If you were to eavesdrop on just about any executive meeting, strategy session or performance review in any business, chances are you would hear the term ‘KPI’ mentioned many times. Most people in those discussions would know that the acronym stands for Key Performance Indicators, but if you pressed each person to explain what a KPI actually is, it’s likely that you would hear many different definitions.
Therein lies the issue: KPIs are ubiquitous in modern business and yet the term is often overused and misunderstood. This means that, although KPIs are very common, businesses that are actually using KPIs effectively are not quite so common. And that’s a real shame because, used properly, KPIs can make a huge difference to the success of a business.To remedy the situation, I want to clarify what KPIs are and set out the main ways businesses should be using them.
What exactly are KPIs?
In simple terms, KPIs provide a way to measure how well companies, business units, projects or individuals are performing in relation to their strategic goals and objectives.
In their broadest sense, KPIs provide the most important performance information that enables organisations (or their stakeholders) to understand whether or not the organisation is on track toward its stated objectives. In this way, well-designed KPIs are vital navigational instruments, giving a clear picture of current levels of performance and whether the business is where it needs to be.
KPIs are also useful decision-making tools. Because they help reduce the complex nature of organisational performance to a small, manageable number of key indicators, KPIs can, in turn, assist decision making – and, ultimately, help improve performance.
Using KPIs as navigational tools
On an ocean-liner, the captain and crew use navigation data to understand where they are relative to their planned sailing route. Indicators like GPS location data, speed, fuel levels, or weather information allow those in charge to understand where exactly they currently are to make decisions about where to steer next.
This is exactly the same for companies. Here, KPIs are the navigation tools that managers use to understand whether the business is on a successful voyage or whether it is veering off the prosperous path. The right set of KPIs will shine a light on the key aspects of performance and highlight areas that may need attention.
Now more than ever, businesses need a way to assess where they are and whether they are on or off course against their strategy. They need to be able to correct quickly and adapt to the changing conditions of the market. If you want to succeed in a fiercely competitive market you need a way to measure progress (or otherwise) in real time, not just after the fact, and adapt your actions according to what the KPIs are telling you.
KPIs as key decision-making tools
Effective decision makers understand that they need information on the key dimensions of performance, and that this can be achieved by distilling them into the vital KPIs – similar to the way a doctor would go about trying to understand someone’s health. Instead of measuring random things, a doctor would focus on key health measures first, for example, taking your blood pressure, and measuring your cholesterol levels, heart rate and body mass index as key indicators of your health.
In our organisations, the most effective KPIs are closely tied to strategic objectives and help to answer the most critical business questions. A good starting point is therefore to identify the questions that the decision makers, managers or external stakeholders need to have answers to. One or two so-called Key Performance Questions (KPQs) should be identified for each strategic objective.
Once the most important business questions have been identified, you can select or develop the right KPIs that best help answer those questions. That way, all KPIs will be strategic, relevant and meaningful.
The importance of selecting the right KPIs
There are thousands of KPIs to choose from and most companies find it hard to select the right ones for their business and instead end up measuring and reporting a vast amount of information on everything that is easy to measure. This is just one of several KPI pitfalls that organisations fall victim to. Or, sometimes they simply pick the KPIs everyone else seems to be using, regardless of whether or not those are useful for their business. This is why it is so important to develop the right KPIs for your organisation.
In today’s challenging and competitive business landscape it is more important than ever that business leaders and senior executives are able to make better informed decisions, improve performance, and seek out new and novel ways to gain the edge over their competition. KPIs, when properly understood and used effectively, provide a powerful tool in achieving just that. Without them, organisations are simply sailing blind.
Where to go from here
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Bernard Marr is a bestselling author, keynote speaker, and advisor to companies and governments. He has worked with and advised many of the world's best-known organisations. LinkedIn has recently ranked Bernard as one of the top 10 Business Influencers in the world (in fact, No 5 - just behind Bill Gates and Richard Branson). He writes on the topics of intelligent business performance for various publications including Forbes, HuffPost, and LinkedIn Pulse. His blogs and SlideShare presentation have millions of readers.