Key Performance Indicators (KPIs) are measurable values that provide an objective evaluation of how well a business has performed in meeting it objectives.
KPIs can be as broad as gross and net profit, or as specific as the average time it took to convert a lead.
The Value Of KPIs
Both broad and specific, KPIs are essential to business analysis by producing an objective performance measure that holds the business accountable.
KPIs are a businesses best friend, but are only effective when they are used in comparative analysis. Common methods of comparison include: internal and external benchmarking.
1) Internal Benchmarking
Horizontal (Trend) Analysis – this method involves comparing recent KPI values and ratios to results within the company at a previous time period. For example, a business generally compares performance to the previous month or financial year.
2) External Benchmarking
Industry Benchmarking – industry benchmarking is when a company compares its KPI values to the average of the industry, indicating how they are performing relative to the whole industry.
Australian industry metric values can be found via this ATO link.
Competitor Benchmarking – in this method a company will compare it’s KPI values to the corresponding values of a select number of close competitors.
Best Practice Benchmarking – this is similar to competitor benchmarking, however, the basis for comparison is against best-practice, or industry-leading, competitors.
How To Ensure You Have The Right KPI Management System
KPI management can be easy if the system is well-designed and monitored frequently. There are three tips for building an effective management system:
1) Systemise to avoid measurement mistakes
Recording mistakes can often occur from time-to-time if measures are being recorded manually. We are only human and we make mistakes sometimes, but do robots?
This error can be eliminated by automating your recording system. An automated recording system that integrates to all data collection baskets in your company will not only decrease the chance of recording error, but it will also improve your operational efficiency by uploading and updating instantaneously,
One of the primary reasons for the occurrence of recording errors is because businesses do not have a wholistic database for metrics. Often, metrics and KPIs will be segregated into departments such as marketing metrics, CRM metrics, manufacturing metrics, etc.
To better organise and monitor your company’s KPIs, check out some cloud-based solutions such as MAUS KPI Dashboard.
2) Make sure you have deep KPIs
A shallow KPI is when the KPI value is only measured by 1-2 single-dimensioned metrics. To get the most out of KPI tracking, KPIs should be an index of generally 3 or more metrics, which we refer to as deep KPIs. This not only cover more of the scope of the issue but will also allow you to investigate which component of the measure is negatively affecting the KPI. Including more KPIs results in the creation of a web of interdependent indicators.
MAUS CEO Peter Hickey introduced the KPI Iceberg Business Goals principle which emphasises that it is essential to understand the relationship between KPIs.
This principle suggests that often broad symptom KPIs such as profit, expenses and sales are just the surface-level factors, and that by establishing a network of KPIs, businesses and consultants will be able to track down the specific, deep-level causal factors.
3) Make sure you are measuring the right metrics
This is the most important aspect. A lot of the time, KPIs are inaccurate because they are not capturing the right information. To measure the right information, businesses need to start by defining what each KPI means to them. This is, of course, going to differ from business to business, and so too will the metrics to measure them.
This requires businesses to undertake extensive research and conceptual thinking to understand what measures and metrics are relevant to their business, and which metrics define a KPI.
Example: How to Measure Customer Satisfaction
Let’s suppose Average Joe owns a sunglasses brand and wants to measure it’s customer satisfaction. Joe’s company defines customer satisfaction as the positive reception of their products, where the product is fit for purpose and meets their customers needs. However, to measure this KPI they monitor the product’s ratings on an online review website.
TIP: We need to break it down and think critically about the KPI
This metric might only measure a select few customers – commonly with review sites, only the extreme satisfied or dissatisfied customers. Perhaps, their customer satisfaction KPI would be more accurate if the business broke down it’s definition of customer satisfaction, which encompasses:
- Positive reception of product – this could include metrics such as net promoter scores, online ratings and intentions to repeat purchase.
- Fit for purpose – this could include metrics such as product return rates, warranty claims, etc.
- Meeting customer needs – this could include metrics such as after-sales customer feedback loop ratings.
If you are interested in learning more about effective KPI management, you should consider the Certified Business Advisor Course.