“Whenever you can, count.” – Sir Francis Bacon
Throughout my entire career I have had some form of KPIs (Key Performance Indicators) or OKR (Objective and Key Result). Most of them have had numeric values like Revenue, Cost, Margin, Time, Failure on Installation, etc. In most organizations between $10-50MM, the leaders and their staff do not have individualized goals and objectives (OKRs) or KPIs. I have also looked at the data above this level and overwhelmingly less than 50% of the organizations below $1B in annual revenue have individualized goals and strategic objectives. Here first, let’s define KPIs.
Key Performance Indicator
A Key Performance Indicator (KPI) is to measure performance used to evaluate the success of organizational goals, individuals, or activities. By looking at KPIs (key performance indicators) or KPI reports that show performance across time or a specific area of the business, leaders can make decisions that will improve their overall profitability.
KPIs can be financial or non-financial, and they can be either quantitative or qualitative. Financial KPIs focus on measures such as revenue, profit, and ROI. Non-financial KPIs focus on measures such as customer satisfaction, employee retention, and safety records.
Financial KPIs
Financial KPIs are one of the most important tools that companies use in their KPI dashboards to measure their operational performance. They help businesses make better decisions, monitor progress and identify opportunities for improvement.
There are many different types of financial metrics, but some of the most common include:
– Revenue growth
– Earnings before interest and taxes (EBIT)
– Net income
– Cash flow
– Return on equity (ROE)
– Return on assets (ROA)
Net Profit Margin
Net Profit is the leading indicator, and most important financial KPI because it provides insights into a company’s profitability. By tracking net profit margin, businesses can make decisions that will improve their overall profitability.
Net profit margin is a financial ratio that measures the percentage of profit a company earns after all expenses are paid. The higher the net profit margin, the more profitable the company is.
A leading KPI metric shows how much profit a company is making relative to its revenue. A high net profit margin indicates that a company is efficient and generating a lot of profit from its KPIs sales.
There are several ways to improve performance measures:
-Increase revenue: This can be done by improving marketing campaigns growing the sales revenue, expanding into new markets, or offering new products and services.
-Reduce costs: This can be achieved through cost-cutting production costs such as streamlining operations, negotiating better deals with suppliers, or automating in business processes.
-Improve pricing: This can involve implementing pricing strategies such as value-based pricing or premium pricing.
Non Financial KPIs
Non-financial KPIs are measures that assess aspects of a company’s performance that are not directly related to financial outcomes. While financial KPIs such as revenue and profit are important indicators of success, they don’t tell the whole story. Non-financial KPIs can provide insights into other aspects of a company’s performance, such as employee satisfaction, customer satisfaction, operational efficiency, and sustainability.
There are many different types of non-financial KPIs that companies can track, but some common ones include:
– Employee satisfaction: This KPI measures how satisfied employees are with their jobs. It can be assessed through surveys or polls.
– Customer satisfaction: This KPI measures how satisfied customers are with a company’s products or services. It can be assessed through marketing KPIs like surveys or polls.
– Operational efficiency: This KPI measures how well a company’s operations are running. Good example is the manufacturing process, which has a lot of operational key performance indicator reports It can be assessed through metrics such as the number of errors, number of defects, or cycle time.
– Sustainability: This key performance indicator measures a company’s environmental and social performance. It can be assessed through metrics such as carbon footprint, water usage, or waste generated.
Non-financial KPIs are important because they provide insights into other aspects of a company’s performance that are not captured by financial KPIs. By tracking non-financial KPIs, companies can identify areas for improvement and make decisions that will help them achieve their long-term goals.
Customer Satisfaction
One of the most important smart KPIs for any business is customer satisfaction. Customer satisfaction can be measured in a number of ways, but one of the most common is through customer surveys. Customer surveys can be administered in a variety of ways, but they all aim to gauge how satisfied customers are with your product or service.
Customer satisfaction is essential to the success of any business. By measuring customer satisfaction, you can identify areas for improvement and build loyalty among your customer base. Keep these tips in mind when designing your next customer satisfaction survey.
Customer Lifetime Value – (CLV or CLTV), is a metric that represents the total amount of revenue a customer will generate over the course of their relationship with a company. Customer lifetime value is important because it allows businesses to focus on acquiring and retaining customers who will generate the most value.
Customer lifetime value is an important metric for businesses to focus on because it represents the total amount of revenue a customer will generate over the course of their relationship with a company. By improving customer satisfaction, reducing churn rate, and increasing referral rate, businesses can increase CLV and acquire more valuable customers.
The most important thing to remember about KPIs is that they should be aligned with the overall strategic goals of the organization. Choosing the right and develop KPIs is essential to any business operations for tracking progress if successful and achieving business objective.
How to choose the best Key Performance Indicators (KPIs)?
There are four steps to choosing the best KPIs for your organization:
1. Define your organizational goals. What are you trying to achieve? What does success look like?
2. Identify the metrics that will help you track progress towards those goals.
3. Select KPIs that are aligned with your organizational goals.
4. Track, measure, and analyze your KPIs on a regular basis.
The best organizations measure KPIs that are aligned with your organizational goals. By choosing KPIs that reflect the things you want to achieve, you can more effectively measure progress and identify areas for improvement. When selecting KPIs, it is also important to consider the resources available for tracking and measuring them. The most effective KPIs are those that can be easily measured and tracked.
