There are targets and objectives to achieve – at an individual and team level – to meet your organisation’s overall goals
What Is a KPI?
A Key Performance Indicator (KPI) is a quantifiable metric that reflects how well an organisation is achieving its stated goals and objectives.
KPIs link organisational vision to individual action.
Thinking of your organisation as a pyramid: with strategic vision at the top, feeding down to specific actions at the bottom. In the middle you’ll find the KPIs that have been derived from the strategy, objectives, and Critical Success Factors (CSFs).
CSFs are the areas of activity in which you must perform well in order to be successful. KPIs are the means by which these CSFs can be measured. The actions below the KPIs are the tasks and projects that you carry out in order to achieve the KPIs.
Used well, KPIs support your organisation’s goals and strategy. They allow you to focus on what matters most, and to monitor your progress.
How to Set KPIs
First, your organisation needs to choose KPIs that measure the appropriate activity for each area of the business or project.
For example, net profit is a standard KPI for an organisation’s financial performance. It’s easy enough to calculate (total revenue minus total expenses), and you know that the higher it is, the better the company is performing.
Others may be harder to calculate. A customer satisfaction KPI, for example, may require regular, carefully constructed customer surveys to build the right amount of data. You’d then have to decide what sort of customer satisfaction score represents the benchmark you want to achieve.
Whatever the nature of your KPIs, you need to make sure that they’re SMART. This stands for:
- Specific: be clear about what each KPI will measure, and why it’s important
- Measurable: the KPI must be measurable to a defined standard
- Achievable: you must be able to deliver on the KPI
- Relevant: the KPI must measure something that matters and improves performance
- Time-Bound: it’s achievable within an agreed time frame
Ask yourself the following questions to help you to understand the context and define effective KPIs:
- What is your organisation’s vision? What’s the strategy for achieving that vision?
- Which metrics will indicate that you are successfully pursuing your vision and strategy?
- How many metrics should you have?
- What should you use as a benchmark?
- How could the metrics be cheated, and how will you guard against this?
Managing Your KPIs
When you’re deciding which KPIs to set up, plan how you’ll capture the information you need. Net profit requires a different set of data than customer satisfaction, for example, and requires access to different systems.
Also, establish who will collect the data, and how frequently. Sales data can usually be collected daily, for example, whereas KPIs that require data to be collated from a number of sources might be better measured weekly or monthly.
You’ll need to verify the data, too, to make sure it’s accurate, and that it covers all the requirements of your KPI.
Communicate KPIs clearly to everyone concerned.
If you’re responsible for a team or organisational KPI, make sure that your reports know how each KPI impacts their work, and that they know which activities to focus on. You may be able to set up a performance dashboard, or use a balanced scorecard to measure progress efficiently.
How to Set Individual KPIs
“What gets measured gets done” – If you set a goal around a desired outcome, the chances of that outcome occurring are much higher, simply because you have committed to managing and measuring your progress toward it.
When you set goals and KPIs with individual team members, make sure that they align with your team’s overall strategy – which, in turn, aligns with the overall strategy of your organisation.
Defining an employee’s goal with an organisational KPI ensures that their daily activities are well aligned with the goals of the organisation. This is the critical link between employee performance and organisational success.
Here’s an example of how organisational strategy cascades down to an individual team member’s goals and KPIs:
- Organisational Vision: to be known for high customer satisfaction and superior service.
- Organisational Objective: to reduce the number of dissatisfied customers by 25 percent.
- Organisational KPI: the number of customer complaints that remain unresolved at the end of a week.
- Team Member’s Goal: to increase the number of satisfactory complaint resolutions by 15 percent in this period.
- Team Member KPI: the weekly percentage difference in complaints handled that result in satisfied customers, as against unsatisfied customers.
Using KPIs for Recognition and Development
When you are satisfied that you have meaningful KPIs to measure the performance of your team, and of your organisation as a whole, make sure that the appropriate training, support and incentives are in place to enable your people to perform well.
When you establish your rewards and recognition practices, make sure that they relate directly to the KPIs you’ve set, and that you’re not rewarding potentially counterproductive behaviors.
For example, if you want to measure people on how well they deal with customer complaints, then rewarding them for reducing the number of complaints confuses the message you’re trying to send.
Intuitively, you may feel that the fewer complaints you receive, the better your customer service must be. But this is not necessarily true: you may be getting fewer complaints because you have fewer customers, or because your customers can’t access your support services.
Conversely, if your organisation wants to attract new customers, then you might have a KPI that measures how many new customers you gain each week. Depending on the situation, a well-aligned performance system may reward employees based on the number of new customers they personally help to attract.