What is KPI: main ones, types and how to create
Peter Drucker, father of modern administration and management, said that what can be measured can be improved. After all, companies that follow their strategies closely identify errors and successes more easily, being able to replicate what has worked and adjust what needs to be improved. And that's where the KPI comes in, a metric used to measure the progress and performance of an organization in relation to its strategic objectives. A KPI, or Key Performance Indicator, is essential to monitor the success of a business, as it provides valuable information about performance and helps in making informed decisions. But do you know why this management tool is one of the most important to be applied to a business? We will understand below.
What is KPI?
Generally speaking, KPI is a specific metric that measures a company's performance in relation to its strategic objectives. It provides a clear and measurable overview of an organization's progress toward established goals, from increasing revenue and profitability to improving customer satisfaction and operational efficiency. KPIs may vary according to the nature of the business and its specific objectives. However, they must be defined in a clear, measurable, achievable, relevant and time-bound manner. In addition, a KPI can cover different areas of the organization, such as sales, marketing, customer service, operations, human and financial resources. It should be noted that the selection of an appropriate KPI is crucial. After all, defining too many KPIs can lead to information overload and make it difficult to effectively track performance. On the other hand, having too few KPIs may not provide a complete and accurate picture of organizational performance. Therefore, it is necessary to find a balance, choosing the most relevant and significant indicators for the company. Thus, the KPIs must also be reviewed and updated regularly as the organization's objectives and priorities change over time.
What is the purpose of a KPI?
There are several objectives that can be achieved with the use of KPIs, the main of which are:
Goal monitoring
KPIs provide an instant and tangible view of performance in relation to objectives. They allow managers to assess the success of their strategies and initiatives, identify what is working and what needs to be improved.
Data-based decision-making
The KPIs are based on concrete and quantifiable data, providing a clear understanding of the impact of actions and allowing leaders to identify which areas need additional attention or investment.
Strategic Alignment
KPIs help ensure that all parts of the organization are aligned with strategic objectives. By establishing relevant KPIs and sharing them with the team, everyone has a clear understanding of priorities and what needs to be achieved, which facilitates collaboration and teamwork.
Identifying trends and patterns
By analyzing the data collected by KPIs over time, it is possible to identify trends and patterns that can be used to predict future performance. This analysis allows the company to anticipate problems, identify opportunities, and take proactive steps to improve results.
What are the types of KPIs?
When it comes to the types of KPIs, it is common to classify them in different ways, taking into account their importance, purpose or application. It is important to remember that the choice of an appropriate KPI will depend on the specific objectives and needs of each company, considering both strategic and operational aspects, as well as the availability of data. But, before choosing, it is important to understand the depth of each type of KPI and what they propose to measure. Among the most common classifications are:
Primary KPI
Also known as key KPIs, they are the key indicators that are directly aligned with the organization's strategic objectives and mission. These KPIs have a direct impact on the company's overall success and are used to assess global performance. Examples of primary KPIs are total revenue, net profit, market share, and customer satisfaction.
Secondary KPI
Secondary KPIs are indicators that help provide insights about specific aspects of a company's performance. Although they are not as directly related to general strategic objectives as primary KPIs, they are important for the effective management of individual areas and processes. To name a few examples of secondary KPIs: conversion rate, Churn rate (cancellation fee), cost per Lead and average customer service time.
Practical KPI
Practical KPIs are indicators that can be easily applied and measured in a company's daily operations. They are useful for evaluating performance at operational levels and helping with immediate decision-making. Some practical KPIs include the number of products manufactured per hour, sales team productivity rate, on-time delivery rate, and average response time to a support call.
What's the difference between KPI and metrics?
The fundamental difference between KPIs and metrics lies in their strategic relevance. In short, a KPI is a specific and relevant metric that is directly linked to the strategic objectives of an organization. As we have seen, a KPI is selected based on its importance for measuring performance in key areas that impact the company's overall success. It provides a clear view of progress against specific goals and helps guide the company's actions and decisions. On the other hand, metrics are quantitative measures used to evaluate or quantify a specific aspect of a business. They can be used to monitor a wide range of data, from financial indicators to operational, marketing and quality metrics, and more. Metrics provide valuable information about a particular process, activity, or result, but not all metrics are considered KPIs. The line is thin, but they are different things that complement each other. However - and here is the jump-flop that creates confusion and unites the two expressions - the fact is that, if metrics become relevant to a strategy, then they can become key performance indicators.
