Key Performance Indicator (KPI): meaning, types, examples (2023)

Was it without key performance indicators (KPIs)?

Key Performance Indicators (KPIs) refer to a set of quantifiable measures used to gauge a company's overall long-term performance. In particular, KPIs help determine a company's strategic, financial, and operational performance, especially when compared to other companies in the same industry.

Understand key performance indicators (KPIs).

KPIs, also known as key success indicators (KSIs), vary between companies and industries based on performance criteria. For example, a software company looking for the fastest growth in its industry might consider thisyear by year(YOY) Revenue growth as a key performance indicator. Conversely, a retail chain may place more emphasis on same-store sales as the best KPI metric to gauge its growth.

At the heart of KPIs is the collection, storage, cleaning, and synthesis of data. The information can be financial or non-financial in nature and can relate to any department of the company. The goal of KPIs is to communicate results in a concise way so that management can make more informed strategic decisions.

KPI categories

Most KPIs fall into four different categories, with each category having its own characteristics, time frame, and user.

strategic KPIsThey are usually at the highest level. These types of KPIs can give an indication of how a business is doing, though they don't provide much information beyond a very high-level snapshot. Executives are more likely to use strategic KPIs, and examples of strategic KPIs include return on investment,Profit marginand the total sales of the company.

operational KPIsthey are geared towards a much tighter time frame. These KPIs measure a company's performance on a month-to-month (or even day-to-day) basis by looking at different processes, segments, or geographic locations. These operational KPIs are typically used by executives and are often used to discuss questions that arise from strategic KPI analysis. For example, if an executive notices that company-wide sales are down, he might ask which product lines are having problems.

functional KPIsFocus on specific departments or functions within a company. For example, the finance department might track how many new vendors they log into their accounting information system each month, while the marketing department measures how many clicks each email distribution received. These types of KPIs can be strategic or operational, but they provide the most value for a specific group of users.

Leading/Trailing KPIsDescribe the nature of the data analyzed and whether it indicates something to come or indicates that something has already happened. Consider two different KPIs: the number of hours worked and the profit margin of a flagship product. The number of overtime hours worked can be an important KPI when the company begins to notice a deteriorationmanufacturingQuality. Alternatively, profit margins are the result of doing business and are considered a lagging indicator.

KPI Types

financial figures

Financial-related key performance indicators typically focus on sales and margins. Net income, the most reliable profit-based measure, represents the amount of income that remains as profit during a given period after accounting for all of the company's expenses, taxes, and interest payments during the same period.

Financial ratios can be found in a company's financial statements. However, internal management may find it more useful to analyze other numbers that are more specific to the analysis of the issues or aspects that the company's management wants to analyze. For example, a business may use variable cost accounting to recalculate certain account balances for internal analysis only. Examples of financial KPIs are:

• liquidity ratios(dhradio actualdivide current assets by current liabilities): These types of KPIs measure how well a company is managing current debt obligations based on the current assets it has available.
• profitability metrics(i.e. Net Profit Margin): These types of KPIs measure how good a company is at generating revenue while keeping expenses low.
• solvency ratios(dhTotal Debt to Total Assets Ratio): These types of KPIs measure the long-term financial health of a company by measuring how well a company will be able to repay debt over the long term.
• sales metrics(for example, inventory turnover): These types of KPIs measure how quickly a business can perform a specific task. For example, inventory turnover measures how quickly a business can turn an inventory item into a sale. Businesses strive to increase turnover to generate a faster turnover of cash spend to then recover that cash through revenue.

customer metrics

CouldFocused KPIs typically focus on efficiency per customer, customer satisfaction, and customer retention. These metrics are used byCustomer serviceteams to better understand the service customers have received. Examples of customer-centric metrics are:

• Number of new ticket requests:This KPI counts customer service requests and measures how many new and open issues customers have.
• Number of tickets resolved:This KPI counts the number of requests that have been successfully processed. By comparing the number of requests to the number of resolutions, a business can estimate its success rate in handling customer requests.
• Mean solution time:This KPI is the average time it takes to help a customer with a problem. Businesses can choose to segment the average resolution time across different requests (ie, technical issue requests vs. new account requests).
• Average response time:This KPI is the average time it takes for a customer service agent to first connect with a customer after the customer submits a request. Although the initial agent may not have the knowledge or experience to provide a solution, reducing the time a customer waits for help can be important to a business.
• Main customer service representatives:This KPI is a combination of all the above metrics referenced by customer service representatives. For example, in addition to looking at the average response time for the entire company, a company might look at who are the fastest three responders and who are the slowest three.
• Type of request:This KPI is a count of the different types of requests. This KPI can help a business better understand a customer's issues (ie the business website gave an incorrect or inaccurate address) that the business needs to resolve.
• Customer Satisfaction Rating:This KPI is a vague measure, although companies can conduct post-engagement surveys or questionnaires to gather additional insights into the customer experience.
  

