How to Develop Effective KPIs (plus steps to creating them)

Developing and visualizing effective Key Performance Indicators (KPIs) to measure is an essential part of carrying out and achieving business objectives. If your business is considering developing KPIs for different departments or business functions, it’s important to remember that this process can take time and consistent improvement. In this article, we will highlight how to set effective KPIs and what you can do to ensure the adoption of those KPIs across your business.

What are KPIs?

Key performance indicators (KPIs) are used to assess the progress toward achieving a defined business objective. KPIs can be leveraged to monitor business performance and tracked regularly to assess, adjust, and refine tactics designed to complete business goals. 

Why are KPIs important?

KPIs are essential to tracking business performance and completion of goals. They serve as tools of measurement to quantify progress. Businesses can lean on KPIs to see how close they are to achieving these goals and adjust strategies accordingly as needed. KPIs help to drive strategic decision-making and allocate resources effectively. 

The transparency provided by KPIs can be underestimated. Team members will better understand where they stand and can work together to determine what needs to be done to achieve goals. This shared understanding fosters collaboration, accountability, and continuous improvement. 

Types of KPIs

There are several different types of KPIs and each one has its own purpose for tracking and measuring various business processes. Here are some of the most common types of KPIs found in the business world:

• Leading KPIs: These are predictive KPIs that are designed to share insights into future performance trends. 
• Lagging KPIs: Lagging KPIs are on the opposite end of the spectrum. These retrospective metrics provide insights into past performance trends and outcomes. 
• Financial KPIs: Financial KPIs measure financial performance and health. Some examples include return on investment (ROI), Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), and revenue growth rate.  

• Operational KPIs: Operational KPIs are used to measure the effectiveness of an organization’s operations such as in production and customer service. 

• Marketing KPIs: Marketing departments use KPIs such as conversion rate, cost per lead (CPL), and engagement rate to assess their efforts. 

• Sales KPIs: Sales departments leverage KPIs including qualified leads, pipeline value, and sales revenue by product or service to assess performance. 

• Customer KPIs: Some of the KPIs used to assess customer service and engagement include Net Promoter Score (NPS), customer lifetime value (CLV), and retention rates. 

• Input KPIs: Input KPIs measure the effectiveness of resources allocated to achieve a given business objective. 

• Output KPIs: Similarly, output KPIs are used to measure outputs generated by an organization. 

How to decide on good KPIs

Each KPI should be a simple quantifiable measure that can be quickly understood to represent progress in a business objective. A KPI should tie meaningfully and directly with a goal. It should be something that will make a difference in business outcomes. In other words, avoid using the KPI  to track metrics that don’t correlate with increased performance.

Define what is most important

When deciding on a KPI ask yourself: What is my goal? How will achieving this help my business? Who does this KPI concern?

Another important thing is to consider who is the intended audience for the KPI. Is it for an individual employee? The executives? The whole company? How will they see the KPI regularly?

Short- vs long-term KPIs

Many have found it best to set both short-term and long-term KPIs. Often the short-term KPIs can be goals that lead up to the long-term KPIs. These short-term KPIs can be for a week, month, or quarter. Long-term KPIs will normally be for a quarter or a year, though sometimes even longer.

When developing and deciding on a key performance indicator, it is helpful to keep the SMART goals in mind. A KPI should be Specific, Measurable, Attainable, Realistic, and have a set Timeframe (SMART).

Align KPIs with business goals

It can be beneficial to select a KPI that is more narrow in scope. For example, it may be a goal to achieve a certain increase in revenue. However, the best KPI to measure that might not be revenue but rather sales which will impact revenue. Likewise, trying to break down goals into subgoals can be helpful for generating more specific actions from a KPI.

While having several KPIs is good, it is also important to not create too many as this can lead to a lack of focus on each one. Look at your business to determine a reasonable amount to focus on and choose the most important ones.

Steps to Creating KPIs

Creating KPIs is simple if you take a step-by-step approach. The following are key steps to include as you develop KPIs:

• Understand Your Objectives: What are your strategic objectives? Consider top-level initiatives your organization is undertaking such as revenue growth, employee engagement, or operational efficiency. 
• Break Down Each Objective: Divide each strategic objective into a specific area of the business such as operations, customer service, operations, etc. 

• Picture Success: Define measurable outcomes for each strategic objective. For example, if your strategic objective is to increase revenue, your outcome could be monthly revenue per service line. 

• Select Your Metrics Carefully: Your metrics should be able to be used to measure progress toward strategic objectives. For best results, focus on SMART metrics (specific, measurable, achievable, relevant, and time-bound). 

