Judging Success of Business by Key Performance Indicators (KPIs): Clear Measurable Outcomes That Define Predictable & Sustainable Success…

“Key Performance Indicators (KPIs) are the measures that monitor the performance of key result areas of business activities, which are absolutely critical to the success and growth of the business.

You can measure until the cows come home, but if your KPIs don’t allow for practical changes that actually increase business results, you’re wasting valuable time. Any key performance indicator you define needs to be quantifiable and to reflect a critical success factor for your business.”

Key Performance Indicators (KPIs) are vital means by which firms can judge how well they are performing towards achieving their strategic business goals. KPIs allow businesses to identify their most important measures, and they provide a standardized way of determining whether or not they are meeting their goals, targets, and objectives.

According to Josh Hall, Key Performance Indicators (KPIs) can be used to measure virtually anything.  Different businesses will use different indicators to measure their success; what is important to one business might be irrelevant to another. When determining which KPIs to measure, you should ask: What ‘really’ matters for business success? What ’really’ matters for customers? What ’really’ matters for employees?  What ‘really’ matters for stockholders?

Performance data is only relevant when it’s measured & tracked over an extended period of time with focus on changes and trends; a single snap-shot of information is entirely useless…

In the article How an Organization Defines and Measures Progress Toward its Goals by F. John Reh writes: Once an organization has analyzed its mission, identified all its stakeholders, and defined its goals; it needs a way to measure & track progress toward those goals; ‘Key Performance Indicators’ (KPIs) are those measurements.  Key Performance Indicators are quantifiable measurements, agreed to beforehand, that reflect the critical success factors of an organization– they will differ from organization-to-organization.

However, whichever Key Performance Indicators are selected; they must reflect that organization’s ‘goals’, they must be ‘key’ to its success, and they must be ‘quantifiable’ (measurable). If a Key Performance Indicator is going to be of any value, there must be a way to accurately define, measure, and track it. For example, ‘generate more customers’ is useless as a KPI; without some way to distinguish between new and repeat customers, or ‘be the most popular company’ won’t work as a KPI; there may not be a way to measure the company’s popularity or compare it to others.

Also, being consistent is very important, that is, don’t change the KPIs ‘definition’ from year-to-year; there must be ‘measurement consistency’ over the long-term. For example, a KPI of  ‘increase sales’ needs to address considerations like whether to measure by units-sold or by dollar-value-of-sales. Will ‘product returns’ be deducted from sales in the month-of-the-sale or the month-of-the-return? Many things are measurable:

But that does not make them ‘key’ to the organization’s success. In selecting Key Performance Indicators, it’s important to limit them to a small number of ‘critical’ factors that are ‘truly’ essential to the organization achieving its goals…

In the article “Business Cycle Indicators” by ‘The Conference Board’ writes: The economic statistics that provide valuable information about the expansions and contractions of business cycles can have a profound affect on the business’ KPIs. These economic statistics are grouped into three sets; lagging, coincident, and leading. ‘Leading’ economic indicators tend to move up or down a few months ‘before’ business-cycle expansions and contractions. ‘Coincident’ economic indicators tend to reach their peaks and troughs ‘at the same time’ as business cycles.

Lagging’ economic indicators tend to rise or fall a few months ‘after’ business-cycle expansions and contractions.  Business cycle indicators are a series of economic measures that track monthly business cycle activity. They provide consumers, business leaders, and policy makers with a bit of insight into the current state of the economy and a glimpse into where the economy might be headed.

The actual measures used as ‘business cycle indicators’ are collected by several different government agencies and private organizations, including; ‘Bureau of Labor Statistics’, ‘Federal Reserve System’, and ‘Dow Jones Company’. These measures are then compiled by economists and number-crunchers at the ‘Conference Board’ into leading, coincident, and lagging indicators and used to analyze business-cycle instability.

