Key Performance Indicators (KPIs): Definition, Types and Examples

 

Key Performance Indicator (KPI): Definition, Types, and Examples


 

What are key Performance Indicators (KPIs)?

Key Performance Indicators (KPIs) are a set of quantitative metrics used to measure a company's overall performance over a long period of time. KPIs help determine a company's strategic, financial and operational performance, especially when compared to other companies in its industry.

In this article, you know:

• Key Performance Indicators (KPIs) compare a company's success to its results. A set of goals, objectives or industry peers.

• KPIs can be financial, including net profit (or net profit), profit after deducting certain expenses, or current ratios (liquidity and cash).

• Customer-centric KPIs typically focus on customer-specific efficiency, customer satisfaction, and customer retention.

• Process-focused KPIs are designed to measure and monitor operational performance within the organization.

• Companies typically use analytics software and reporting tools to measure and monitor KPIs.

Understand Key Performance Indicators (KPIs)

KPIs, also known as key success indicators (KSI), vary from company to company and industry to industry based on performance criteria. For example, a software company targeting the fastest growth in its industry might consider year-over-year (YOY) revenue growth as a key performance indicator.

Instead, retail chains can focus more on same-store sales as the best KPI to measure growth.

The basis of KPI is the collection, storage, organization and synthesis of data. The information can be financial or non-financial and can refer to any department of the company. The purpose of KPIs is to succinctly communicate results so that management can make more informed strategic decisions.

Key performance indicators (KPIs) measure a company's performance against a set of goals, objectives, or industry peers. 

 

Categories  of KPIs

Most KPIs fall into four categories, each with their own characteristics, time period, and audience.

1. Strategic KPIs are usually at the highest level: These types of KPIs can show how a company is doing, but they don't provide much information beyond a very high-level picture. Management often uses strategic KPIs, examples of strategic KPIs include return on investment, profit margin, and total company revenue.

2. Operational KPIs are focused on a much narrower timeframe: These KPIs measure a company's monthly (or daily) performance by analyzing different processes, sectors or geographic locations. These operational KPIs are often used by management to analyze questions that arise from strategic KPI analysis. For example, if management notices that sales within the company are down, they might investigate which product lines are having problems.

3. Functional KPIs target a specific department or function within a company: For example, the finance department can track how many new suppliers are included each month in the accounting information system; while the marketing department can measure how many times each email distribution is clicked. These types of KPIs can be strategic or operational, but they provide the most value to certain user groups.

4. Leading/Lagging KPIs describe the nature of the data being analyzed and whether it is a signal of something to come or something that has already happened. Consider two different KPIs: overtime and profit margins for key products. When a company starts to see a decline in production quality, overtime can become a key KPI. Alternatively, profit margin is a result of operations and is considered a lagging indicator. 

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Types of KPIs

Financial Metrics and KPIs

Key performance indicators related to financing typically focus on revenue and profit margins. The most proven revenue-based measure is net profit. This represents the amount of sales that remains as profit in a given period after taking into account all of the company's expenses, taxes and interest payments during that period. Financial measures can be obtained through a company's financial statements. However, it may be more useful for internal executives to analyze a variety of more specific numbers to analyze the problem or aspect of the business that management wants to analyze. For example, a company may use variable costing to recalculate certain account balances solely for internal analysis.

Examples of Financial KPIs include:

• Liquidity Ratio (i.e Current Assets divided by Current Liabilities): This type of KPI measures how well a company manages its short-term liabilities relative to the current assets it has.

• Profitability Indicators (eg net profit margin): This type of KPI measures how well a company is doing at generating revenue while keeping costs low.

• Solvency Indicators (eg total Liabilities to Total Assets): This type of KPI measures the long-term financial health of a company by assessing how well it can service its long-term debt.

• Turnover (e.g Inventory Turnover): This type of KPI measures how quickly a company can complete a certain task. For example, inventory turnover measures how quickly a company turns inventory into sales. Companies try to increase sales to spend their pocket money faster and to recoup that money later through profits.

 

Customer Experience Metrics and KPls

Customer-centric KPIs typically focus on customer-specific efficiency, customer satisfaction, and customer retention. These metrics are used by our customer service team to better understand the service our customers receive.

Examples of customer-oriented values ​​include:

• New ticket requests: This KPI counts the number of customer service requests and measures the number of new and unresolved issues customers have.

• Number of resolved tickets: This KPI counts the number of requests that were successfully resolved. By comparing the number of requests to the number of solutions, companies can gauge their success rate in handling customer requests.

• Average Time to Resolution: This KPI is the average time it takes to help a customer resolve their issue. Businesses can choose to categorize average resolution times by different queries (for example, those related to technical issues).

• Average Response Time: This KPI is the average time it takes a customer service representative to first contact a customer after submitting a customer request. Even if the first agent doesn't have the knowledge or experience to provide a solution, businesses can find value in reducing customer wait times for help.

