Key performance indicators help evaluate the performance of the business or a particular individual or activity done by him/her. Key performance indicators (KPIs) for performance management enable business leaders, manager and employees effectively monitor the achievement of the various business functions, which in turn facilitate the achievement of the business objectives.
KPIs are a simple tracking tool that any business can adopt. Contrary to analyzing data from the various activities, KPIs are best used to summarise relevant data and provide a future vision on business performance.
Implementing KPIs into the business can be done with relative ease. All that is required is an effective data collection and tracking systems.
Michael J. Mauboussin, of Credit Suisse Group, states that for KPIs to be effective they need to pass the test of being ‘persistent and predictive’. KPI being persistent refers to the ability to measure a consistent set of input data and predictive nature of KPI refers to the presence of a direct relationship between the action of the data being measured and the desired outcome.
Define the objective
It is necessary to define the objective of the business. For example, a business may select its objective to grow sales. With the business objective set, it enables the setting of KPIs according to the functions or department. For the business goal of increasing sales, KPI could be YoY sales trends, re-purchase volume trend and average customer spend trend.
Determine the ‘Cause and Effect’ relationships of KPIs
Having the KPIs relevant and aligned to the objective is very important as it would help develop strategies for achievement of the objective. With each KPI, businesses should identify the correlation between the KPIs and the achievement of the objective for the business. For a business focused on driving sales for its products, then KPIs such as re-purchases, customer satisfaction level, number of complaints, etc. can be relevant and would help business in achieving its business objective.
Use a combination of lagging vs leading KPIs
Use a combination of lagging and leading indicator for KPIs. Having the right balance of leading and lagging KPIs enables the business to accurately gauge historical performance and predict future performance. With the right balance, KPI can accurately track performance and suggested a combination of KPI is a combination of quantitative figures like sales volume, sales value and non-qualitative factors like customer reviews, brand equity.
Lagging indicators refers to indicators which can be measured based on historical performance data. Also, a good lagging indicator in this month does not guarantee a good result next month. Leading indicators provide insights on where the business is headed to in the future. For example, operating profit is a lagging indicator while customer loyalty is a leading indicator.
Run a test
You need not to wait to decide whether the selected KPI is relevant or not. With access to historical data in a click, run your KPI tracking over them for a specified period of time. Relate the KPI data to then the business outcome. This would quicken the process of KPI adoption and track as you can judge the effectiveness of KPIs impartially.Add to favorites