If you ask most people in business to define the term KPI, they will always answer with Key Performance Indicator. While people may think they have responded to the question correctly, they have missed it entirely. KPI is an acronym that stands for Key Performance Indicator. If you pin someone down and ask them to provide a real definition, things start to break down.
Here are some actual replies from friends and colleagues when I asked them to quickly provide a real Marion Webster-like definition of “Key Performance Indicator”; here are the answers to that question.
“The sales & marketing metrics used to track progress.”
… Frank, Dir of Sales, Telephony Company
“What Management Tracks to cover their ass, the basic performance metrics for the departments.”
… Marc, General Council, Software Firm
“Things leadership measures to ensure we are doing everything that they think we should be doing to accomplish the business’s goals.”
… Todd, Sr Sales Executive, Software Firm
“The ongoing items reviewed by upper-management that ensure we are getting things done.”
… Lori, Credit Analysis, Mortgage Company
So, as you can see, people have a general idea of how to define an actual KPI. The issue is that their definition of a KPI is somewhat role-based. Additionally, their interpretation is impacted by their level of job seniority.
So, since most everyone would agree that defining the term “Key Performance Indicator” can be tough, I will review and breakdown the term “Key Performance Indicator” its self.
KPI Literal Definition
– Something that is vital or an important aspect.
Everything you may want to measure cannot be considered Key. You need to start with 3 to 5 per department or role.
Examples could be:
- Sales Revenue
- Cash Burned
- Billable Hours
– The action or process of carrying out or accomplishing an action, task, or function.
To measure performance, you need to have what is considered a success for each Key item.
Examples could be:
- Assigned revenue goal attainment
- Cash Burn rate vs. Business Plan
- Billable Hours vs. Available Manhours
– A trend or fact, that indicates the state or level of something.
An indicator would be an assigned number, percentage or rating.
Examples could be:
- Percentage obtained
- Net Cash Flow
- The percent of Manhours billed
Based on the what was just reviewed, the following is the correct answers to the question, “Please define the term KPI.”
KPIs are the critical (key) indicators of the performance toward an intended result or goal.
KPIs provide a focal point for deliberate and operational improvement, establish an analytical basis for a decision support system, creating actionable insights and help focus attention on what matters most.
What’s Your KPI?
So, now that we have established the definition for KPIs, you need to understand how to create the right KPIs for your company or department. You need to start with what are the things that make your company or department tremendous or unique. You must be able to examine your success and understand your failures critically.
Look for things like:
- What do successful reps repeat in order to overachieve consistently?
- Why do hard working reps fail to meet their sales quota?
- What is your trailing weekly, monthly and quarterly cash balance?
- What impacts your cash balance above and below the trailing average?
- What projects or cases contribute the most billable hours?
- What activities are occurring that are going unbilled?
“What get measured gets done”
Once you create your KPIs, you will need to work towards implementing them and putting the KPIs to work. The core categories for successfully deploying new KPIs are:
Gain buy-in from those that will be the focus of the KPIs. This could include Sales People, Attorneys, Accounts, etc. It is important that these people understand that measuring KPIs are not a form of micro-management, it’s an indicator system to repeat success and change course before a failure.
Be transparent with your KPI measurements. People must be confident that KPIs which involve their performance will be shared with them and other relevant team members in an extremely regular fashion. This transparency includes not only employees, but it must also include partners and vendors.
You must commit to revisit and reset. Being upfront with your team when and how you will be reviewing the merit of the KPI and the components making up that KPI.
Be sure that compensation plans do not conflict with driving positive KPI results.
Be sure that your KPIs are relevant to your company’s direction. Measuring for measurement sake without consideration of your business plan will only discredit the merit of your newly formed KIPs.
Keep in mind that KPIs are best when kept simple and easily understood. Be sure you can deliver an “elevator pitch” for each of your KPIs, to anyone, anytime. You want your KPIs to allow for the most efficient way to stay on course. As Peter Drucker coined, “What gets measured gets done.”