What Does KPI Mean?: An Introduction for New Leaders

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As businesses evolve, leaders need to understand how they’re performing. Many businesses use key performance indicators (KPIs) to quantify business metrics and standardize performance reviews. The first step to implementing a KPI review process is to understand KPIs and how they can be defined for various business segments.

 

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What is a KPI?

KPIs are quantifiable measurements that help businesses assess how effectively they’re achieving operational and strategic goals. KPIs are specific to departments, companies and industries. Each measures a specific element such as sales, the number of hours employees are working, or speed to market. 

 

KPI reports can help companies understand how a business performs overall and which factors contribute to success. For example, if speed to market and sales are both increasing, a business owner may conclude that a quicker speed to market also boosts sales. Some examples of KPIs for various segments include:

 

  • Sales: Measuring profit margins, unit sales and the number of new customers can quantify performance.
  • IT: Calculating web processing speeds, number of clicks per page and the efficacy of cybersecurity protocols can demonstrate IT effectiveness.
  • Marketing:  Analyzing daily web page views, ad click conversion rates and traffic resulting from media advertisements can indicate if marketing strategies are persuasive.
  • Human resources (HR): Employee satisfaction, retention rates, time to hire and cost per hire are some of the KPIs that illustrate the efficiency of HR processes.
  • Customer support team: Call times, hold times, number of phone calls versus online customer chats are some ways to measure the efficiency of customer support.

Related: How to Grow Your Business

 

The benefits of KPIs

KPIs track trends over time. They also analyze factors that a business can control, so measurements should be precise in order to reveal the most useful insights. Three benefits of KPIs are:

 

  1. Targeted efficiency analysis
  2. Focused goals and strategies
  3. Increased business growth

 

1. Targeted efficiency analysis

KPIs accurately capture performance metrics for individual departments and processes. Because each business segment is unique, managers must determine the most beneficial elements to evaluate. After establishing metrics, KPIs must be regularly reviewed and adjusted continually to align with business needs.

 

2. Focused goals and strategies

Effective KPIs can be generated from balanced reports of the entire business. A detailed business strategy helps managers develop KPIs that target specific areas such as financial metrics, personnel efforts and customer service response times.

 

3. Increased business growth

Regular reviews of KPI reports can help you quickly measure the effectiveness of business strategies so you can adjust goals and processes to increase growth.

 

Top KPI tips

Here are some tips for using KPIs effectively:

 

  • KPIs must be specific, quantifiable and appropriate for indicating performance over time.
  • SMART goals are ideal for developing KPIs. The acronym SMART stands for specific, measurable, achievable, relevant and time-based. 
  • Inevitably, businesses change. If KPIs become irrelevant, they should be adjusted.
  • A strong IT infrastructure and internal systems that communicate across platforms are needed. KPI systems pull information from across departments and compile it into readable performance charts.

KPI FAQs

KPIs are often new projects for managers and businesses. Here are two of the most commonly asked questions about KPIs:

 

How can I define a business KPI?

Individual departments use measurements to track specific goals. Including all of these metrics, however, may or may not add value to a business-level report. To determine which KPIs should be used, follow these steps:

  1. Specify your desired outcome and why it’s important to your business.
  2. Consider which KPIs measure your company’s progress.
  3. Establish metrics that allow you to see when the business has achieved desired outcomes.
  4. Determine how often KPIs and progress towards your goal will be reviewed.

 

How are KPIs linked to performance management?

In addition to overall financial health, KPI reports show progress on business objectives. Managers can use these specific KPIs in performance reviews.

 

Related: How to Conduct an Employee Evaluation

 

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