What it means
Every business has hundreds of numbers it could look at, but only a handful tell you whether the strategy is working. A KPI is one of those handful.
It is chosen because it is closely linked to a goal the leadership team cares about, such as profit, growth, customer loyalty or cash. KPIs usually fall into a few families.
Financial KPIs cover things like gross margin, operating cash flow and revenue growth, while customer KPIs cover retention, satisfaction and average order value. Operational KPIs track speed and quality, such as order fulfilment time or defect rates, and people KPIs track staff turnover or time to hire.
A good KPI has a clear definition, a data source, an owner and a target. Without a precise definition, two managers can report different figures for the same KPI and spend the meeting arguing about whose number is right.
Without a target, the figure is just a statistic, because nobody knows whether it is good or bad. It helps to separate leading and lagging indicators.
A lagging KPI, such as quarterly revenue, tells you what has already happened. A leading KPI, such as the number of qualified sales meetings booked this month, gives an early signal of what revenue is likely to do next, so managers can act before it is too late.
The most common failure is measuring too much. When a dashboard carries thirty KPIs, nobody knows which three matter, and teams start to chase the number rather than the outcome behind it.
Many finance teams keep a small set of headline KPIs for the board and let each department keep a few more of its own. Finally, KPIs only work when they are discussed.
A number that sits in a spreadsheet changes nothing, whereas a short monthly review where each owner explains the movement and agrees an action turns the figure into a management tool. Good finance teams also revisit KPIs once or twice a year, because a measure that suited a start-up may no longer fit a larger business.
In practice
Real-world examples.
Example
A subscription software company tracks monthly churn (the share of customers who cancel each month) as its main customer KPI. When churn rises from 2% to 3%, the head of customer success launches a review of recent cancellations before revenue is affected.
Example
A restaurant group tracks food cost as a share of food sales in each branch. One branch drifts well above the group target, and the manager discovers that over-ordering and waste are the cause.
Example
A logistics firm tracks on-time delivery rate as its operational KPI. The operations director links part of each depot manager's bonus to it, which focuses the whole team on the same measure.
Formula
Calculation
There is no single KPI formula because each KPI has its own calculation. The most common way to judge any KPI is target attainment:
KPI attainment (%) = actual result / target x 100
Worked example: a sales team has a quarterly new revenue target of $500,000 and actually closes $425,000.
Step 1: Divide actual by target = 425,000 / 500,000 = 0.85.
Step 2: Convert to a percentage = 0.85 x 100 = 85%.
The team reached 85% of its target, which leaves a shortfall of $75,000 (500,000 - 425,000 = 75,000). A manager would then ask whether the gap came from fewer deals, smaller deals or slower deals.Case study
Seen in the real world.
Brightwater Cleaning Services is a fictional commercial cleaning company with about 60 staff. Its owner tracked more than twenty numbers each week and still could not explain why profit was flat while revenue was growing.
With help from an advisor, the owner cut the list to five KPIs: gross margin per contract, labour cost as a share of revenue, client retention, invoices overdue by more than 30 days, and cash balance. Within a month it became clear that two large contracts had been priced too low, so labour cost was eating the margin.
In this illustrative story, Brightwater repriced the two contracts at renewal and lost one client, but overall margin improved. The lesson is that a short list of well-defined KPIs made the problem visible.
Watch out
Common mistakes.
- Choosing KPIs because they are easy to measure rather than because they relate to a real business goal.
- Tracking too many KPIs, so the important ones are lost among minor figures.
- Setting a KPI with no owner or target, which means nobody is accountable and nobody knows what good looks like.
Questions
People also ask.
What is the difference between a KPI and a metric?
A metric is any number you can measure, while a KPI is a metric that is directly tied to a strategic goal and watched closely.
How many KPIs should a team have?
Most teams work best with roughly three to seven, though the right number depends on the size and complexity of the business.
How often should KPIs be reviewed?
Operational KPIs are often reviewed weekly or monthly, while strategic KPIs are usually reviewed monthly or quarterly alongside targets.
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