Meaningful key performance indicators are established by tracking both quantitative and qualitative data. Quantitative data can be easily measured and tracked through numbers that are captured in the process of conducting business. Qualitative data, on the other hand, can be more difficult to measure and often is more binary (yes/no) in nature. But, by tracking both types of data, you can get a more complete picture of organizational progress.
It is also important to track KPIs on a regular basis. This will allow you to identify trends and patterns over time. By tracking KPIs on a regular basis, you can more effectively measure progress and identify areas for improvement.
Once you’ve selected the KPIs you want to track, the next step is to set up a system for tracking them. There are many different ways to do this, but one option is to use data visualization like a balance scorecard. Data visualizations can help you quickly and easily see how your KPIs are performing over time.
Tracking KPIs is a great way to improve your business’s future performance management. By monitoring the right key performance indicators, you can get a better understanding of what’s working well and what needs improvement. So get started today and see how tracking KPIs can help your business grow.
Leading and Lagging indicators for KPIs
As a business owner, you’re always looking for ways to improve your company’s performance and bottom line. One way to do this is by monitoring leading and lagging indicators. Leading indicators are those that can predict future performance while lagging indicators are those that reflect past performance.
Monitoring both types of indicators can give you a well-rounded view of your business and help you make informed decisions about where to focus your efforts.
Leading indicators are often used in manufacturing processes and production settings to track early signs of trouble or identify opportunities for improvement. For example, if you run a factory, you might track the number of defective products coming off the line as a leading indicator. If you see an increase in defects, that could be a sign that there’s a problem with the manufacturing process that needs to be addressed.
Lagging indicators, on the other hand, are often used in financial settings to track overall performance. For example, if you’re trying to increase profitability, you might track net income or earnings per share as lagging indicators. These numbers reflect past performance and can give you a good idea of how your efforts have paid off.
While leading indicators can help you predict future performance, they’re not always accurate. And while lagging indicator can give you a good idea of past performance, they don’t always tell you why that performance occurred. That’s why it’s important to monitor both types of indicators when making decisions about your business.
When used together, leading and lagging indicators can give you a well-rounded view of your business and help you make informed decisions about where to focus your efforts.
“What gets measured gets done, what gets measured and fed back gets done well, what gets rewarded gets repeated.” – John E Jones
Why doesn’t your organization have individual goals and objectives measured in OKRs or KPIs?
There are many reasons why an organization has not set up KPIs or OKRs:
- Speed at which the organization is moving
- Comfort level in speaking with employees about rolling out a measurement system
- A tool to track the target and company’s performance
- Leadership team alignment around what to measure
From my perspective the list above is simply a list of excuses that will continue to be a barrier for an organization to hold people accountable in doing their part to help organizational objectives. Time to stop making excuses.
Where would I start?
One place to start is with a list of questions about what you want to achieve.
- Is there a revenue target for your organization this year?
- Is the measurement for this year to complete a new product introduction (NPI)? What are the measurable components for the development (i.e. phase reviews)
- If you look at each department from the bottom up, can you develop measurements that will contribute to the end goal?
- Where are the biggest problems facing the organization and can you measure in any way the progress?
I personally like to measure dollars, time and headcount as a way to understand how something is done today versus a target of where we want to get to in the future. It is hard to debate the amount of money you spend on something, the amount of time spent or the resources assigned to complete a task.
In the end you want to have a maximum of 3 challenging targets to improve upon for any one individual in the organization and the improvements should all be in support of the overall organizational goals.
In organizations that use KPIs progress is tracked quarterly with an overall annual target. OKRs normally have a quarterly target with the idea that you set your sights on completing things rapidly.
The next question is what happens when the goal is not met?
In many organizations this is a critical question because it will set up how people create the performance metrics they want to be measured by. When I have joined organizations in the past I have been told “we are establishing a new way of measuring our metrics and we want 75% of the goals to be clearly achievable and then 25% of the goals are stretch goals that are meant to be tough to achieve.” My next question is what happens when a goal is not met?
At GE, although we were meant to stretch and achieve a high bar, you also entered the year pushing hard toward getting a clear path to success. If your goals were not achieved you could fall into the low performer category during that year’s review which could mean that you would be put on a performance improvement plan. At GE, I always felt as though I was enabled to achieve my goals and drive real results.
I would propose that for a new organization if you are new to setting KPIs or OKRs you need to understand why a goal was not achieved. Luckily, OKRs are so frequently looked at it would be easy to set up frequent discussions to break down why a goal was not achieved. Regardless of whether you are measuring OKRs or putting KPIs in place, ways to reward those who truly stretch and achieve their goals is much more critical than having a pre-established way to punish those who have not achieved their goals.
At the end of the day, having clear goals for your people will help move your organization forward and you just might be surprised what your people can do when they have a clear goal.
Additional Resources
Setting & Achieving Goals With OKRs: The Ultimate Guide
https://www.achieveit.com/resources/blog/4-steps-to-implement-key-performance-indicators-kpis/