Key performance indicators (KPIs)

Kay performance indicators (KPIs) are business metrics used by corporate executives and other managers to track and analyze factors deemed crucial to the success of an organization. Effective KPIs focus on the business process and functions that senior management sees as most important for measuring progress toward meeting strategic goals and performance targets. 

Furthermore, different business units and departments are typically measured against their own KPIs, resulting in a mix of performance indicators throughout an organization -- some at the corporate level and others geared toward specific operations.

Importance of KPIs

Key performance indicators shine a light on how well a business is doing. Without KPIs, it would be difficult for a company's leaders to evaluate that in a meaningful way, and to then make operational changes to address performance problems. Keeping employees focused on business initiatives and tasks that are central to organizational success could also be challenging without designated KPIs to reinforce the importance and value of those activities.

In addition to highlighting business successes or issues based on measurements of current and historical performance, KPIs can point to future outcomes, giving executives early warnings on possible business problems or advance guidance on opportunities to maximize return on investment. Armed with such information, they can manage business operations more proactively, with the potential to gain competitive advantages over less data-driven rivals.

Types of KPIs

KPIs that measure the results of business activities, such as quarterly profit and revenue growth, are referred to as lagging indicators because they track things that have already occurred. By comparison, KPIs that herald upcoming business developments -- say, sales bookings that will generate revenue in future quarters -- are known as leading indicators.

There's also a difference between quantitative indicators that have a numerical basis and qualitative indicators that are more abstract and open to interpretation, such as assessing user experience with a product or on a website. In the case of qualitative indicators, identifying useful KPIs can be challenging; the selection of appropriate ones depends on an organization's ability to actually measure them in some way. For example, the percentage of abandoned transactions in online shopping carts might be one indicator of customer experience on a retail website.

From a functional standpoint, key performance indicators encompass a wide variety of financial, marketing, sales, customer service, manufacturing and supply chain metrics. KPIs can also be used to track performance metrics related to internal processes, such as HR and IT operations.

How to measure KPIs

Once key performance indicators have been identified, they should be clearly communicated to employees so all levels of the organization understand which business metrics matter the most and what constitutes successful performance against them. This could include the entire workforce on broad corporate KPIs or smaller groups of workers on ones that apply to particular departments.

In most companies, KPIs are automatically tracked via business analytics and reporting tools that collect relevant data from operational systems and create reports on the measured performance levels. Increasingly, KPI results are presented to executives on business intelligence dashboards or performance scorecards that often include charts and other data visualizations, with the ability to drill down into the performance data for further analysis. Multiple KPIs also underlie balanced scorecard frameworks that pull together sets of metrics in an effort to provide a broader view of business performance beyond operating income and other common financial measurements.

One of the challenges in setting key performance indicators is deciding how many to track to determine organizational success. Having too many KPIs may dilute the attention paid to the truly important ones. As a result, it may be more effective to limit the scope to small sets of indicators.

Managers must continually evaluate KPIs to ensure they're still relevant and aligned with priorities in business operations. If individual KPIs no longer serve a useful purpose, they need to either be refined or replaced altogether.