process performance metrics

Process metrics are intended to measure and monitor operational performance throughout the organization. These KPIs look at how tasks are being performed and whether there are process, quality, or performance issues. These types of metrics are most useful for companies with repetitive processes, such as B. Manufacturing companies or companies in cyclical industries. Examples of process performance indicators are:

• Production efficiency:This KPI is often measured as the production time for each phase divided by the total processing time. A company may strive to spend only 2% of its time sourcing raw materials; If it finds that it takes up 5% of the entire process, the company can target improvements in customer acquisition.
• Total cycle time:This KPI is the total time it takes to complete a process from start to finish. This can be converted to an average cycle time when management wants to analyze a process over a period of time.
• performance:This KPI is the number of units produced divided by the production time per unit. This is the average number of items made in a given time period and how fast the manufacturing process is.
• Error rate:This KPI is the total number of defects divided by the total number of units produced. A business that works to reduce waste can better estimate the volume of items that fail quality control tests.
• Quality rate:This KPI focuses on positive items produced rather than negative ones. By dividing the units successfully completed by the total number of units produced, this percentage informs management through a KPI of its success rate in meeting quality standards.

Marketing

Marketing KPIs attempt to gain a better understanding of how effective marketing and advertising campaigns have been. These metrics often measure conversion rates, the frequency with which prospects take specific actions in response to a specific marketing medium. Examples of marketing KPIs are:

• Website traffic:This KPI tracks the number of people who visit specific pages of a company's website. Management can use this KPI to better understand if online traffic is shifting to potential sales channels or if customers are not being routed correctly.
• social mediaTraffic:This KPI similarly tracks views, followers, likes, retweets, shares, or other measurable interactions between customers and company social media profiles.
• Conversion rate for call to action content:This KPI focuses on targeted advertising programs that encourage customers to take specific actions. For example, a specific campaign can encourage customers to take action before a specific sale date. A business can divide the number of successful engagements by the total number of content distributions to understand what percentage of customers responded to the call to action.
• Blog articles published per month:This KPI simply counts the number of blog posts a business publishes in a given month.
• Click Rates:This KPI measures the number of specific clicks made on email distributions. For example, certain programs can track how many customers opened an email distribution, clicked on a link, and made a sale.

ES

A company may desire operational excellence; In this case, they may want to track the performance of their internal IT department. These KPIs can provide a better understanding of employee satisfaction or whether the IT department is adequately staffed. Examples of IT KPIs are:

• Total System Downtime:This KPI measures the time that various systems must be taken offline for upgrades or repairs. While systems are down, customers may not be able to place orders or employees may not be able to perform certain tasks (for example,Accounting information systemIs under).
• Number of tickets/decisions:This KPI is similar to customer service KPIs. However, these tickets and resolutions relate to requests from internal staff, such as hardware or software requirements, network issues, or other internal technology issues.
• Number of functions developed:This KPI measures internal product development by quantifying the number of product changes.
• Number of critical errors:This KPI counts the number of critical issues within systems or programs. A company should have its own internal standards for what constitutes a minor error and a major error.
• Backup Frequency:This KPI counts how often critical data is duplicated and stored in a secure location. Based on record retention requirements, management may set different objectives for different information.
  

sale

The ultimate goal of a business is to generate revenue through sales. Although sales are often measured by financial KPIs, sales KPIs take a more granular approach and use non-financial data to better understand the sales process. Examples of sales KPIs are:

• Customer Lifetime Value (CLV):This KPI represents the total amount a customer is likely to spend on your products over the course of their relationship.
• customer acquisition costs(CAC):This KPI represents the total sales and marketing costs required to acquire a new customer. By comparing CAC to CLV, companies can measure the effectiveness of their customer acquisition efforts.
• Average dollar value for new contracts:This KPI measures the average size of new deals. A company may have a desired threshold to attract larger or smaller customers.
• Average conversion time:This KPI measures the time from the first contact with a potential customer to the completion of a signed agreement to transact business.
• Number of Engaged Leads:This KPI counts how many potential leads have been contacted or met. This metric can be further broken down into mediums such as visits, emails, phone calls, or other customer contacts.
  

staffing

Organizations may also find it beneficial to analyze specific KPIs for their employees. From turnover to retention to satisfaction, a company may already have a wealth of information about its employees. Examples of personnel or personnel indicators are:

• absenteeism Bowl:This KPI counts how many days a year or in a certain period of time employees get sick or miss shifts. This KPI can be an early indicator of unmotivated or dissatisfied employees.
• Number of overtime hours worked:This KPI tracks the number of overtime hours worked to assess whether employees may be burned out or whether staffing levels are adequate.
• Employee satisfaction:This KPI often requires a company-wide survey to gauge how employees feel about various aspects of the company. To get the most out of this KPI, companies should consider running the same survey each year to track changes from year to year on the exact same questions.
• Employee turnover rate:This KPI measures how often and how quickly employees leave their jobs. Organizations can dig deeper into this KPI across departments or teams to determine why some positions may end faster than others.
• Number of applicants:This KPI counts how many applications have been received for vacancies. This KPI helps assess whether job postings are reaching a wide enough audience to generate interest and attract strong candidates.

