What are KPIs? A Simple Definition of Key Performance Indicators.
A KPI is a number—often expressed as a ratio or percentage—that shows how well an organization, department, work group, or even an individual employee (like you!) is doing in its job to help the business succeed. KPIs can be used to assist your organization with both its short- and long-term strategy for productivity, growth, and profitability. That's because you can't improve something—or have any idea how much you've improved it—until you measure it. This is the bedrock of data-driven improvement.
Now, to put that in simple terms: KPIs are a way of seeing how well you're doing.
That's it. Simple as that. We can get into lots of specifics (and we will), but that should be your main takeaway here. It's something you can measure, and put a number on—and then use that number to determine how well you (or your company, business unit, etc.) is performing. That's the "P" in KPI.
Common KPIs & Metric Definitions by Industry
Support Group Operations
General Line Groups
Supply Chain Operations
Metrics vs. KPIs – What is the Difference?
That's a really good question. What's the difference between a "metric" and a "KPI"?
A metric, for the purposes of our KPI 101 discussion here, is any activity in a business that can be measured. You can measure a lot of things in a business; heck, there's no shortage of data these days. But a metric, by itself, may not reveal to you the performance of a person or process. That's the difference between a metric and a KPI. A KPI will contain metrics (often more than one, compared as a ratio) that shines a spotlight on results. A metric, by itself, may or may not. Therefore — stay with us here — all KPIs are metrics, but not all metrics are KPIs.
The Different Types of KPIs
For digestive purposes, we've broken the KPI universe into four major groups:
Qualitative & Quantitative KPIs
- Qualitative KPIs are descriptive, or opinion-based. They often rely on assumptions and personal bias. They're not based on cold, hard facts or raw streams of data. That said, they can still be very important for a business, for the very reason that they can provide insights that quantitative metrics cannot.
- Quantitative KPIs, on the other hand, are completely mathematical in nature, and are derived from the analysis of raw data. Quantitative KPIs are the Joe Friday of metrics: "Just the facts, Ma'am."
Leading & Lagging KPIs
Now this isn't a way to bifurcate the entire KPI universe, as the qualitative/quantitative method was, but the distinction between leading and lagging KPIs can be incredibly helpful for your organization.
- Leading KPIs are input metrics that influence how a process or function's output will change. Leading KPIs are the Magic Eight Ball of the operations world; they can give you a good prediction of a process' expected output.
- Lagging KPIs, on the other hand, are metrics that indicate the outcome of a process, and how well that process is functioning. The good news is that these metrics are often much easier to find than their leading-KPI brethren. The bad news is that they're reactive rather than proactive, meaning that they'll show you the result of the problem rather than the problem itself.
Industry & Operations KPIs:
Okay, here's one more way to divide the KPI universe in two. This one's pretty easy; check it out:
- Industry KPIs are indicators of company performance specific to business products, processes, and organization structures across the macro landscape of a particular industry. For example, you might want to look at Amazon's market share relative to the rest of the big-box retailers. Or you could compare the growth in revenue for Instagram vs. Snapchat. So remember: "Big macro metrics, same general industry." These are the kinds of metrics that you find on Bloomberg or Morningstar.
- Operations KPIs focus on the performance (i.e., the efficiency and quality of operations, processes, customer service, individual employees, etc.) of a department, team or employee within the company. For example, you can employ operational KPIs to measure mortgage lending (e.g., mortgage loan pull-through rate, mortgage loans closed per loan officer, mortgage closing cycle time, etc.). As their name implies, they're operations-specific.
Key Risk Indicators (KRIs) & Key Control Indicators (KCIs):
These are two different, but related metrics. And once we tell you what they stand for, we bet you'll figure them out instantly.
- Key Control Indicators (KCIs) are used to ensure that adequate monitoring and response protocols have been put in place to proactively mitigate risk and respond to certain scenarios. KCIs shine a spotlight on the quality of planning, maintenance, and due diligence related to risks that can threaten an organization.
- Key Risk Indicators (KRIs), as you’ve probably guessed by now, are established to measure an organization’s current and potential exposure to various risks. KRIs can measure the potential risk related to a specific action that the organization is considering—as well as the risk inherent in the company’s day-to-day operations. KRIs can act as an early-warning system to alert the company of financial issues (lost revenue), operational issues (loss of productivity), or reputational issues (loss of credibility).
How to select the right KPIs
You can generally follow a simple four-step process for choosing KPIs and ensuring their alignment with behavior and actions your company wants to reinforce.
- Refine Your Focus: Start by determining which departments will be monitored by KPIs. Begin with the work groups that are closest to the product or service you're delivering to the customer. And think big. Don't impose KPIs on groups that consist of just one or two people. Go for the broader perspective. Begin with the larger, customer-impacting departments.
- Define Your Audience: After you have selected the scope of your KPI reporting, you need to define who the users of the data will be. Executives, for example, will need to look at higher-level KPIs than front-line managers. Tailor your KPIs and the level at which they are reported (e.g., company-wide aggregation, by location, by employee, etc.) directly to your audience.
- Assess Data Availability: Before you get too excited about your new KPIs, you need to make sure you have the data to calculate the numbers and populate your reports. This is one area where you might need to get your company's IT Team involved. Go to them with your KPI definitions well-defined so they can help you identify the elements you need to calculate and pivot each one.
- Validate & Document KPIs for Reporting: If you want your audience to use your KPIs, it's important to get their input and buy-in. Before and during the process of selecting KPIs, sit down with key stakeholders to validate the direction you're heading in. If you fail to get their input, your KPI reporting effort may be doomed to fail from the start.
How to improve operations using kpis
Here are some keys to applying KPI reports to improve day-to-day operations:
- Set targets based on best-demonstrated historical performance. If it had actually been achieved before, then it's clear that it's quite possible to do it again. Seen from the other side: If a goal is unreachable or unclear, performance can suffer. Not to mention morale.
- Avoid subjective performance management. When you have unbiased, measurable data to support any findings of shortcomings, employees will understand that you're not being swayed by emotions, rumors, or gut feelings. You'll be perceived as fair, and the KPIs will be used as true motivators.
- Reward improvement. This may seem obvious, but note that we didn't say, "Only reward those who hit their targets." An employee who's making progress toward a stated goal is also one who needs that extra recognition, reward, and motivation. Keep them on that great path upward.
- Create action plans with achievable milestones. Understanding where an employee or functional area's performance is today, and where it should be in the future, is great. Creating a detailed action plan with observable and reachable milestones along the way is even better.
- Maintain the quality of the data and reports. Once data-collection is automated and reports get generated, it's easy to fall into the "set it and forget it" mindset. This is dangerous. None of this is carved in stone. Data should be audited regularly for quality, and report functionality should be tested to prevent any setbacks in tracking performance.
- Frequently re-evaluate best-demonstrated performance targets, or benchmarks. "Is that the best you can do?" Last year's answer may well get outstripped by this year's performance (thanks, in no small part, to your KPI-driven initiatives). In other words, as change propagates throughout the organization, performance will improve. So update your definition of "best" and keep those sights aimed appropriately high.