What are a company's main KPIs?
The main KPIs of a company may vary depending on the sector of activity, the size of the organization, and the specific objectives. However, to provide a comprehensive overview, let's explore some examples of KPIs in different functional areas.
Sales
In the sales area, KPIs play a fundamental role in measuring performance and achieving objectives. Some of the key KPIs include total revenue, evaluating the financial value generated by sales, and the conversion rate, which accompanies the proportion of Leads who convert into effective customers. In addition, the average sales amount is an important KPI along with the number of new customers, showing the growth of the customer base and may reflect the success of acquisition strategies.
Marketing
In the marketing department, KPIs are crucial for measuring the performance of campaigns and outreach activities. In this scenario, the cost per Lead is a significant KPI. In addition, monitor KPIs related to site traffic and the conversion rate of Leads in sales it helps to evaluate the effectiveness of marketing in generating real customers.
Logistics
In the logistics area, KPIs are used to assess the efficiency and quality of delivery and transportation processes. Here, the average delivery time is a relevant KPI, as is the on-time delivery rate.
Quality
In quality control, KPIs are essential to monitor the excellence of the products or services offered. In this context, we have as KPIs the defect rate and the rework rate, both related to the number of errors or defects in the products or services.
Financial
Here, KPIs are used to assess the company's financial health and its economic performance. In the financial aspect, net income is a central KPI, indicating the amount remaining after all expenses are deducted from revenue. Profit margin is also an important metric to consider, as is return on investment (ROI).
Operational
In the operational area, KPIs are used to monitor the efficiency of internal processes and team productivity. Thus, we have the labor productivity KPI, the equipment utilization rate and the average cycle time, an indicator that allows us to identify opportunities for optimization and time reduction.
How to create a KPI?
Preliminarily, you need to know what is relevant to your business vision. Or rather, what is your business objective when seeking to establish metrics and KPIs. So, start with these steps:
Define strategic objectives
First of all, define What does your business seek to optimize, and in which sector. Start by identifying the company's strategic objectives, seeking to understand what is important for business success.
Establish clear and relevant metrics
Don't forget: the goals associated with the KPI must be SMART - Specific, Measurable, Achievable, Relevant, and Temporary. Therefore, define clear goals that are specific enough to provide guidance, measurable to enable the quantification of progress, attainable so that they are realistic, relevant to the company's objectives and temporal to establish a defined deadline.
Define the formula or calculation method
Determine how the KPI will be calculated or measured. This may involve developing a specific formula, defining classification criteria, or selecting pre-existing performance indicators.
Establish the monitoring frequency
Decide how often the KPI will be monitored and reviewed. Some KPIs may require daily or weekly reviews, while others may be monitored monthly or quarterly. Define a schedule that's appropriate for the metric and context.
Implement data collection systems
Identify data sources relevant to the KPI and establish efficient systems for collecting and recording that data. This may involve the use of softwares specialized, process automation, or the creation of clear procedures for manual data collection.
Communicate and engage stakeholders
Share the KPI with relevant stakeholders, such as the management team and collaborators involved. Make sure everyone understands the importance of the KPI, its goals, and how it will be measured. Encourage the participation and commitment of teams to achieve the expected results.
Monitor, analyze, and adjust
Regularly monitor the performance of the KPI, analyze the results, and make necessary adjustments as appropriate. If the KPI is not meeting established goals, review the strategy, processes, or resources allocated and make the necessary changes to boost performance.
Finally, start measuring
Sheets, dashboards, interactive whiteboards, and whatever else makes sense for your team's reality! The most important thing is to have a concrete database, which allows us to measure the objectives in a real way, that is, to ensure that they reflect the reality of the business. Work with objectives and strategies that match your company and the future you intend to give it. To do this, investigate what can be done to achieve the objectives set and evolve strategically. In this scenario, the use of KPIs combined with the digitalization of processes is a powerful combination to boost productivity in organizations. When we talk about electronic signatures and online document management, for example, we are looking for greater efficiency, reduction of errors and improvement of workflows. If you want to digitize your processes, as the main companies in the market do, in an applicable and legally valid manner, don't waste time and Discover Clicksign now!