• Customer Service Representative Excellence: This KPI is a combination of all of the above metrics referenced by customer service representatives. For example, in addition to analyzing the average response time within the company, a company can identify the fastest and three slowest responders.

• Types of requests: This KPI is the number of different types of requests. This KPI will help you better understand what customer problems your company needs to solve (ie, if your company's website is bad or provides inaccurate instructions).

• Measuring customer satisfaction: This is a vague KPI, but companies can conduct post-interaction surveys to gather more information about the customer experience. KPIs are generally not required externally. These are simply internal metrics that management uses to evaluate the company's performance.

 

Process Performance Indicators and KPIs

Process indicators are designed to measure and monitor the operational performance of an organization. These KPIs look at how work is being done and whether there are process, quality or performance issues. These types of metrics are especially useful for companies with repetitive processes, such as manufacturing companies or companies in cyclical industries.

Examples of Process Performance Indicators Include:

• Production efficiency: This KPI is often measured as production time per step divided by total processing time. A company may aim to spend only 2% of its time sourcing raw materials. A company can aim to improve its hiring process if it determines that it takes 5% of the total process.

• Total cycle time: This KPI is the total time required to complete a process from start to finish. If management wants to analyze a process over a period of time, it can convert it to average cycle time.

• Throughput: This KPI is the number of units produced divided by the production time per unit and measures how fast the production process is running.

• Error Rate: This KPI is the total number of errors divided by the total number of units produced. Companies looking to reduce waste can better understand how many items fail quality control tests.

• Quality Percentage: This KPI focuses on the positive items produced rather than the negative items. This percentage of successfully completed units divided by the total number of units produced indicates to management the level of success in meeting quality standards.

 

Marketing KPIs

Marketing KPIs try to better understand how effective your marketing and advertising campaigns are. These metrics measure conversation velocity, how often prospects take specific actions in response to certain marketing experiences.

Examples of marketing KPIs include:

• Site Traffic: This KPI tracks the number of people who visit specific pages on your company's website. Executives can use this KPI to better understand if online traffic is flowing through potential sales channels and if customers are not being properly targeted.

• Social Media Traffic: This KPI tracks comments, followers, likes, rewets, shares, engagement, and other measurable interactions between customers and your company's social media profiles.

• Conversion rates for call-to-action content: These KPIs translate into targeted advertising programs that prompt customers to take specific actions. For example, certain promotions might encourage customers to take action before a certain sale date ends. Companies can determine the percentage of customers who responded to a call to action by dividing the number of successful engagements by the total number of content distributions.

• Number of blog posts published per month: This KPI simply counts the number of blog posts published by the company in a given month.

• Click Rate: This KPI measures the actual number of clicks on an email distribution. For example, some programs may allow you to track the number of customers who open an email distribution, click a link, and complete a sale.

 

IT KPIs

A company may want operational excellence. In this case, the company can monitor the performance of its internal technology (IT) department. These KPIs provide a better understanding of employee and IT staff satisfaction.

Examples of IT KPIs include:

• Total System Downtime: This KPI measures the amount of time different systems need to be offline for system upgrades or repairs. If a system fails, customers may not be able to place orders or employees may be unable to perform certain tasks (for example, if your accounting information system is down).

• Number of tickets/resolutions: This KPI is similar to the Customer Service KPI. However, these tickets and resolutions are related to internal staff requests, such as hardware or software requirements, network issues, or other internal technical issues.

• Number of features developed: This KPI measures internal product development by quantifying the number of product changes.

• Number of serious errors: This KPI counts the number of serious problems in a system or program. Companies must have internal standards regarding minors and minors.

• Backup Frequency: This KPI measures how often important data is backed up and stored in a secure location. Management may assign different purposes to different information depending on record-keeping requirements.

 

Sales KPIs

The ultimate goal of a business is to make a profit through sales. While revenue is often measured using financial KPIs, sales KPIs take a more granular approach, using non-financial data to better understand the sales process.

Examples of sales KPIs include:

• Customer Lifetime Value (CLV): This KPI shows the total amount a customer is expected to spend on a product over the course of the entire business relationship.

• Customer Acquisition Cost (CAC): This KPI represents the total sales and marketing costs required to acquire a new customer. By comparing CAC and CLV, companies can measure the effectiveness of their customer acquisition efforts.

• Average Dollar Value of New Contracts: This KPI measures the average size of new contracts. A company may have a higher or lower desired customer acquisition threshold.

• Average conversion time: This KPI measures the time from initial contact with a potential customer to obtaining a signed business contract.

• Number of Leads Engaged: This KPI counts the number of leads that were contacted or met. This measurement can be further broken down by media such as visits, emails, phone calls or other customer contact.

 

Human Resource and Staffing KPIs

It can be useful for companies to analyze KPIs for each employee. From revenue retention to satisfaction, companies gain a wealth of information about their employees.

Examples of HR or personnel KPIs include:

• Absenteeism rate: This KPI is the number of days in a year or period that employees report being sick or missing a shift. This KPI can be a key indicator of disengaged or dissatisfied employees.

