KPI rules are critical to how leadership in organizations develop and manage their business. KPIs also known as “Key Performance Indicators” are metrics that businesses use to determine health and progress towards their objective goals. These KPI’s will vary across an organization as you travel horizontally through departments or vertically through management. When it comes to designing KPI’s there are rules that managers must follow to ensure they are focusing on what matters most and what can actually be tracked and affected.
Page Contents
What is a KPI?
Key performance indicators are the big metrics that matter to your companies success. Investopedia defines a KPI as
Key performance indicators (KPIs) refer to a set of quantifiable measurements used to gauge a company’s overall long-term performance. KPIs specifically help determine a company’s strategic, financial, and operational achievements, especially compared to those of other businesses within the same sector.
~ Investopedia updated 09/18/2019
How do you create KPIs?
A KPI is NOT a GOAL, they are not your ENDS to your MEANS. At the end of the day a KPI is just a metric (a very important one). Your business needs to have a mission for what they want to achieve. From that mission, you should have a vision of what that looks like for your company. From that vision you should have BIG milestone goals that push you in that direction. From those goals you develop strategies to achieve them. THEN finally you get to KPIs that tell you if you are on your way towards achieving that overarching vision.
Top 6 KPI Rules to Follow
Below are my top 6 recommended KPI rules you should follow,
- Start with your mission statement and work down to strategies, never start with a KPI first
- Be open to being wrong, developing KPI’s is part of strategic planning. This means there is always an opportunity cost for decisions you make. If you pick a KPI that is leading you in the wrong direction or isn’t sufficient to accurately gauge success plan to change it.
- Ensure you KPI informs you if your strategy is helping you achieve your goals or not
- Evaluate often, the more frequently you review a KPI the more frequently you can course correct or adapt.
- Less is MORE the higher up in an org chart you are. Careful, just because you only look at a handful of KPIs doesn’t mean you don’t need to understand the 1000 things that help contribute to that KPIs success.
- Be SMART with your KPIs
What is a smart KPI?
Smart doesn’t mean KPI’s that think for themsevles. SMART is a acronym used in business to help drive ACTIONABLE objectives. S.M.A.R.T stands for the following.
- Specific:
- You’d be surprised how often board stokes are thrown around as things businesses WANT to do. The specific requirement of smart ensures focus towards a particular objective.
- Measurable:
- We always like to say “you can’t expect what you don’t inspect” if it is not possible to measure objectively what is happening then you will never know if you are on track towards you goal.
- Achievable / Actionable:
- Hopefully this is self-explanatory. Don’t set goals that aren’t possible, there is no better way to let down your board or shareholders than aiming for something you will never achieve and then failing (reminder the stock market values trades of expectation NOT on performance).
- I have often seen the A in smart changed to “actionable” when it comes to KPI’s and metrics and this is because you should NOT measure things you can’t do anything about.
- Relevant:
- Does this match up with the company’s vision and mission statement? In other words, is doing this or measuring this helping to achieve what the long term place this company wants to be.
- Timely:
- Similar to actionable and achievable, when will you know / be able to tell if you are on the right track.
Now that you know what SMART is, let’s apply it to KPIs specifically (SMART is just an acronym it is not ONLY used when talking about KPIs).
SMART Applied to KPIs
Let’s look at a fairly common KPI for streaming platforms, “time watched”. We’ll go ahead and extend this hypothetical to “time watched per account per month” which I couldn’t tell you if that is the exact specificity that platforms use but you will see from the example below why it COULD be,
- Specific:
- We want to know how much time an account is watching our service.
- Measurable:
- We are measuring in hours and fractional hours for minutes / seconds.
- Actionable:
- Yes things we do with content, licensing, accounts, can all impact if watch time goes up or down. In other words ACTIONs we take will move this needle.
- Relevant:
- We are a streaming service who’s product is video content. If people do not consume our content they have no need for our service. The more they consume the more they need us.
- Timely:
- We want to know per month how much people are consuming our videos because that aligns with their perception of VALUE based on monthly premiums. If you pay $12.99 a month you want to feel like you got $12.99+ in value while you consume.
How do you maintain KPIs?
Managers must know what drives their KPI’s. As a leader you need to plan strategy and execute with your team. Let’s look at the following simple example below,
Company XYZ wants to reduce support tickets filed per account
- Mission – Not Relevant for this example
- Vision – Includes an intuitive product or service that doesn’t require manned support
- Strategy to achieve vision – Move to customer self support and make product easier to use
- Goal – Reduce number of tickets per account per month
- KPI – Tickets per account per month
- Strategy to drive kpi – Eliminate root cause of top tickets by removing issues in product or service or making them easier to understand
- Tactical example – Our #1 issue is we get 5 ticket cases per account about password resets because there is no password reset ability in our app. We need to add in a password reset to the app to so users will no longer need to reach out. The feature just released now we need to monitor the change. Are total cases going down? Is our strategy working or is it creating NEW issues.
