What Are Key Performance Indicators?

Joe Weinlick
Posted by in Career Advice


Key performance indicators, often abbreviated to KPIs, refer to statistics that measure how well a business is doing as it achieves goals set forth by management and company leadership. KPIs differ in size and scope depending on what departments need particular data. Managers and executives use this information to make decisions to try to bring in more revenue and profits.

Characteristics of KPIs

This type of specialized information takes thousands of forms, but each KPI has the same basic characteristics. Each one should reflect some aspect of the company's goals. If the firm's main goal is to create happy returning customers, the metrics should reflect how well the customer service department works to bring more revenue to the business.

KPIs must have some kind of quantifiable aspect so leaders can view the information, know what it means and take action on the results. A company must define the KPI and then know what it needs to measure it needs to obtain that information. Once it has the correct information, the business needs to interpret the data.

For example, a business wants to increase its new customers by 100 each month. The system must be able to differentiate between new customers and customers who have bought products or services from the business before. The company should collect customer information in some way so that managers can show how many new customers the firm actually gains. This might mean employees need to know the customer's name and contact information, such as by persuading the customer to sign up for a loyalty card, in order for the computer to add that person to the database.

KPIs take into account a company's data based on specific information collected by a firm's computers. Therefore, each set of KPIs should be unique within every business. Software then crunches the numbers to create charts, graphs and spreadsheets so that employees can interpret the vast amounts of information.

What KPIs Measure

KPIs can measure just about any statistic a company needs, helping to measure a company's profits, sales, quality of customer service and efficiency. Some types of information, such as financial results, run monthly. Sales figures often run daily as a manager or the owner tries to determine how much money the business made each day. Companies compare these numbers to the goals of the business versus past weeks, months and years to see what factors, if any, changed from one period to the next.

Another important aspect of this information includes how close a company gets to achieving its goals. When a business achieves 60 new customers in the first three weeks of the month, clerks know they have to get 40 more in one more week to achieve the goal of 100 new customers in one month. If a restaurant's goal is $5,000 in sales per day and the register collects $4,800 before dinner time, then a manager may conclude that the restaurant had a busier-than-normal lunch crowd. How managers interpret the information determines how a business needs to change to achieve the goals set forth by the company.

Examples of KPIs

Companies need data so that managers can analyze the information. Once leaders know what the information means, the company can take action based on the results. KPIs occur in four main areas of business operations: cost reduction, customer service, revenue improvement and business process.

Companywide metrics that are important include sales, revenue, profits, expenses and efficiency. Each of these types of KPI measure how well a company is doing during a particular month. If a business sees that its profits increased 3 percent from the previous month despite a decrease in takings, managers need to know why that happened and what changed.

Some KPIs remain relevant to certain departments instead of the entire company. Human resources needs to know how much revenue a company generates per employee, the turnover rate, employee satisfaction, the response to open positions and the training return on investment. For instance, a company wants to change the turnover rate of employees from two years to three years. The HR manager should look at the company's KPIs that indicate why employees leave, such as low salaries, lack of promotions or dissatisfaction.

Companies that rely on customer service delivery have many metrics that gauge how well employees interact with customers. Customer ratings, time per call, volume of calls and the number of customer complaints all take into account the effectiveness of customer service. If the volume of calls increased by 10 percent on one day, managers need to know why so the company can take action to alleviate the extra load on employees. Do the extra calls mean more employees need to come into work the next day, or do more calls indicate a problem with a product? It's up to the leaders in the company to determine what the data indicates.

The Bottom Line

KPIs help a company earn profits more efficiently. This information, shared among managers, department heads, executives and leaders, helps businesses order raw materials, hire more staff, increase sales and improve customer service. Not every KPI statistic remains relevant to a business, so companies should choose their metrics wisely.

The key to KPIs is how well a firm collects the information. Specialized computer software helps in this regard, so firms should invest in the best possible solution for their current and future needs.

Photo Courtesy of David Castillo Dominici at FreeDigitalPhotos.net

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  • Hema Zahid
    Hema Zahid

    I find that I work better when I know exactly how close I am to reaching a goal. If a manager referred to a KPI and told me that a specified amount of work needed to be done, then that would definitely increase my productivity. If used properly, KPIs can provide businesses with a great way to motivate employees.

  • Kristen Jedrosko
    Kristen Jedrosko

    Would some of the software available for measuring KPIs be able to manipulate the data at all? We all know the world is unpredictable, so things can happen that are outside of the organization's control that can greatly affect their performance on many levels. In the case of a disastrous event it seems that it would be a daunting task for a human to have to sort through and manipulate data themselves.

