M&L15: Principles of leadership and management

Handout4: Setting KPIs

Key Performance Indicators

DEFINITION of Key Performance Indicators (KPIs):

A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their strategic and operational goals. KPIs vary between companies and industries, depending on their priorities or performance criteria.

Many managers and business strategists use the mantra ‘If you can’t measure it, you can’t manage it’ to justify the development of KPIs in business. This statement is true in the basic sense but it’s vital to understand what should be measured and the most effective way to do it.

KPIs cover many areas and there are different measures for different roles. Typical KPI examples are:

  • cost of sales
  • sales against target
  • sales conversion rates
  • delivery on time
  • employee turnover
  • number of new ideas generated
  • how many ideas become profitable
  • customer acquisition
  • error rate
  • customer complaints.

Whatever Key Performance Indicators are selected, they must reflect the organisation's goals, and they must be measurable in order to be beneficial to the organisation.

  • ‘Generate More Repeat Customers’ is useless as a KPI without some way to distinguish between new and repeat customers.
  • ‘Be The Most Popular Company’ is not an effective KPI because there is no way to measure the company's popularity or compare it to others.

A good example of a clear, measurable KPI is:

  • ‘Reduce turnover by five percent per year’

This is a clear target that everyone will understand and be able to take specific action to accomplish.

This management tool is useful in monitoring and reporting on performance. Measurable outcomes cannot be disputed and it can provide a basis for development.

The following activities should be completed in order to set effective KPIs.

  • Establish organisational goals and objectives
    Before you can drive performance standards, you need to have a clear picture of the core processes and overall objectives.
  • Establish roles, responsibilities and key success factors
    To ensure KPIs are effective it must be clear who is responsible for each step of the process.
  • Consult with relevant stakeholders
    Make sure everyone with a financial or practical interest is involved to ensure a clear flow of information.
  • Use historical data to identify performance trends
    This forms a quantitative base for new KPIs
  • Set KPIs most critical for business success
    This focusses the effort on the most important factors and standards
  • Set target and review date
    To close the loop on the overall process and to identify improvements for future setting