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Business-analysis is essential for a business to sustain a high level of success in a dynamic marketplace. Businesses must establish clear goals and ways to quantify and measure aspects of the business that might require impovement. Key Performance Indicators (KPI) provide the core measurable aspects of a business.
Defining KPI
KPI should be rooted in the goals and objectives of an organization. They can provide a measurement of progress toward an ultimate goal. KPI can also provide measurement of sustained performance in a significant area of operation. KPI should not constitute every company metric for analysis and evlaution. Rather, KPI should reflect the most important objectives of the business. The most important feature of any KPI is that it be quantifiable based on data. Existing data, sabremetric comparison of data, and/or future measurements of current operations should constitute the quantifiable data for KPI. Generally, KPI should consist of four elements:
- A clever title
- Variable(s)
- Methodology for Measurement
- Target
Business owners will best understand which factors are the most important to be considered for KPIs. Some common factors include: profitability or units sold, percentage of income from return customers, length of customer service calls, number of clients, working downtime, and employee turnover rate.
Specifics, Specifics, Specifics
KPIs are meant to be specific. KPI are intended to inform overarching management decisions; sloppy construction of KPI can lead to misinformation and business failure. Extra attention should be paid to the methodology for measurement, often a mathematical equation or other statistical metric. For instance, a KPI to increase customer satisfaction efficiently may consider the average time of a customer service call. Similarly, a KPI to increase sales volume should consider returns and exchanges. Understanding all relevant variables is essential to defining effective KPI.
Applying KPI
Data on its own accomplishes nothing. For KPI to make a difference in a business, they should be compared against predefined targets. Setting a clear performance goal is often more important than worrying how realistic or arbitrary the data seems. KPI are quantifiable embodiment of an organization’s goals. When properly defined, effective KPI define a successful organization. Employees should be informed of KPI and related progress, as this will provide an incentive to work productively towards meeting KPI goals. Moreover, top performers will be reassured of their contribution with encouraging KPI results.