Every manager knows the importance of Key Performance Indicators (KPIs) and how essential it is to track them for business decision-making. But how do you decide these KPIs?
If you too have been pondering over the same question, this article is for you. You’ll be surprised that the process is not as overwhelming as it is perceived to be. We’ll discuss five simple guidelines that will help you in setting the correct KPIs.
Guidelines for setting KPIs
The first and foremost step before setting KPIs is to have a set of business goals in place. This is because the main role of KPI is to tell you whether the goal is/will be met. Experts have been saying that these goals must be SMART, that is Specific, Measurable, Achievable, Relevant and Timely. SMART goals pave the way for setting effective KPIs. Business goals or areas of improvement are thus a prerequisite for setting KPIs as KPIs are directly related to these goals. Here is a table of examples of business goals and what KPIs are directly related to the goal.
Lagging and leading KPIs
KPIs are of two types, lagging and leading. Lagging KPI tells you the output of the process while a leading KPI tells you the input of the process. In other words, a lagging KPI will indicate the results but a leading KPI will indicate the process that led to the results. Understanding the difference between these KPIs is extremely important to optimally set and use KPIs for business decision-making. Let us look at some examples to understand the difference clearly.
As seen in the table above, lagging KPIs are essentially ‘output’ oriented while leading KPIs are ‘input’ oriented. You can only measure the lagging KPIs but cannot change them while a leading KPI can be only changed and measured but not controlled. Since KPIs play the role of informing the progress/result, organizations mostly focus on lagging KPIs and track leading KPIs to further analyze any result. Choose the right mix of lagging and leading KPIs to do an in-depth analysis. For example, if your business goal is to increase conversion rate by 5%, one combination of bounce rate (leading KPI) and cart abandonment rate (lagging KPI) is an ideal way to track the conversion rate.
The growth stage of your company will largely influence the KPIs you wish to set. Since a KPI is meant to reflect the progress towards a business goal, it goes hand-in-hand with the growth stage of the business. Business goals vary according to the growth stage of the company, hence the KPI varies accordingly too. Here is an example of KPIs relevant to each growth stage of the business:
Don’t know what stage your business is? Read The Five Stages of a Business Cycle.
Business model and roles
Another factor that changes the way you set KPIs is the business model and the roles within the business. The target market and product differ according to the industry, the roles, and hence influences the target KPIs.
Below is a table of examples of KPIs according to the industry type:
As earlier mentioned, KPI also differs from role to role within the industry:
Points to remember
Last but not least, here are some points to remember while setting KPIs to optimize their use:
- LIMIT the number of KPIs – KPIs are essentially just a handful of metrics that communicate business performance while ignoring irrelevant details. Thus, ensure that you limit the number of KPIs per business goal and keep it simple. Ideally, it is said that every goal should not have more than 4 KPIs.
- ALIGN the KPIs – The most important point to remember is to align the KPIs with each other so that they are relatable for each business goal. For example, for a marketing goal, combining Customer Acquisition Cost with Marketing Return on Investment will give a better idea of effectiveness of marketing costs. Doing so will not only help you pair the right data for better analysis but also save time and speed up the decision making process.
- TRACK the KPIs consistently – The main purpose of KPIs is to indicate whether the business is meeting its goals. Unlike metrics, KPIs need not be tracked on a daily basis. However, tracking KPIs weekly can help you make timely business decisions if required.
- UPDATE the KPIs – Since KPIs are based on business goals, which change with time, they need to be updated as and when these goals change. Being dynamic and SMART are two important qualities of a good KPI.
KPIs are an integral part of business analysis. They help measure targets, communicate important information, ensure accountability and make timely adjustments to optimize business activities. While setting correct KPIs demands a lot of experience, having a few guidelines beforehand can simplify the process to a great extent.