What is a KPI?
A prominent term in today’s corporate cosmos, one could easily assume they only apply to the big rollers, however KPIs or Key Performance Indicators, are a powerful tool for a business of any size.
KPIs are a measurable value applied to business objectives, and can be used in all areas of a business. For example, a company may set indicators on sales figures, purchases or return on investments (ROI) such as marketing activity, to name a few.
To those outside of the corporate world, it may sound like a new-fangled business acronym, but they have been around for centuries. In fact the earliest use is believed to have been in 3rd century China, when it is said that the Wei Dynasty used themto rate the performance of family members. Perhaps something to note when we complain about modern day KPIs!
The world has come a long way since 300 AD, in the 20th century the use has grown in alignment with the development of powerful computer systems, advancing from intermittent use applied to individual workers to the valuable business tool now used every day.
Why should I use KPIs?
Quite simply, KPIs will tell you whether your business is moving forward or backward. The use of them will be invaluable in the decision-making process and help to drive forward the growth of your business.
You plough time, effort and money into the running of your business, surely it makes sense to measure the performance or ‘health’ of that business on a continuous basis.
Clarification – KPIs help to clarify the current business position and performance expectations
Benchmarking – KPIs provide a point of reference for making future or past comparisons
Focus – KPIs outline the important aspects for attention within the business
Consistency – KPIs enable a consistent approach to achieving business goals
Motivation – KPIs engage employees with company goals
Accountability – KPIs will highlight both good performance and under performance
Elimination of waste – KPIs help identify inefficiencies within the business
How to implement KPIs
Modern businesses churn out huge volumes of data, known as ‘metrics’. Business metrics range from sales and productivity figures to web traffic and social media followers, they may be financial or non-financial. The challenge is working out which metrics to monitor, and how to monitor them, which is where KPIs come in.
KPIs are individual to every business. Think about where you are now and where you want to be in the future. Which figures must you track to ensure you reach your goal?
Select metrics that are relevant to your business type. For example, a commercial vehicle dealer such as myself will measure the number of vans sold per month and average profit per unit, a call centre would follow the number of outbound calls made in a certain timeframe and number of those that converted to sales.
It is likely that without realising it, you are already tracking important metrics – and possibly just within your own headspace. Start by setting some base KPIs initially, and once you become comfortable with the process move on to some more complex metrics.
Select the area of business you want to measure – typically within finance, growth, marketing
Set a target – make it S M A R T (Simple, Measurable, Achievable, Relevant, Timebound)
Review progress regularly or in real time – look at previous data and compare with current figures and future target
Maintaining effective KPIs
Track and review! London-based live dashboard provider Geckoboard recently ran a survey on company metrics and found that nearly half of UK SME’s are failing to identify KPIs. Of the companies that do establish KPIs, many do not continue to track or reassess their KPIs on a regular basis, and may therefore miss crucial data for pushing forward growth. Their research showed that companies who track data regularly are twice as likely to hit targets.
Ideally track them in real time, or at the least at regular intervals. There are now plenty of online tools available to assist with managing indicators, each ranging in functionality and price.
Share your KPIs with your team. It is crucial for employees to be aware of and understand business goals, so that they know what they are working towards, they might have their own individual KPIs too. Ensure your KPIs are realistic, if they are unachievable employees will become frustrated and demotivated. Where implementing individual KPIs, these must be relevant to the overall business goals.
Certain indicators will require more attention than others, use them to keep you on course. For example, I will always be up to date on our monthly sales figure and each of our salespeople will know their own individual figures and how close they are to reaching their target. Our staff are fully aware of what they are working to achieve and how it contributes to the overall business goal.
Ensure they are reviewed and updated regularly. We operate in a rapidly evolving world and they can quickly become out of date, especially if your business is growing. Likewise you may find that your initial goals are not quite right, don’t be afraid to adjust any indicators you have previously set.
The data available to us is vital for providing direction. Running a business without monitoring key metrics is akin to sailing a ship without a rudder. Employ them and make sure your ship, or fleet, knows where it is and where it is going.
Simon Joyce director of Anchor Vans