as a set of slides, a spreadsheet, or a written document.
Conventionally, KPI reports are compiled quarterly, but you may want to generate them annually, monthly, weekly, or daily (depending on how frequently you conduct KPI reviews).
The purpose and benefits of KPI reports
The purpose of KPI reports is to provide an overall picture of the performance. Further, KPI reports from different departments show how each has an impact on the others across an organization.
There are several benefits of using KPI reports:
- enable informed decision-making;
- warn of problems ahead and help you find ways of overcoming them;
- provide actionable data;
- visualize data for easier interpretation.
Best practices for KPI reporting
Here are some guidelines for creating and using KPI reports, so you can execute your strategy as effectively as possible.
1. Consider ownership
While many team members may contribute to a KPI, it’s best to assign the responsibility of each KPI to a specific person. If that person has ownership of the task of improving the KPI, performance is more likely to increase.
2. Include both high-level and low-level KPIs
Too much focus on high-level KPIs leaves the details of execution under-managed. On the other hand, becoming bogged down in low-level KPIs may lead to overlooking how these constitute the end goal. A good mix of both high-level and low-level metrics will give you a more accurate and holistic picture of performance.
3. Find a balance between leading and lagging KPIs
Try to have an equal balance between leading and lagging KPIs. Too much emphasis on leading indicators prevents accurate assessment of the work so far while focusing primarily on lagging KPIs handicaps your ability to predict future outcomes.
4. Ensure you have all the data
KPI reports are no good if they’re incomplete. Team members responsible should gather the data required from their respective departments.
5. Break down objectives into smaller goals
It’s easier to make improvements when given bite-sized goals. Divide your long-term objectives into short-term goals in order to increase performance.
The KPI dashboard
A KPI dashboard is a tool that uses metric data to generate visualizations of KPI progress. It provides an at-a-glance view of KPIs in real time and is customizable, offering different chart types, scales, and colors – all to give you a better overview of how your organization is performing.
The main benefit of a KPI dashboard is that it provides real-time data, all in a single place. Instead of switching between different tools and websites, you can access all the relevant information in a few seconds. This quick communication of performance to every stakeholder enables management and teams to make informed decisions, rather than wasting valuable time searching for relevant insights.
A modern, well-constructed KPI dashboard also helps you identify problems and suggest ways to resolve them. Managers can check KPI dashboards daily and quickly gain insights into areas that need more focus or recognize a sub-optimal process.
How to create a KPI dashboard
Before creating a KPI dashboard, you need to consider your organization’s objectives and formulated strategies to measure progress. You also need to have the tools to collect the necessary data. Generally, there are four steps to follow when creating a KPI dashboard.
1. Define your organization’s objectives. What are the goals you want to achieve, or the problems you’re trying to solve? You’ll need to define what you want to accomplish before you can begin.
2. Decide who will be using the dashboard. Who will use the KPI dashboard, and how will they use it? This affects the choice of KPIs to use.
3. Define the KPIs to be used. Which KPIs should be included, and what are their results? Always ensure your KPIs are actionable, and produce a clear process for achieving their targets. It’s tempting to include vanity metrics, but these are usually irrelevant.
4. Check the availability of the necessary data. To track your KPIs, you’ll need the means to collect the required data. Manual data collection can slow down a project and significantly diminish performance, so it’s best to implement some form of automation, such as work management software.
Take a look at our complete guide to creating KPI dashboards.
KPI dashboard software
KPI dashboard software is needed to handle real-time data and to generate KPI visual representations, such as charts, graphics, and maps. It aids in combining large datasets from different departments and enables analysis of this information directly within the interface.
The best KPI dashboard software
Scoro lets you oversee every aspect of your business on one (or several) dashboards – and keep track of your project, work, and financial KPIs in real time.
- Real-time KPI dashboard
- A full overview of your projects, clients, and finances
- Gantt chart
- Automated reporting
- Integration with a wide range of business tools
Pricing: From $26 per user per month.
Datapine is another tool that enables you to visualize and monitor KPIs in a single place. It also discovers new relationships between data to help you uncover hidden trends.
- advanced analytics
- custom formulas
- automatic KPI reports
- interactive dashboards
- intelligent notifications
Pricing: From $249 per month + $55 per user per month.
InetSoft provides dashboard analytics and reporting, using data mashup (the integration of two or more datasets) and big data scalability. It can store and quickly manipulate large datasets from different sources, and it can also work alongside a data warehouse if necessary.
- professional atomic data block modeling
- a web-based data mashup interface
- embedded dashboards
- annotations for visualizations
- secure infrastructure
Pricing: Paid plans from $165 per month
Check out our complete list of top KPI dashboard software.
KPIs are the key to a successful organization – whether business KPIs, financial KPIs, sales KPIs, marketing KPIs, or project management KPIs. Make sure you frequently monitor them, using a real-time dashboard, to meet the SMART criteria outlined above. Start your free 14-day trial to see how Scoro can help you monitor your KPIs.