Examples of KPI

Let's take a look at electric vehicle maker Tesla (TSLA) to see some real KPI examples. These numbers are all from the fourth quarter 2021 results release.

vehicle production

During the quarter, Tesla produced a record 305,840 vehicles and delivered 308,650 vehicles.Production is a big problem for the company as it is constantly criticized for ramping up poorly. A larger scale of production means more market share and profit for Tesla.

automotive gross margin

For the quarter, Tesla's automotive gross margin increased to 30.6%.Gross margin is one of Tesla's best indicators of profitability because it isolates the cost of producing the vehicles. Tesla managed to increase its gross margin in the fourth quarter even as sales of lower-priced models outpaced higher-margin models.

Free cash flow

Tesla's free cash flow was $2.8 billion in the quarter. That's a big improvement over free cash flow of $1.9 billion in the prior year period.Tesla's current level of free cash flow production suggests the company is achieving profitability without the help of regulatory credit.

KPI levels

Companies can use KPIs at three broad levels. First,company-wide KPIsfocus on the overall health and performance of the business. These types of KPIs are useful for reporting back to management on how things are going. However, they are often not granular enough to make decisions. Company-wide KPIs often spark conversations about why certain departments are performing well or poorly.

At this point, companies often begin to dig deeper.Department level KPIs. Department-level KPIs are more specific than company-wide KPIs. These types of KPIs are often more significant in terms of why certain results occur. Many of the examples above are department-level KPIs because they focus on a niche aspect of a business.

If a company chooses to go even deeper, it can get involvedKPIs at the project level or sub-department level. These KPIs are often specifically requested by management, as they may require very specific data sets that may not be readily available. For example, the management of a control group may want to ask very specific questions about a possibleProduct Launch.

Development of KPI reports

With companies seeming to collect more data every day, sorting through the information and determining which KPIs are most useful and impactful for decision making can become overwhelming. Consider the following steps when you start to assemble KPI dashboards or reports.

Step 1 – Discuss goals and plans with business partners.KPIs are only as useful as users make them. Before compiling any KPI reports, understand what you or your business partner are trying to achieve.

Step 2 – Draft SMART KPI requirements.KPIs should be constrained and tied to specific, measurable, achievable, realistic, and time-limited metrics. Vague, difficult to determine, or unrealistic KPIs offer little or no value; Instead, focus on what information is available to you and what meets the requirements of the SMART acronym.

Step 3: Be adaptable.As you compile KPI reports, be prepared for new business issues to emerge and to pay additional attention to other areas. As customer and business needs change, KPIs must also adapt, with specific numbers, metrics and targets changing in line with operational developments.

Step 4: Avoid overloading users.It can be tempting to overload report users with as many KPIs as you can fit in one report. At a certain point, KPIs become difficult to understand, and it can be harder to determine which metrics are really more important to focus on.

Benefits of KPIs

A company may want to analyze KPIs for various reasons. KPIs help inform management about specific problems; The data-driven approach provides quantifiable information that is usefulstrategic planningand ensure operational excellence.

KPIs help hold employees accountable. Instead of being based on feelings or emotions, KPIs are based on statistics and cannot discriminate against employees. When used correctly, KPIs can help encourage employees as salespeople can realize their numbers are being closely monitored.

KPIs are also the bridge that connects business operations and actual goals. A business can set goals, but without a way to track progress toward those goals, those plans are of little to no use. Instead, KPIs allow companies to set goals and then monitor progress toward those goals.

Limitations of KPIs

There are some drawbacks to consider when working with KPIs. KPIs can take a long time to provide meaningful data. For example, a company may need to collect annual employee data for years to better understand trends in satisfaction rates over long periods of time.

KPIs need to be constantly monitored and closely followed to be useful. A KPI report that is created but never analyzed is useless. Furthermore, KPIs that are not continually monitored for accuracy and adequacy do not encourage beneficial decision making.

KPIs give managers the opportunity to "play" with KPIs. Instead of focusing on actually improving processes or results, managers may be motivated to simply focus on improving related KPIs.performance bonds. Also, quality can degrade when managers focus too much on productivity KPIs, and employees can feel too much pressure to meet certain KPI metrics that just aren't appropriate.

The final result

KPIs provide an effective way to measure and track a company's performance using a variety of different metrics. By understanding exactly what KPIs are and how to implement them correctly, managers can better optimize the business for long-term success.