For a growing business to remain competitive, it’s important to regularly track how its company-wide goals are progressing. Setting key performance indicators (KPIs) is one of the easiest ways to do this.
But for KPIs to be effective, it’s important that they are actionable and easy to understand.
Read on to find out the five features that make an effective KPI and how to measure them in your business.
A KPI should be simple, straightforward and easy to measure. Business analytics expert Jay Liebowitz says that an effective KPI is one that “prompts decisions, not additional questions.” For example, “How many customers did we add this quarter?” is clear and simple.
Everyone involved in a goal should be able to recognize their role in enacting a KPI. If a goal is clear, staff can make practical decisions that lead to achieving the desired outcome.
As important as it is for a KPI to be simple, it must also be relevant to a specific team within an organization. A question such as, “Are people who are buying printers also buying ink?” is most useful for sales managers. This KPI can help the sales manager better understand where additional cross-sell opportunities lie within an existing customer base.
Relevance ensures the right decision makers are responsible for measuring specific KPIs — increasing the likelihood of a successful outcome.
KPIs should always trickle down from the overall strategic goals of an organization. As a result, they need to be aligned and not unintentionally undermine each other.
While some organizations focus on attracting and acquiring an ever-growing number of new customers, for other businesses this may not work inside the overall vision.
For example, a business that places emphasis customer service would have a more central focus on customer retention than acquisition. An example of a KPI for this type of business might be, “How many clients has sales rep X visited this month?”
Make sure that KPIs are always supporting the overall goals of the organization.
It’s no use building KPIs for the sake of it. Managers should want to build KPIs that positively affect the company. As such, not only should they be easy to understand, but employees should also know how to achieve an effective outcome. Setting unachievable goals can be a big de-motivator for employees. The more realistic the goal of a KPI is, the more likely teams are to reach it.
Instead of setting large, complex goals, an organization might want to start small. By setting short-term goals that challenge employees but don’t overwhelm them, an organization can not only track the progress of a KPI, but also boost morale.
It might seem obvious, but a KPI should be easy to measure. An effective KPI avoids generalized goals like, “Improvement in warehouse department.” Instead, an effective KPI should be based on a solid, focused goal that can produce qualitative and quantitative measures. A good example could be to 'decrease dead stock by 20% within the next quarter'.
A good way to measure a KPI is with a business intelligence (BI) solution. BI aggregates all the data from your various systems and gives you a single source of truth, making it easy to analyze. A good BI solution will let you ask questions of your data to make critical decisions based on facts rather than gut feel.
Not only will you be better placed to accurately and effectively measure your KPIs, you will also have more detailed insights into how your business is performing, leading to more informed forecasts and decision making.
Choosing the right BI solution to measure your KPIs
As BI becomes more common, it can be tricky to find a provider that delivers exactly what you need. While some vendors offer BI tools that can be difficult to use, a provider such as Phocas offers a whole-of-business solution that can be used by anyone in the company.
Phocas Software helps thousands of manufacturing, distribution and retail customers around the world use data to identify opportunities, grow profits and increase efficiencies.
It’s an intuitive, user-friendly solution for all skill levels that becomes your single source of truth.
To learn more about the most effective KPIs, and how you can use them to improve your business, download a free copy of our eBook ‘The top 7 KPIs for CEOs and Executives’.