KPIs: What They Are and Why You Need Them
If you’re in the business world, chances are you’ve heard of the KPI, or Key Performance Indicator. You likely hear many terms and acronyms in business meetings, and they can start to blur together — but KPIs should stand out from the pack.
That’s because businesses need KPIs to achieve their objectives.
It’s not enough to just know what KPI stands for. You should understand what they are, how they work, and how you can get the most out of them. Let’s break down what KPIs are, how to set them, and how they apply to project management.
What is a KPI?
A KPI is how businesses transform goals into reality. By breaking goals down into regular, measurable targets, KPIs indicate whether a company is on track toward achieving them.
An effective KPI is specific, quantifiable, and clear to everyone. Many organizations use general, overarching KPIs, such as gross revenue targets, complemented by department-specific KPIs that support the achievement of those goals.
For example, a company that offers automatic invoicing software may set a high-level KPI to attain $1,000,000 in annual recurring revenue. To realize that goal, they could set a marketing-specific KPI to onboard 10,000 clients at a certain cost per user, and a customer-support KPI to retain a certain percentage of those users by solving their problems faster.
In principle, a KPI isn’t that different from the way you might already set goals in your personal work. But unlike personal goals, business goals involve accountability and contribution from many — hundreds or thousands at a very large organization. That’s why they use quantifiable metrics.
Think of KPIs as a strategy to communicate goals to a large number of people. KPIs remove ambiguity about performance – when a goal is made up of measurable, actionable targets, it’s immediately clear whether the company t is on track to achieving it.
Some common examples of KPI categories include:
- Financial: Think profits, gross revenue, cost of goods sold, and projected vs. actual revenue.
- Customer-related: Goals like customer acquisition cost (CAC), customer lifetime value (CLV), customer satisfaction, and customer retention.
- Human resources: KPIs in this category include employee turnover rate, employee satisfaction, and number of applicants for particular job openings.
- Process: These goals can be related to efficiency, amount of bugs, and amount of customer support tickets.
How to define an individual KPI
A KPI should be a natural extension of broader business objectives. If you’re being asked to set KPIs for a whole department, you should be provided with the larger business goals they need to support.
Then, it’s a matter of breaking down that goal into the specifics of how each member of your team can contribute. Someone you report to knows what the company as a whole needs to achieve, and that your expertise and hard work is crucial to getting there. But they need you to show them how your team will go about it in specific, actionable terms.
Your KPI will share the actions your team will take to achieve your company’s goals, and how you’ll know if you’re succeeding.
A good starting point for figuring out a KPI is using SMART goals. These goals are specific, measurable, actionable, relevant and time-based:
- Specific: Get crystal clear on the business objectives your KPI will support. This isn’t the time for sweeping, generalized statements — ask for clarification if you need it and make sure you understand where you’re going.
- Measurable: what does progress look like? What specific metric will indicate that you’re on track?
- Actionable: What specific tasks and actions will it take to work towards the goal? Who will be responsible for executing them?
- Relevant: Exactly how do these actions support the achievement of the goal? Where do they fit into your greater plan?
- Time-based: On what schedule will your plans be executed? How do they break down into daily, weekly, and monthly tasks? By when will you deliver your promised, measurable results?
From these, you can determine what your KPIs should be and how you’ll work towards achieving them.
Remember that communicating a KPI is just as important as drafting it. Your team needs their KPIs to be crystal clear, but your direct manager and all relevant stakeholders need to be aware of them as well. Your KPIs will keep them aware of how successful you’ve been in progress towards your goal.
Keep the lines of communication open and share how things are going, even when you run into setbacks or challenges. To make informed decisions about your company’s future, executives and upper management need to be in the know.
Project management and the KPI
As we’ve discussed, a KPI is a tool that keeps teams working cooperatively towards a goal. If you’re working under a project manager or team lead, they’re likely given team- or department-specific KPIs that they break down into actionable steps for each team member. These sub-KPIs are based on each person’s role, expertise, and responsibilities.
A KPI also helps managers assess performance in a fair, objective way. Just as having clear targets removes ambiguity in a big-picture sense, KPIs make it obvious whether teams are reaching their goal or not.
Everyone likes to feel like their work matters. That’s why KPIs are also effective at motivating teams. People tend to perform better if they’re given a clear goal to work towards, rather than feeling like a hamster on a wheel. Clear, realistic KPIs tailored to their strengths can help employees feel valued, important, and confident.
Imagine the frustrating, futile feeling of working on a team with a vague, general goal, like “earn more profits” or “get more users.” While there’s nothing wrong with these objectives, there aren’t clear steps to getting there, and different team members could be trying to achieve them in different ways.
If instead, that goal is broken down into KPIs, there’s no guesswork or uncertainty around what to do. For example, one member of a marketing team’s KPI could be “create content that ranks highly for 4 competitive keywords”, while their co-worker’s might say “launch a social ad campaign that accrues X website visitors at X cost per click”. These specific, actionable KPIs hold everyone to their own best standard in support of a larger goal.
Even though they’re overseeing your team’s progress, your project managers likely have KPIs with which to assess their own success, too. These might include the project’s adherence to its planned budget, the amount of work hours being spent to achieve various milestones, and the percentage of KPIs that have been attained.
Know what needs to get done
Business acronyms like “KPI” can sound intimidating or jargon-like at first. But KPIs are just a way to promote cooperation — to keep everyone working towards a common goal.
Clear goals and standards help people perform at their best and individual contributions shine. When everyone understands the greater purpose of their actions, they can rise to the occasion and produce truly exceptional work.