Top 4 KPI Rules for maintaining
I am a big believer that all managers and leadership MUST understand basic statistics and the scientific method. Your goal in maintaining a KPI is to keep it moving in the right direction NOT to determine if its a good or bad KPI (we’ll get to that later). That said, my top 4 KPI rules for maintaining day to day operations are,
- Know what activities impact the KPI
- Form a hypothesis for what will drive the KPI in the right direction
- TEST hypothesis
- Adjust if not working
Remember the more often you test the faster you can react to incorrect assumptions or changes in underlying conditions of your hypothesis. This is what makes you MORE AGILE as a company.
How do you evaluate KPIs?
When you evaluate a KPI you are trying to determine is this the RIGHT KPI for your business based on your goals.
What are examples of KPIs?
New sales per given time frame is maybe the most common as it directly relates to how fast a business could potentially grow. Monthly recurring revenue for subscription models is also very common. After all, why sign up 100,000 people if they don’t pay you anything. Lifetime value of a customer is very important for non one off purchases. Cost to acquire customers is very common as well. Below are some more examples by department,
- Marketing KPI Examples
- Marketing KPI Rules to Follow
- Focus on what comes in and what goes out. The purpose of marketing is to get and qualify leads for sales. How much it cost, how fast you can qualify, and if you are being efficient are top priorities.
- Cost to acquire lead
- You can’t spend more to acquire leads than their LTV or you don’t have a viable business model, this is only PART of cost to acquire customers.
- Leads acquired per given timeframe
- How fast you are bringing leads into your sales pipeline
- Leads conversion to sale
- What quality are the leads you are bringing in, if none of them ever buy then marketing money isn’t being spent very efficiently.
- Average lead lifetime
- How long does it take for someone to buy or get out. If it takes people 10 years to buy is this factored into our business model (sounds crazy but think about real estate you may have a lead relationship with someone for YEARS before they buy or sell their home)?
- Marketing KPI Rules to Follow
- Sales KPI Examples
- Sales KPI Rules to Follow
- Sales needs to focus on closing qualified leads. How fast they do this and how efficient their process is matters to the profitability and growth potential of a company.
- Cost to acquire customer (CAC)
- Lead cost + Sales cost – promotional value, can never be higher than LTV or business model doesn’t work.
- Conversion rate
- Of the leads going in how many actually convert.
- No contact rate
- Are leads going to sales who don’t want to talk to them, this is bad targeting.
- Sales KPI Rules to Follow
- Product / Service KPI Examples
- Product and Service KPI Rules to Follow
- Product and Service teams are there to ensure the customer get’s what they ordered. Error rates and delivery issues are the enemy of this. Additionally, since this is the main thing they bought for it is likely the largest single cost center as well.
- Cost of goods and services
- how much is it actually costing to service these customers, if COGS + CAC > LTV your business model is failing.
- Late Delivery Rates
- How often is the thing arriving on time
- Quality Error Rates
- How many things are going out with problems
- Renewal Rate
- I am putting renewal rate in product / service because the main reason people should be staying or leaving is the value of the product or service they consume. It definitely has other factors too.
- Product and Service KPI Rules to Follow
- Support KPI Examples
- Support KPI Rules to Follow
- Support is the front lines of what customers experience. It is their job to help customers and advocate for change in the organization to improve that experience.
- Number of Tickets Per Customer
- If your product or service on average REQUIRES support you may have an inherently broken product or experience that is too difficult.
- First contact resolution
- If there is an issue how often are customers be routed to an immediate resolution
- Time to close / Handle Time
- How long does it take to resolve issues that come in.
- Support cost per customer
- How much is each customer costing us to support.
- Support KPI Rules to Follow
- HR KPI Examples
- HR KPI Rules to Follow
- HR is there to help recruit and retain employees. Treat them just like leads and customers but on the inside of a company.
- See sales / marketing KPI’s and change “lead” to “candidate” and “customer” to “employee” and that is pretty much it.
- HR KPI Rules to Follow
Want to learn more about business strategy and planning?
Check out all my posts on business strategy and operations here – https://nathanielkam.com/category/business/
Have more questions on KPI’s? I’d love to hear from you over at https://nathanielkam.com/contact/
