key performance indicators (KPIs)

What are key performance indicators (KPIs)?

Key performance indicators (KPIs) are quantifiable business metrics that corporate executives and other managers use to track and analyze factors deemed crucial to the success of an organization. Effective KPIs focus on the business processes and functions that senior management sees as most important for measuring progress toward meeting strategic goals and performance targets.

From a functional standpoint, key performance indicators encompass a wide variety of financial, marketing, sales, customer service, manufacturing and supply chain metrics. KPIs can also be used to track performance metrics related to internal processes, such as human resources and IT operations.

How do organizations use key performance indicators?

KPIs differ from organization to organization depending on the business priorities. For example, one of the key performance indicators for a public company might be its stock price, while a KPI for a privately held startup company might be the number of new customers added each quarter. Even direct competitors in an industry are likely to monitor different sets of KPIs tailored to their individual business strategies and management philosophies.

The KPIs different people in the same organization closely follow can also vary depending on their roles. For example, a CEO might consider profitability to be the best KPI for the company, while the vice president of sales might consider the ratio of a sales team’s wins vs. losses as the highest-priority KPI.

Different business units and departments are also typically measured against their own KPIs, resulting in a mix of performance indicators throughout an organization -- some at the corporate level and others geared toward specific operations.

Importance of key performance indicators

KPIs are critical to the health and profitability of an organization for the following reasons:

• Key performance indicators focus on how well a business is doing. Without KPIs, it would be difficult for an organization’s leaders to evaluate that in a meaningful way and then make operational changes to address performance issues.
• Keeping employees focused on business initiatives and tasks that are central to organizational success would be challenging without designated KPIs to reinforce the importance and value of those activities.
• In addition to highlighting business successes or issues based on measurements of current and historical performance, KPIs can point to future outcomes, giving executives early warnings of possible business problems or advance guidance on opportunities to maximize return on investment. Armed with such information, leaders can manage business operations more proactively, with the potential to gain competitive advantages over rivals.

Types of key performance indicators

The following are the four most common types of KPIs:

1. Lagging indicators. KPIs that measure the results of business activities, such as quarterly profit and revenue growth, are referred to as lagging KPIs because they track things that have already occurred.
2. Leading indicators. By comparison, leading KPIs are those that herald upcoming business developments -- for example, sales bookings that generate revenue in future quarters.
3. Quantitative indicators. Indicators such as revenue or website traffic can be measured numerically. They’re easy to assess and compare over time and are frequently used to monitor progress toward specified numerical targets. Quantitative indicators provide accurate, data-based insight into how well a company or organization is performing.
4. Qualitative indicators. Qualitative indicators are more abstract and open to interpretation, such as user experience with a product or on a website. In the case of qualitative indicators, identifying useful KPIs can be challenging; selecting appropriate ones depends on an organization’s ability to measure KPIs in some way. For example, the percentage of abandoned transactions in online shopping carts might be one indicator of customer satisfaction and customer retention on a retail website.

Developing key performance indicators

The process of creating the right KPIs involves several steps, but most organizations typically use the following approach:

1. Establish strategic goals. Determine the organization’s or department’s primary strategic objectives before generating KPIs for it. Describe the expected outcomes that help achieve those business goals. For example, before creating the KPIs, the organization must specify the precise results it’s striving for.
2. Recognize alternate performance measures. Try to find alternate performance metrics that could be used to attain the desired outcomes. For example, the company should ask what additional metrics might be used to evaluate development.
3. Select the best-suited KPIs. Decide which KPIs are most appropriate for achieving each desired outcome. Once identified, these metrics should be used because they demonstrate progress toward the desired goal.
4. Define and record the KPIs. Define and record the chosen KPIs, including their calculation process, data sources, frequency of collection and any benchmarks or targets that might be required.

How to improve an existing KPI strategy

If the key performance indicators don’t deliver the expected outcomes, it’s time to adjust the KPI strategy. Organizations can take the following actions to make sure KPIs are used effectively:

• Choose the most crucial KPIs. A balance of leading and lagging indicators should be used to ensure that the most important elements are being measured. Lagging indicators make it easier to comprehend results over time, such as sales over the past 30 days, while using data-based predictions. Leading indicators enable organizations to make changes to their strategy to achieve better and attainable results.
• Establish a KPI-driven culture. KPIs are useless if people don’t know what they indicate and how to use them. To ensure that everyone is working toward strategic goals, data literacy should be increased across the organization. Companies should employ best-in-class business intelligence software, train workers and provide them with relevant KPIs to guarantee decision-making that benefits the business.
• Iterate. It’s important to stay up to date with key performance indicators by updating them in response to market, customer and organizational changes. Companies should regularly review KPIs, carefully assess performance to identify any improvements that are required and disclose any modifications they make so that teams are constantly up to speed.
• Evaluate the data sources. Review the data sources and data gathering techniques used for creating the current KPIs. Organizations must evaluate if there are any changes they can make to ensure accurate and timely data collection.
• Contact key organizational stakeholders for feedback. To learn more about KPI metrics and any potential areas for improvement, key stakeholders within the organization should be asked for feedback.

