What is a KPI?

Measure your performance against key business objectives.

Key Performance Indicator (KPI) Definition

A Key Performance Indicator is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs at multiple levels to evaluate their success at reaching targets. High-level KPIs may focus on the overall performance of the business, while low-level KPIs may focus on processes in departments such as sales, marketing, HR, support and others.

So what is the definition of KPI? What does KPI mean? What does KPI stand for? Here are a couple other definitions:

Oxford's Dictionary definition of KPI: A quantifiable measure used to evaluate the success of an organization, employee, etc. in meeting objectives for performance.
Investopedia's definition of KPI: A set of quantifiable measures that a company uses to gauge its performance over time.
Macmillan's Dictionary definition of KPI: A way of measuring the effectiveness of an organization and its progress towards achieving its goals.

Table of Contents for this KPI Guide

1. What makes a KPI Effective

2. How to define your KPIs

3. What is a SMART KPI?

4. What is a SMARTER KPI?

5. How to write and develop KPIs

6. KPIs as part of your performance management frameworks

7. Three ways KPIs can help build a better team

8. Are KPIs still relevant

9. KPIs in action

10. Top 15 Most common questions we get on KPI's

1. What makes a KPI effective?

Now that we know KPI stands for key performance indicator it is only as valuable as the action it inspires. Too often, organizations blindly adopt industry-recognized KPIs and then wonder why that KPI doesn't reflect their own business and fails to affect any positive change. One of the most important, but often overlooked, aspects of KPIs is that they are a form of communication. As such, they abide by the same rules and best-practices as any other form of communication. Succinct, clear and relevant information is much more likely to be absorbed and acted upon.

In terms of developing a strategy for formulating KPIs, your team should start with the basics and understand what your organizational objectives are, how you plan on achieving them, and who can act on this information. This should be an iterative process that involves feedback from analysts, department heads and managers. As this fact finding mission unfolds, you will gain a better understanding of which business processes need to be measured with a KPI dashboard and with whom that information should be shared.

2. How to define a KPI

Defining key performance indicators can be tricky business. The operative word in KPI is “key” because every KPI should related to a specific business outcome with a performance measure. KPIs are often confused with business metrics. Although often used in the same spirit, KPIs need to be defined according to critical or core business objectives. Follow these steps when defining a KPI:

What is your desired outcome?
Why does this outcome matter?
How are you going to measure progress?
How can you influence the outcome?

Who is responsible for the business outcome?
How will you know you’ve achieved your outcome?
How often will you review progress towards the outcome?

As an example, let’s say your objective is to increase sales revenue this year. You’re going to call this your Sales Growth KPI. Here’s how you might define the KPI:

To increase sales revenue by 20% this year
Achieving this target will allow the business to become profitable
Progress will be measured as an increase in revenue measured in dollars spent
By hiring additional sales staff, by promoting existing customers to buy more product

The Chief Sales Officer is responsible for this metric
Revenue will have increased by 20% this year
Will be reviewed on a monthly basis

3. What is a SMART KPI?

One way to evaluate the relevance of a performance indicator is to use the SMART criteria. The letters are typically taken to stand for Specific, Measurable, Attainable, Relevant, Time-bound. In other words:

Is your objective Specific?
Can you Measure progress towards that goal?
Is the goal realistically Attainable?
How Relevant is the goal to your organization?
What is the Time-frame for achieving this goal?

4. Being even SMARTER about your KPIs

The SMART criteria can also be expanded to be SMARTER with the addition of evaluate and reevaluate. These two steps are extremely important, as they ensure you continually assess your KPIs and their relevance to your business. For example, if you've exceeded your revenue target for the current year, you should determine if that's because you set your goal too low or if that's attributable to some other factor.

KPI Planner Download

Download this simple PDF to start constructing your own KPIs, with our helpful and simple KPI Planner!

5. How to write and develop KPIs

When writing or developing a KPI, you need to consider how that KPI relates to a specific business outcome or objective. KPIs need to be customized to your business situation and should be developed to help you achieve your goals. Follow these steps when writing a KPI:

Write a clear objective for your KPI

Writing a clear objective for your KPI is one of the most important – if not THE most important – part of developing KPIs.

A KPI needs to be intimately connected with a key business objective. Not just a business objective, or something that someone in your organization might happen to think is important. It needs to be integral to the organization’s success.

Otherwise you are aiming for a target that fails to address a business outcome. That means that, at best, you’re working towards a goal that has no impact for your organization. At worst, it will result in your business wasting time, money and other resources that would have best been directed elsewhere.

The key takeaway is this: KPIs need to be more than just arbitrary numbers. They need to express something strategic about what your organization is trying to do. You can (or should be able to) learn a lot about a company’s business model just by looking at their KPIs.

Without writing out a clear objective, all of this will be lost.

Share your KPI with stakeholders

Your KPI is useless if it doesn’t get communicated properly. How are your employees – the people tasked with carrying out your vision for the organization – supposed to follow through on your goals if they don’t know what they are? Or perhaps worse: Not sharing your KPI risks alienating and frustrating your employees and other stakeholders who are unable to see the direction in which your organization is heading.