  • Nancy Anderson
    Nancy Anderson

    @Mike as @Jacob mentioned - the first step is knowing what is more important for the success of the company. Every company is going to have their own set of KPIs. Have you ever been involved in creating KPIs? It can be quite interesting and a real eye opener about your company. I had the pleasure of being involved from the very first step in the process. During that step we had a huge group brainstorming which gradually resulted in the KPIs that were needed. We set it up so that we reviewed them every 6 months and made modifications as needed.

  • Mike Van de Water
    Mike Van de Water

    In a sea of information, how do you determine which KPIs are the correct ones to be following? It seems like basing your business strategy off what may be a sub-optimal statistic (or group of statistics) could be potentially devastating. For example, a company that is so focused on getting new customers that existing customer satisfaction falls to unacceptable levels.

  • Jacob T.
    Jacob T.

    Measuring KPIs is indeed a very critical measuring stick companies can use to gauge success or failures. I agree that one of the key pieces of using this type of data is to first know what is more important to measure for your company. It is far too easy to get lost in a sea of statistics and miss key pieces of information by trying to measure everything.

  • Jacqueline Parks
    Jacqueline Parks

    Although KPIs provide an efficient way to use data to make better decisions, I also think it is important to keep an eye on the more personal and human parts of your business results when making plans. KPIs are occasionally misleading. For example, a manager might assume that a lack of repeat customers following calls to customer service is due to poor customer service. It could actually be due to high prices or poor product quality, either of which could lead to calls to customer service. KPIs need to be analyzed along side more direct customer surveys and interviews to avoid confusing causation with correlation.

  • Nancy Anderson
    Nancy Anderson

    Thanks for the comments. @Jay I would pretty much guarantee that you can find a software program to track your KPIs and that it would be based in the clouds as well as formatted for mobile devices. Companies that produce KPI software would certainly have to be totally up-to-date in the latest technology. @Lydia certainly companies would take into account that some people are just vicious and would try to attack through negative reviews. Hopefully the company has someone tracking reviews and will remove any negative reviews if they are unwarranted. But, if the review was justified, the company should not remove it but respond in a way that will satisfy the reviewer and show that the company really cares. Again - remember that KPIs are "indicators" and that these change based upon the current needs. Nothing is written in stone when it comes to these.

  • Jay Bowyer
    Jay Bowyer

    Are there software programs out there that can help me keep track of — better still, formulate — KPIs for my business? If so, are they based in the cloud and can I access them via smartphone, tablet, laptop etc.? I'm a very mobile businessperson, but also want to ensure that I have my finger on my company's pulse at all times.

  • Duncan  Maranga
    Duncan Maranga

    The KPIs approach to company progress is very key in putting the company on the right track all the time. I believe there are times when a company is hit hard by turbulent times, especially from external competition, to the extent of loosening its grip on its set goals. This is the time the KPIs help it to see how well its wading through the tempest.

  • Lydia K.
    Lydia K.

    How much analysis is done on social media postings? On one hand this is a great way to keep tabs on how customers feel about a given product. But some people actually post false negative reviews that can also be damaging to company/brand reputations. Do companies factor this in when looking at KPI data?

  • Jane H.
    Jane H.

    A really great KPI that has helped a lot of major brands is the contemporary practice of keeping a finger on the pulse of customer satisfaction through direct interaction on social media. Twitter feeds and Facebook pages in particular have helped many companies overcome potential major losses when something went terribly wrong with their products or services. Frank discussions and promotional offers have led to measurably positive impacts on their bottom lines.

  • William Browning
    William Browning

    You can never have too much data so long as you have the right software that gives you the right numbers. That's where your understanding of the metrics comes into play. Learn how to interpret KPIs before you decide how to invest in technology that gives you the numbers you need to make money.

  • Shannon Philpott
    Shannon Philpott

    Key performance indicators are not just for collecting information about the company's clients, they are also helpful for measuring employee satisfaction and performance. In fact, many companies use KPIs when conducting employee evaluations. This information can ultimately help businesses to better serve their employees who may be more motivated to better serve customers. It's a win-win strategy.

  • Nancy Anderson
    Nancy Anderson

    @Abbey I can only speak from personal experience. I have worked for very large corporations as well as very small - less than 10 employee - companies and, in all cases, KPIs were all created in house - no outsourcing. You could probably get a consulting firm to come in and check out your company and see if you are on the right track - if your performance indicators are in keeping with the needs of the company. But typically the measures are all determined within the company.

  • Abbey Boyd
    Abbey Boyd

    I believe it is absolutely essential to keep tabs on how your company is performing, so I think the use of KPIs is a great idea. How do companies go about gathering and analyzing the information for KPIs? Do most companies handle all the data within, or are their firms that they outsource this job to? Does the size and nature of the company have an impact on this?

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