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What Are Key Performance Indicators (KPI)?

While setting business (and personal) goals helps identify what’s most important to you, the practice doesn’t mean squat if you, well, never actually achieve them. Sound familiar? Don’t worry. We’ve all been there. And sure, some goals naturally change as our businesses change. But other goals—you know, the ones that take a ton of freakin’ work and time—get super hard to reach if you don’t have any way to track your progress as you go along.

As legendary management consultant Peter Drucker once said, “If you can’t measure it, you can’t improve it.” That’s exactly where key performance indicators come in.

What Are Key Performance Indicators?

A key performance indicator, or KPI, is a measurable metric that shows if—and how effectively—a company is hitting its operational and strategic goals. In other words, a KPI measures the goals of your business against quantifiable data so you have a clear idea how your business is performing over a specific time period. Think of KPIs (also known as flash reports or dashboards) as guides to understanding all the moving parts of your business in real time.

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For instance, a sales team could measure marketing-generated leads. A customer service team could measure the average on-hold time for a customer calling in. Accounts payable could track their payment error rate. A KPI is nothing if not versatile—and goes far beyond just measuring profit (which, by the way, is not the only measure of business success).

The real power of KPIs is that they allow you to course correct as you work toward your goals, which significantly increases your chances of absolutely crushing them.

How Do I Define a KPI?

In today’s competitive business landscape, KPIs are more important than ever. They can be an invaluable tool to inform better decisions, improve overall performance, and, ultimately, even edge out your competition. But make no mistake, when it comes to KPIs, one size does not fit all. There are thousands of KPIs to choose from, but they are essentially worthless unless they are tied to a specific business outcome for your business.

That’s why you should always start with strategy—period. A clearly defined strategy will highlight your core business objectives, which will, in turn, guide you in defining critical KPIs.

Before defining KPIs for your business, answer these important questions:

  • What’s your desired outcome?
  • Why does this outcome matter?
  • How will you measure progress?
  • How can you influence the outcome?
  • Who on your team is responsible for the outcome?
  • How will you know if you’ve successfully achieved the outcome?
  • How often will you review progress toward the outcome?

For example, let’s say your objective is to increase qualified sales leads. The answers to those questions might look like this:

  • We want to increase qualified sales leads.
  • Achieving this objective will increase profits.
  • We will measure progress as an increase in sales leads generated by our new marketing campaign.
  • We can influence the outcome by executing a highly targeted email marketing campaign.
  • Our Director of Marketing is responsible for this KPI.
  • We’ll know we succeeded if qualified sales leads increase by 10%.
  • We will review progress weekly for a six-week period.

What Does an Effective KPI Look Like?

To create the most effective KPIs, follow these five guidelines:

  • Be specific: Is your objective clearly defined?
  • Make them measurable: Can you easily track and measure progress for this KPI?
  • Make them time-sensitive: What’s the timeframe? How long will you focus on the KPI?
  • Make them yours: Will this KPI help you achieve your goals for your business? Is it relevant?
  • Put them in writing: Did you write down a blueprint for this KPI? What steps will it take to put the KPI in place and track progress?

How Should I Communicate My KPIs to My Organization?

Your KPIs—no matter how specific or measurable or relevant—are pretty much useless if you fail to communicate them to your team. After all, those are the people you’re relying on to carry out the work needed to achieve your goals. Not only do they need to be aware of what you’re trying to achieve, but they also need to understand how you’re measuring progress toward achieving those goals.

And don’t forget that KPIs need context to be effective, which means you have to explain what you’re measuring as well as why you’re measuring it. That information will enable your team to make more informed decisions and goes a long way in creating buy-in—two very important things when working toward big goals.

How Often Do I Need to Review My KPIs?

The whole point of setting KPIs in the first place is to use them to track progress in your business. But remember, just like your business, KPIs aren’t static. They need to evolve and change as your company does. Otherwise, you’re in danger of blindly driving toward objectives that are no longer relevant. And you know what that is? A huge waste of time.

Reviewing your KPIs regularly (weekly is ideal—do it monthly at minimum) is the best way to know when and how to fine tune them. If you discover the metrics you’re measuring are no longer useful, get rid of them in favor of a new KPI better aligned with your business.

What Are the Benefits of Using KPIs?

With the right KPIs in place, the upside for your business is enormous. For starters, KPIs put laser focus on the things that can actually move the needle and help align your team around a common purpose. Increased alignment leads to higher employee engagement, improved performance, and increased productivity. And in most cases, that means increased profits too.

A Successful Business Starts With KPIs

If your business is operating without KPIs, it’s like hiking without a compass—in the dark of night. The great motivational speaker Zig Ziglar said it best, “If you aim at nothing, you will hit it every time.”

But you can’t do it alone. Even the most dialed-in KPIs are no substitute for a rock star team. And the best way to get one is to be incredibly intentional with the development of each new team member from day one.

Check out our 90-Day Plan to Jump-Start New Employee Performance to set up your team for success.

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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