Many companies use these ‘business cycle indicators’ in defining and tracking their KPIs. There are also three terms that describe an economic indicator’s ‘direction’ relative to the direction of the general economy:

  • Procyclic indicators move in the same direction as the general economy: they increase when the economy is doing well; decrease when it is doing badly. Gross domestic product (GDP) is a procyclic indicator.
  • Countercyclic indicators move in the opposite direction to the general economy. The unemployment rate is countercyclic: it rises when the economy is decreasing.
  • Acyclic indicators are those with little or no correlation to the business cycle: they may rise or fall when the general economy is doing well, and may rise or fall when it is not doing well.

Business Performance Management’ is a set of management and analytic processes that enable the management of an organization’s performance to achieve their Key Performance Indicators (KPIs). Core business performance management processes include; financial planning, operational planning, business modeling, consolidation and reporting, analysis, and monitoring of KPIs linked to the strategy.

Business Performance Management involves consolidation of data from various sources, querying, and analysis of the data, and putting the results into practice. Business Performance Management has three main activities:

  • Selection of goals.
  • Consolidation of measurement information relevant to progress against goals.
  • Interventions made by managers to improving future performance against goals.

In the article What Do I Do With Key Performance Indicators?” by ‘Profit In Focus’ writes:  Once you have defined and targeted the Key Performance Indicators (KPIs), that is; ones that reflect your organization’s goals & ones that you can measure: What do you do with them? The Key Performance Indicators function as a business performance management tool, and as an organizational incentive. KPIs give everyone in the organization a clear picture of what is important and what needs to happen, and it’s a mechanism to manage performance. It ensures that the people in the organization are focused on meeting or exceeding those Key Performance Indicators.

Promoting the KPIs through organization-wide incentives and involvement is critical to its success: Post the KPIs in key locations in the company –in the lunch room, on the walls of conference rooms, on the company intranet, even on the company website for some goals. The people involved must be informed and motivated to achieve the KPI targets; display the target(s) for each KPI and show the progress (or lack of) being made towards each target(s)…

Measurable objectives are a vital part of any growth and expansion strategy. They provide businesses with a tangible, observable goals: KPIs are an important element of business strategy. Businesses cannot grow without coherent, relevant, and measurable objectives: Measurable objectives cannot be achieved without the efficient formulation and monitoring of KPIs; they are a vital element of any growth strategy.

However, there are potential problems with KPIs; among the most common is ‘data overload’.  It’s common for businesses to begin ‘measuring absolutely everything’, which is counter-productive; most information is not critical for business success. Another common issue is a lack of monitoring the results; KPI tracking is an ongoing and long-term process. For example, if you are measuring ‘average-revenue-per-customer’, you should be recording this information consistently on a weekly, monthly, or quarterly basis. This helps to identify trends in the data, and determines whether or not you are on track to achieve your objectives.

Defining and targeting the KPIs, such that, it tracks the ‘vital-for-success’ performance data should ensure that you are growing on a predictable and sustainable path; or it should provide an alert indicating that measures are out of alignment with the goals, and changes may be necessary. The targeted Key Performance Indicators should adhere to the rule of  ‘SMART’:  Specific, Measurable, Achievable, Realistic, Time-bound.  

Once the KPIs are identified, then there must be clear assignments of responsibility for delivering each KPI. It’s fine for your top-level strategic objectives to be abstract and business-wide, but it’s most important that the KPI targets are specific and well-defined, and each KPI is clearly assigned to a specific person(s): Each KPI must have an owner(s)– someone that’s responsible for the result(s)…

“Key Performance Indicator (KPI) has become one of the most over-used and little understood term in management. In theory it provides a series of measures against which internal managers and external investors can judge the business and how it is likely to perform over the medium and long-term.

Regrettably it has become confused with metrics – if we can measure it, it’s a KPI. The KPI when properly developed should provide all staff with clear goals and objectives, coupled with an understanding of how they relate to the overall success of the organization.”