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5 Qualities that Make KPIs Effective and 5 Steps to Define a KPI [Business Metrics]

 

Part 1
Definitions

What Are Business Metrics?

Business metrics are quantifiable measurements that are used to track, measure, and analyze the impact of business processes.

Each stakeholder has a specific metric that is important to them, and leaders need to remember this when putting parameters in place to gather data. Business metrics should address interactions and engagement with various key stakeholders: investors, customers, and multiple types of employees.

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It is difficult to improve what is not measured and a businesses’ dedication to measuring the impact of the business processes will determine how successful it is in meeting goals and objectives. This brings us to the importance of KPIs, and how business metrics cannot survive without them.

What Is a KPI and What Makes It Useful?

What are your strategic goals? What are those detailed metrics that get to the heart of a problem or hypothesis? These are Key Performance Indicators (KPIs). KPIs are used to help managers, and their teams assess how close they are to meeting a goal. They are vital in assisting companies to improve on specific metrics that will, in turn, improve overall business processes. They are useful because they allow managers and department leaders to drill down into particular data points that may be a part of a more significant issue.

Instead of just addressing increased revenue growth as a whole, KPIs will instead look at a segment of this goal. For example, revenue could be low, and the main problem could be poor customer service which is driving customers away. A KPI could be the average hold time for customers who are on the phone, or the percentage of times a customer service representative was able to solve the problem without needing to refer it to someone else. Tracking these data points gives leaders a glimpse into what can improve a lagging business performance metric. If revenue does increase, then managers and leaders can always come back to these metrics to see their impact on customer service satisfaction.

Part 2
5 Main Qualities That Make KPIs Effective

There is a reason why KPIs are now a primary buzzword in most innovative workplaces. However, they are not only helpful in theory, but they can take another organization to the next level if they are implemented correctly. KPIs are most effective when they are:

  1. Relevant

    Those who need the results most are in charge of managing them. A marketing manager is going to be concerned with web analytics, while an executive wants to know the ROI on overall business metrics. The challenge of the leader is to get the right KPIs to the right people.

  2. Strategically Aligned

    KPIs are not useful if they do not align with overall business goals and objectives. What is the long-term strategic plan? KPIs should address this. It does not make sense to measure data points that do not have a direct impact on the overall goals of the business.

  3. Realistic

    Every company should challenge themselves, this is how change and innovation happen. However, leaders need to make sure that KPI metrics are not impossible. If they are, then it can seriously hurt morale or de-motivate employees. Companies have to strike the right balance between achievable and reach. If goals are being met too quickly, then leaders should go back to the drawing board to figure out how they can challenge departments.

  4. Measure What Is Critical

    A long list of KPIs will not do the trick. Leaders need only to measure what is crucial to a specific department’s success. Many times, companies will only have three to five critical KPI measurements. This ensures that only what is most important is measured. Too many KPIs can take attention away from what needs to be the focus.

  5. Predictive

    One of the primary purposes of KPIs is to use the results to make projections about correlations. KPIs “indicate” how specific important measurements are impacting broader business goals. These results should help leaders make intelligent conjectures about what they can do to create better outcomes.

Part 3
How to Define a KPI – 5 Steps

Some use KPIs and business metrics interchangeably, but they are markedly different. Business metrics are typically used to track all areas of the business. It is a broad and general measurement. KPIs are used to measure particular and critical areas of performance. There are specific ways that leaders can help departments define KPIs.

  1. Gather key leaders from each department and discuss problems and issues their departments are facing. Connect these issues to overall business goals and objectives to begin the process of defining KPIs.
  2. To get a better idea of the problem in each department, have leaders conduct a SWOT analysis (Strength, Weakness, Opportunities, and Threats).
  3. Begin to decipher how the weaknesses and threats posed by each department impact essential business topics like revenue or customer satisfaction. A great way to begin to define KPIs is by using the IPA rule:A.

     Is the measurement important?
    B. Does it have the potential to be improved?
    C. Does the department have the authority to change this indicator?If all of these can be checked off, then the proposed metric can be turned into a KPI.

  4. Also, each KPI should be consistent and reliable enough to produce the same results over time. This reliability will help leaders also predict based on a correlation between the projected KPIs and overall business goals.
  5. Use the findings to determine KPIs that align with business goals and overall strategy. They should be defined as either overall business KPIs or departmental. Each will have a different impact on how the organization tracks them and applies their results to overall business metrics.

Part 4
KPI and Business Metrics Best Practices

  • Ease the Concerns of Employees

    For some, when leaders want to begin measuring progress, this can be an indicator of management trying to weed out low-performing employees or those who are not a “fit.” Leaders need to be transparent with employees about the need for KPIs and how this informs overall business metrics. It is important to get employees comfortable with the idea of measurement, and how the results can improve business workflows and make their jobs more effective. The goal is not to overwhelm workers. This may be the first time they hear about metrics, and some may have never heard about KPIs. Therefore, it is essential to open the lines of communication and discuss why this is necessary.

  • Keep Everyone Up-To-Date on Progress

    You do not watch a sports game without knowing the score in the upper right (or left) hand corner. The same is true for KPIs. It is a good idea to have a daily scorecard visible in the office or on the dashboard of a metrics software system that allows employees and leaders always to know where their KPIs stand. This makes it easier to address low KPIs a lot sooner. Once workers see that measurement is an integral part of business management, they will understand the importance of taking continuous metrics. It will become a part of the business culture.

  • Don’t Copy KPIs, Pick the Right Ones for Your Purposes

    It is easy to think that another company’s or department’s KPIs make sense for every business processes. Some of them might, but leaders will never know what is best for their company if they do not drill down and do their own analysis to see what makes sense to measure. Going through the process of doing a SWOT analysis or constructing SMART goals will give insight into how the company is performing. KPIs need to be specific to the company to address its own business goals.

  • Ensure You Have Accurate Record Keeping

    KPIs will not do much good to overall business metrics if they are incorrect. Leaders should try to decrease the impact of human error, and have the IT team regularly check all software that is used to collect data to make sure that everything is working smoothly. This may seem like a no-brainer, but it is easy for programs and coding to malfunction. Technology is not perfect. Therefore, it is critical for leaders to always have processes in place to check for workers or software that is producing inaccurate results.

  • Sit in Your Customer’s Chair

    What matters to them? Is the service or good provided meeting their needs? Leaders should listen to customer satisfaction surveys, and see what customer are saying about the company on social media. Yes, KPIs should address business needs, but they should also make the customer service process even more satisfactory and efficient. Are clients receiving the messaging? Could response times be better? This may be an excellent place to start to begin seeing where the company could improve. Every department has an impact on the customer regardless of whether they directly interact with them. Leaders need to remember this when they are designing KPIs and strategizing with departments. The customer’s experience needs to be a priority and should inform the strategy for selecting KPIs that impact business metrics.

Business metrics are meant to help the company improve their approach to accomplishing their mission, and cutting off processes or expenditures that are not to their benefit. KPIs are a huge part of this endeavor. They are the most critical measurements that help leaders and department teams know if they are on the right path. How can companies improve if they do not have benchmarks to compare themselves to? However, leaders cannot frivolously select items to measure; they have to take time to strategize and involve all relevant stakeholders to figure out what is best to measure. Each KPI should point to the processes companies should improve on, keep them as they are, or discard for the betterment of the business. Data collection is a necessary part of business management, and the more companies continue to embrace this idea, the more likely it is for improvement to occur.

 


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