• Number of overtime hours: This KPI tracks overtime hours to determine employee fatigue and compliance with staffing levels.

• Employee satisfaction: This KPI often requires a company-wide survey to find out what employees think about different aspects of the company. To get the most value from these KPIs, companies should consider conducting the same survey each year to monitor year-over-year changes to the same questions.

• Employee turnover: This KPI measures the frequency and speed with which employees leave their positions. Companies can break these KPIs down further by department or team to determine why certain positions have higher turnover rates than others.

• Number of applicants: This KPI tracks the number of applications submitted for open positions. These KPIs help you gauge whether your job vacancy is reaching a large enough audience to generate interest and attract strong candidates.

 
Examples of KPIs

To see some examples of KPIs in action, consider electric car maker Tesla (TSLA). This figure is from the fourth quarter (Q4) 2021.

Vehicle Production

During the quarter, Tesla produced a record 305,840 vehicles and delivered 308,650 vehicles.1 Production is a major issue for the company, which has been consistently criticized for not growing. As production increases, Tesla's market share and profits increase.

Automotive Gross Margin

Tesla's automotive gross margin rose to 30.6% in the quarter.2 Gross margin is one of the best measures of Tesla's profitability because it isolates the cost of manufacturing its vehicles. Tesla managed to expand its gross margin in the fourth quarter, even as sales of lower-cost models outpaced higher-margin models.1

Free Cash Flow

Tesla's free cash flow during the quarter was $2.8 billion. This is a significant improvement over the previous year's free cash flow of $1.9 billion.2 Tesla's free cash flow generation rate indicates that the company has been able to break even without the help of regulatory borrowing.

 

KPI Levels

Companies can use KPIs at three broad levels:

First, company-wide KPIs focus on the overall health and performance of the company. These types of KPIs are useful for informing management about how things are going. However, it is often not detailed enough to make a decision. Company-wide KPIs are often the starting point for conversations about why a particular department is performing well or poorly.

At this point, companies often turn to departmental KPIs. These are more specific than general company KPIs. Departmental KPIs often provide more insight into why certain results are occurring. Most of the examples above are department-level KPIs because they focus on very niche aspects of the business.

If your company digs deeper, you can reference KPIs at the project or department level.

These KPIs are often specifically requested by management as they may require very specific data sets that are not readily available. For example, management may want to ask the control group very specific questions about the feasibility of launching a product.

When creating a KPI report, start by showing the highest level of data, such as total company revenue. Next, prepare to display lower-level data (for example, revenue by department, revenue by department and product).

 

How to Create a KPI Report

As companies collect more data every day, it can be difficult to sift through the information and determine which KPIs are most useful and impactful for decision making.

 

Consider the following Steps when Starting to Create a KPI Dashboard or Report:

1. Discuss your goals and intentions with your business partner: KPIs are only as good as you make them. Before creating a KPI report, you need to understand what you or your business partners are trying to achieve.

2. Establish SMART KPI requirements: KPIs should have boundaries and be linked to SMART (Specific, Measurable, Achievable, Realistic and Time-bound) indicators. These are unrealistic KPIs that are vague, hard to define and have little or no value. Instead, focus on information that meets the requirements of the SMART acronym.

3. Be adaptable: As you write your KPI report, be prepared for new business issues to arise and focus on other areas. As your business and customer needs change, KPIs must also adapt to changing certain values, metrics and operational developments.

4. Avoid multiple users: It can be tempting to overload report users with KPIs until they fit in the report. At some point, KPIs become difficult to understand and it becomes difficult to decide which metrics to focus on.

 

The Benefits of KPIs

Companies may want to analyze KPIs for a number of reasons. KPIs help management provide insight into specific issues. A data-driven approach provides quantitative information useful for strategic planning and improving operational efficiency.

KPIs help employees feel accountable. KPIs are not based on feelings or emotions, are statistically supported and cannot discriminate against employees. When used correctly, KPIs help motivate employees because they understand that their numbers are being closely monitored.

KPIs also serve as a bridge between actual business operations and goals. A company can set goals, but if it can't monitor the achievement of the goals, those plans are of little or no use. Instead, KPIs allow companies to set goals and monitor progress toward those goals.

 

Limitations of KPIs

There are some downsides to consider when using KPIs. 

KPIs can take a long time to generate meaningful data. For example, a company may need to collect annual data from employees to better understand long-term satisfaction trends.

To be useful, KPIs require continuous and careful monitoring. A KPI report that is prepared but not analyzed is of no use.

Furthermore, KPIs that are not continuously monitored for accuracy and validity do not contribute to useful decisions. 

KPIs allow managers to “play” KPIs. Instead of actually focusing on improving processes or outcomes, managers may feel motivated to focus on improving the KPIs associated with performance bonuses.

Additionally, if managers focus too much on performance KPIs, quality may suffer and employees may feel undue pressure to meet unrealistic KPIs.

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