• Know Your Targets: What is your target for each KPI? Lean on data to analyze past performance and trends to set your benchmarks. 

• Prepare Your Data: Know how you will collect data to track metrics. Consider the current systems and processes you’re using. 

• Track Results: With your data set up, consistently track your progress and performance against your set KPIs. 

• Review: Consistently track and analyze your KPIs. You may choose to review them each week, month, quarter, or other time frame. The important thing is to do it consistently and adjust accordingly. 

• Refine: Based on your progress, adjust your tactics and strategy to achieve your goals proactively. 

Be flexible with KPIs

A key aspect of establishing KPIs for your business is to understand that they are only as effective as you make them. Oftentimes, companies establish goals and metrics that become forgotten for a variety of reasons. When developing KPIs be sure to follow these steps:

Check KPIs often

It is important to check on KPI progress regularly and assess how the business is doing in regards to meeting those objectives. Often when looking at and reviewing the KPIs, employees and executives will notice that they are not exactly where they either expected to be or wanted to be. This may require, or benefit from, an adjustment to previously decided on key performance indicators.

Make adjustments where necessary

Sometimes the KPIs may need to be adjusted to reflect a more current and realistic goal. Sometimes the business does better than expected and will want to continue to push themselves to achieve more than they had previously anticipated. However, other times, employees and executives of the business may realize they aimed too high or had an unexpected event happen that caused them to be well below expectations. In both situations, it may be appropriate to adjust the KPI to ensure it is obtainable while still encouraging employees to stretch themselves.

Involve the team

When assessing the accuracy and benefit of a KPI, make sure to include team members from all aspects of the business. From key executives to individual contributors, everyone should have a say in defining the success criteria for a KPI. As individuals and teams become aligned across the business, you will see incredible progress and results for the KPIs you have set together.

How to visualize KPIs

Now that you know how to create KPIs and understand the importance of being flexible with them, consider how you’ll communicate them effectively. It’s best that they are quickly seen and understood. Businesses can leverage visualizations to allow large sets of data to be viewed as a simple summarized number, chart, or graph.

It can be helpful for a business to show their KPIs for employees or executives immediately when signing on so they can quickly understand where the business is in regards to their goals. Visualizations make it easy to do so. 

Timely data

It is also helpful to ensure the data is updated regularly (usually at least daily) to best aid in gauging the current business situation. Likewise, a dashboard is most effective when it updates on its own without relying on a person to run a program or query or refresh something themselves.

Color

Colors will also play an important role when displaying visualizations of KPIs. It is common that if a KPI is being met or exceeded, it will display in green. When it is just below the goal, it can be displayed in yellow or red, and if it is even further down it can be shown in red. These colors can help with very quickly identifying where the business is in regards to the KPI.

Simple visualizations

A simple visualization of a KPI could just be a number, percent, or dollar amount that shows something in large numbers that is quickly visible and sticks out on a dashboard. This number can also include colors that change based on set conditions of the KPI.

Graphs and charts can also be useful when displaying KPIs. They can help show a comparison of where the business is at compared to where they want to be and this may help increase the overall visual appeal of a dashboard. These may also be good visuals to have in a drill-down option rather than the primary number or visual for a KPI.

How can I get started using KPIs?

Once you’ve selected your KPIs, it’s important to make sure you have access to the right data and tools to actually create and track the KPI. Businesses of all sizes have turned to business intelligence (BI) tools to help facilitate KPI creation.

BI tools facilitate KPI creation

BI tools are specifically designed to create dashboards and visualizations that can help you track your KPIs. They are incredibly useful tools because they allow business users to easily connect to the data they need to power the KPI. That data can then be updated daily to create real-time dashboards.

BI also allows businesses to easily share dashboards and KPIs across the company because it is cloud-based software. All a user needs is an internet connection and a simple web browser to access the dashboard and view the KPIs that matter most to them.

Getting started with a BI tool

By using a BI tool, businesses can facilitate faster and more effective KPI creation. Getting started with a BI tool is incredibly easy for businesses of all sizes and types because they follow a subscription model tailored specifically to your business. If you are a small business and only need a few users, you can purchase a BI tool that fits your unique needs. Then, as your business grows, you can easily scale the tool to new members of the team. BI is cloud-based with the infrastructure being fully managed by the business, meaning fewer headaches for you and your team.

Conclusion

KPIs are valuable tools for keeping track of how a business is performing. They help executives know what metrics will be most advantageous for the company to focus on. Having effective KPIs can help improve efficiency, revenue, productivity, or any other important measurable aspects of a business. Learning how to decide on, track, and visualize KPIs is essential for overall success as a business.