KPI Guide - Definition, Examples & Best Practices
by Maddy Mirkovic, on Feb 19, 2019 9:39:12 PM
Questions about KPIs are frequently heard here at Cascade, whether that be from one of our 6000+ users or 60,000+ subscribers. It wasn't until we released our first mini-series on key performance indicator examples early last year that we realized there was so much confusion surrounding the subject. As a result, we decided to create a resource that addresses all the commonly asked questions we hear. Not only that, we'll also be providing examples, best practices, and an easy to follow process for creating great KPIs.
What Is A Key Performance Indicator?
A Key Performance Indicator (KPI) is a measurable value that shows the organization's progress towards achieving key business objectives. Organizations use KPIs to determine whether their key business objectives are on track, behind, ahead, or have been achieved. While this is how we (Cascade) define and describe key performance indicators, there are many other similar definitions. You can check some of them out below:
How Are KPIs Used in an Organization?
Key performance indicators are a form of communication in an organization. They inform business leaders of their organization's progress towards reaching key business objectives. KPIs are able to provide this information because they actually track the most important performance measures, which can be taken together to represent how successful you are being in achieving an objective. This information channel is extremely valuable as, in a well-designed strategy, an organization's key business objectives should have a direct impact on the organization's overall performance. Therefore, KPIs will communicate whether your activities are achieving, for example, business growth at the rate expected or not, and how much growth you've actually achieved.
KPIs also assist in identifying issues with organizational processes. If the progress on an objective falls behind, the key performance indicator associated with it will communicate this to business leaders as soon as the trend begins to show itself (assuming you have leading & lagging KPIs). The organization will know that something has gone wrong and an investigation is required. A strategy to mitigate the issue can then be created and implemented before it has far-reaching effects on the organization's performance.
How To Write KPIs
Creating KPIs should always begin by first articulating your key business objectives. This is necessary or you may end up with key performance indicators that don't correctly measure the success of your objectives. Often, people tasked with creating KPIs for their organization or department will turn to industry lists and copy common examples straight into their own strategy. The problem with this is that you risk applying KPIs that aren't relevant for your business. Industry lists and examples are useful, but should always be used after the key business objectives have been identified. Once you have a clear idea of the key business objectives, you can then use examples to ideate ways to measure your own objectives.
We've devised a simple and straightforward 4 step process for writing great KPIs.
- Determine Key Business Objectives
- Define Success
- Decide on Measurement
- Write SMART KPIs
If you'd like to learn more about the 4 step process, check out our detailed post on it here.
How Many Key Performance Indicators Do You Need?
The question of how many key performance indicators you need will vary with every company. However, we do have a framework which you can apply to help you assess how many KPIs you'll need to implement for your organization. The number you need will depend on how many key business objectives you have in your organization. As a rule, we generally say you should have 2-3 KPIs per objective, to ensure a variety of measures without overwhelming the picture. The reason we use a minimum of 2 KPIs as a rule, is because we believe each business objective should have at least 1 leading indicator and 1 lagging indicator. This allows you to predict future performance as well as record the actual performance and compare these to the direction of your business objective.
What Are Leading and Lagging KPIs
Leading and lagging KPIs are often mentioned when it comes to strategy, but what is the difference between the two? A leading KPI indicator is a measurable factor that changes before the company starts to follow a particular pattern or trend. Leading KPIs are used to predict changes in the company and future performance, but as predictors, they cannot always accurately forecast the future. On the other hand, a lagging KPI is a measurable fact that records the actual performance of an organization.
Leading key performance indicators are often easier to influence than lagging KPIs, however, generally measuring them can prove more difficult. Lagging KPIs, on the other hand, are usually easier to measure, though much harder to influence. If you'd like to learn more about Leading and Lagging KPIs, check out this post.
Examples by Business Area
To help you ideate, we've compiled a list of common KPIs from different functions and disciplines within the organization. Selecting the right KPI will depend on your industry, which area of your business you're looking to track, and the key business objective you're hoping to measure. To help you along, we've created a library grouped by various business departments. Click on the business area to learn more.
Examples by Industry
We've also compiled a list of common KPIs for different industries. Click the industry to learn more.
Creating relevant, measurable and time-bound key performance indicators is great, but it's only half the job done. The other half (which can often go overlooked) comes down to figuring out how to report on them appropriately and accurately. While it can be tough setting up this kind of reporting, if you don't create an easy way for business leaders to view and stay on top of progress, the KPIs aren't going to be much use. A KPI report is a presentation which displays and communicates the current performance of an organization compared to its business objectives. It's a tool used by management in order to analyze performance and identify issues. These reports can take many formats, including formal written reports, spreadsheets, powerpoint slides, or dashboards.
Creating a KPI dashboard is a great way to provide at-a-glance views of key performance indicators relevant to a specific business objective, department, or the whole organization. Now, before your eyes glaze over with boredom as another business term is introduced, dashboards are just another name for a progress report. However, what makes dashboards more powerful than your typical business report is that they're usually hooked up to business systems so the data is automatically updated. The benefit of this is it ensures the data is always relevant, as it doesn't rely on someone in the organization continuously updating numbers. This is just one of the many benefits of using dashboard software for your strategy report.
Dashboards also give you total visibility of your business performance instantly, display KPI progress in a visual presentation to keep reporting engaging, and save time when compared to the hours poured into creating regular reports. If you're looking for help creating a great KPI dashboard, check out this article we wrote a little while back. We walk through how to set up a great strategy dashboard which includes all your business KPIs for an instant snapshot of your performance. We'll also be adding more examples of key performance indicator dashboards for specific department in the coming months.