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What is a KPI?

Posted on 06/09/2016, 08:22

KPI stands for Key Performance Indicator – essentially just a way of saying “a measure of how your business is performing”.  The critical part is, however, the word ‘Key’.  ‘Key’ performance indicators are quite different from common-or-garden performance indicators.

In a business, pretty much anything you measure related to producing and selling your product is a performance indicator. Theoretically, you could have as many measures as you have the time and imagination to make up.

But here’s the tricky part: every measure you implement costs you time and money.  People have to collect the data about what they’re doing and submit reports; someone has to aggregate it up; someone has to analyse it, publish the result and write some commentary about what it means; someone has to review it. And for there to be any value in the whole process, someone has to make sensible decisions as a result of all of this measurement, analysis and publication.

To be a good performance indicator, the ones you select must fulfil the following 3 criteria:

  1. The underlying data must be relatively easy to capture so that it is accurate, timely and economically viable to collect.
  2. The data must give you a meaningful insight into the health of whatever it is supposedly measuring.
  3. Whatever it is that you are measuring needs to be fundamental to the progress of your business goal.

The last two points are especially important.  Business goals are usually financial and can take a long time to come to fruition, e.g. a business growth objective or £x sales or a Y% increase in profit. You know when they are achieved only once it has happened. Relying purely on the financial indicators would therefore be like driving a car using only the rear view mirror – you can only see where you have been. We call these sorts of performance indicators ‘lagging indicators’ because they tell you that something has happened.

Well-chosen KPIs provide insight into what is happening now. The achievement of a goal may be conditional on upstream activity, e.g. In the case of a new product launch, identifying and communicating with a certain group of customers. If the activity doesn’t happen on time and at the desired volume it is a warning sign that the overall goal is under threat. KPIs are therefore a vital navigation tool, key to the business plan and compliment the management accounts, to give the business an understanding of whether it’s headed in the right direction.

The problem with KPIs

The problem with KPIs is selecting the right ones for your business. Research finds that less than 10% of all the metrics that are collected, analysed and reported in businesses are ever used to inform decision-making. 90% of the metrics are wasted, or worse, used to drown people in data while they are thirsting for insights.

(Advanced Performance Institute)

Using the “right” KPIs

Effective business owners understand that they need real time information on the key parts their business and that this can be achieved by designing, collecting and reviewing KPIs.

The most effective KPIs are closely tied to the business’ strategic objectives. A good starting point is to identify a couple of relevant indicators for each strategic objective. This can be done by asking the question “what are the upstream things that need to be done in order to achieve the desired result?”

We have long experience of helping to develop, implement and interpret KPIs.  We use them as the basis of our business coaching and support so that we know we are adding value to your business. If you would like to know more about KPIs and how they can benefit your business, contact us now.

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