How to Define KPI & Metrics

profit or loss image by Warren Millar from Fotolia.com

A Key Performance Indicator (KPI) is a tool by which companies measure the success of their businesses. These indicators are clearly defined and must be measurable in order to identify changes in results. The KPIs used by one company may not be appropriate for another company. By tracking these measurements, a company can tell which areas of its organization are performing well and which are not. The results can help the company adjust its business practices to better meet the needs of the marketplace and shareholders.

A Key Performance Indicator (KPI) is a tool by which companies measure the success of their businesses. These indicators are clearly defined and must be measurable in order to identify changes in results. The KPIs used by one company may not be appropriate for another company. By tracking these measurements, a company can tell which areas of its organization are performing well and which are not. The results can help the company adjust its business practices to better meet the needs of the marketplace and shareholders.

Identify areas in the company that are measurable, specific and instrumental to the organization’s success. This might include the quarterly activity in a call center or a sales department.

Choose a standard of performance for each KPI to evaluate. Select functions that can be consistently monitored over a period of time. For a customer service department, it may include calls taken per hour.

Choose a metric, i.e., a numerical measure in relation to the equation, for each KPI. This is a benchmark upon which you will base your performance. For example, if you are evaluating a KPI to measure sales, select a factor such as volume, percentage or profit margin.

Select a target for each KPI. This is the goal that you want to reach. This might be based on historical data and may include a comparison to a prior period, or it may be based on numbers needed to break even. For example, you may choose to monitor the quarterly increase in sales percentage by year. A target, such as “a 12 percent increase,” will help direct the organization toward a common goal and increase the likelihood of success.

Tips

  • Quantify your KPI by adding specific, measurable factors, such as “raise inbound call volume by 10 percent in the fourth quarter.” Choose a few critical KPIs that your company can focus on rather than several that will be difficult to track or correlate to one another.

References

Photo Credits

  • profit or loss image by Warren Millar from Fotolia.com