How to measure key performance indicators

Once an organization identifies good KPIs, they should be clearly communicated to employees so all levels of the organization understand which business metrics matter the most and what constitutes successful performance against them. This could include the entire workforce for broad corporate KPIs or smaller groups of workers for KPIs that apply to particular departments.

The following are some best practices for measuring key performance indicators:

• Identify tools for measuring KPIs. In most companies, KPIs are automatically tracked by business analytics and reporting tools that collect relevant data from operational systems and create KPI reports on the measured performance levels.
• Present data visualizations through dashboards. Increasingly, KPI results are presented to executives on business intelligence dashboards or performance scorecards that often include charts and other data visualizations, with the ability to drill down into the performance data for further analysis.
• Provide a broader view of performance. Multiple KPIs also underlie balanced scorecard frameworks that pull together sets of metrics to provide a broader view of business performance beyond operating income and other common financial measurements.
• Create standard and customized reports. Using KPI software with both standard and customized reporting can be beneficial. While certain KPIs are useful on their own, others might require accompanying metrics to clarify the meaning of the data. For example, if the KPI is a social media engagement, the organization could also include details about each social media site that its team uses.
• Limit the scope of KPIs to track. One of the challenges in setting key performance indicators is deciding how many to track to determine organizational success. Having too many KPIs can dilute the attention paid to the truly important ones. As a result, it could be more effective to limit the scope to small sets of indicators.
• Continually evaluate KPIs. Managers must constantly evaluate KPIs to ensure they’re still relevant and aligned with priorities in business operations. If individual KPIs no longer serve a useful purpose, they should be refined or replaced.

Examples of key performance indicators

A company’s business strategy and the sector in which it operates influences the KPIs it chooses. In contrast to brick-and-mortar retailers, business-to-business software-as-a-service companies might opt to concentrate on customer acquisition and churn rather than revenue per square foot or average customer spend.

The following are some examples of industry-standard KPIs.

Financial KPIs

Beyond revenue, expenses and profit, commonly used financial KPIs include the following:

• Gross and net profit margin, which measure how much money a company makes on sales of products.
• Inventory turnover, which tracks how quickly products held in inventory are sold.
• Cost of goods sold, a measure of the materials and labor costs incurred in making products.
• Accounts receivable turnover, a ratio that quantifies how quickly payments on credit sales are collected from customers.
• Days sales outstanding, a related metric that gauges the number of days’ worth of receivables that have yet to be collected.

Thanks to artificial intelligence and machine learning, many finance teams and CFOs are now adopting financial business analytics tools more frequently to increase their success with KPIs.

Marketing and sales KPIs

These include the following:

• Lead conversion rate, which measures the percentage of sales leads that are successfully turned into customers.
• Customer acquisition cost, which calculates the average cost of acquiring new customers in marketing and sales expenses.
• Return on marketing investment, which quantifies the financial payback of marketing campaigns and programs.
• Customer lifetime value, which predicts the total profit a company is likely to make from sales to individual customers.
• Customer churn rate, which measures how many customers stop buying a company’s products.

Customer service KPIs

Key performance indicators in customer service call centers include the following:

• First call resolution rate, which tracks the percentage of incoming inquiries from customers that are addressed without the need for additional calls.
• Cost per call, which quantifies the average cost of handling calls.
• Call volume, which measures the total number of calls handled during a particular period.
• Hold time, which measures the average time customers spend on hold during calls.
• Abandoned calls, a ratio expressing the number of calls terminated by customers on hold vs. the total number of calls.

Additionally, longer-term, preventative KPIs such as employee engagement and knowledge base articles are sometimes included in customer service KPIs.

Manufacturing KPIs

KPIs for manufacturing and supply chain operations include the following:

• The percentage of defective products made by a company.
• Manufacturing cycle time, which measures how long it takes to make products.
• Carrying cost, which puts a value on what it costs to keep products in inventory.
• Percentage of out-of-stock items, which tracks the number of products that aren’t available in inventory when customers order them.
• Back-order rate, which is a related metric that quantifies the number of orders that can’t be filled when they’re placed.
• Return rate, which assesses the percentage of items a customer returns.

Human resources KPIs

Compensation, labor management and recruitment are the three main concerns of HR departments. As such, they often track the following key performance indicators:

• Employee satisfaction levels.
• Turnover rates.
• Absenteeism rate.
• Quality of hire.
• Promotion rate.
• Vacancy rates.

IT KPIs

IT managers commonly look at the following KPIs, among others:

• System uptime.
• Compliance with service-level agreements.
• Total support tickets.
• Critical bugs.
• Server downtime.
• On-time project completion rates.
• Average resolution time on help desk tickets.

Industry-specific KPIs have also been created in retail, healthcare, financial services and other markets. For example, a retailer might track things such as the average purchase value of sales transactions and sales per square foot of brick-and-mortar retail space, while a healthcare organization might measure emergency room wait times, the average length of stay in a hospital and patient readmission rates.

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