But sharing your KPIs with your stakeholders is one thing (though even this is something that too many organizations fail to do). More than that, though, they need to be communicated in the right away.

KPIs need context to be effective. This can only be accomplished if you explain not just what you’re measuring, but why you’re measuring it. Otherwise they are just numbers on a screen that have no meaning to you or your employees.

Explain to your employees why you’re measuring what you’re measuring. Answer questions about why you’ve decided on one KPI over another. And most important of all? Listen. KPIs aren’t infallible. Nor will they necessarily be obvious to all involved. Listening to your employees will help you identify where your organization’s underlying goals aren’t being communicated properly

Say you’re getting lots of questions about why profit isn’t a KPI for your company. It’s a reasonable belief for your employees to have. Making money is, after all, an essential part of what any business does. But maybe revenue isn’t the be all and end all for your organization at a given time. Maybe you’re looking to make major investments into research and development or are on a major acquisition spree. Getting lots of questions like this is a sign you need to do a better job of communicating your KPIs and the strategic goals behind them.

And who knows: Your employees might even give you some ideas on how to improve your KPIs.

Review the KPI on a weekly or monthly basis

Checking in on your KPIs regularly is essential to their maintenance and development. Obviously tracking your progress against the KPI is important (what else would be the point of setting it in the first place?) But equally essential is tracking your progress so you can assess how successful you were in developing the KPI in the first place.

Not all KPIs are successful. Some have objectives that are unachievable (more on that below). Some fail to track the underlying business goal they were supposed to achieve. Only by checking in regularly can you decide if it’s time to change your KPIs.

Make sure the KPI is actionable

Making your KPIs actionable is a five-step process:

1. Review business objectives

2. Analyze your current performance

3. Set short and long term KPI targets

4. Review targets with your team

5. Review progress and readjust

Most of this we’ve already gone over, but it’s worth focusing on the need to develop targets for both the short- and long-term. Once you’ve set a goal with a timeline that’s farther into the future (say the next few quarters, or your fiscal year) you can then work backwards and identify the milestones you’ll need to hit on the way there.

Let’s say, for example, you want to sign up 1,500 newsletter subscribers in the first quarter of the year. You’ll want to set monthly, bi-weekly or even weekly targets to get there. That way you’ll be able to continually reassess and change course as needed on your way to achieving the longer-term goal.

You could divide the targets up equally according to each month. In this case that would be 500 subscriptions in January, 500 in February and 500 in March. However you may want to get more specific. There are more days in January and March than February, so maybe you want to set a target of 600 for those months. Or maybe you typically get more website traffic in February (perhaps your business has a presence at a major trade show) so you decide to set a target of 800 in that month.

Whatever it is, make sure you break up your KPI targets to set short-term goals.

Evolve your KPI to fit the changing needs of the business

KPIs that never get updated can quickly become obsolete.

Let’s say, for example, that your organization recently started a new product line or expanded overseas. If you don’t update your KPIs, your team will continue to chase targets that don’t necessarily capture the change in tactical or strategic direction.

You may think, based on your results, that you are continuing to perform at a high level. In reality, though, you may be tracking KPIs that fail to capture the impact your efforts are having on underlying strategic goals.

Reviewing your KPIs on a monthly (or, ideally, weekly) basis will give you a chance to fine tune – or change course entirely.

You might even find new and possibly more efficient ways of getting to the same destination.

Check to see that the KPI is attainable

Setting achievable targets for your team is essential. A target that’s too high risks your team giving up even before they start. Set a target too low and you’ll quickly find yourself wondering what to do with yourself once you’ve achieved your annual goals two months into the calendar year.

An analysis of your current performance is essential. Without this you’re left to search blindly for numbers that have no root in reality. Your current performance is also a good starting place for deciding on areas upon which you need to improve.

Start rooting around in the data you’ve already collected to set a baseline for what you’ve accomplished in the past. Tools like Google Analytics are great for this, but so are more traditional accounting tools that track revenue and gross margin.

Update your KPI objectives as needed

KPIs aren’t static. They always need to evolve, update and change as needed. If you’re setting and forgetting your KPIs, you risk chasing objectives that are no longer relevant to your business.

Make a habit of regularly checking in not just to see how you are performing against your KPIs, but on which KPIs need to be changed or scrapped completely.

To someone who’s never developed a KPI before, all of this might sound exhausting.

But here’s the good news: Once you’ve gone through this process a few times, it’ll be that much easier to use it again in the future.

Bringing it all together

KPIs generally are an essential tool for measuring the success of your business and making the adjustments required to make it successful.

The usefulness of individual KPIs, though, have their limits.

The most important part of any KPI is its utility. Once its outlived its usefulness, you shouldn’t hesitate to toss it and get started on new ones that better align with your underlying business objectives.

Get smarter about your data in daily bite-sized emails.

“I loved the short straight-to-the-point emails about KPIs and dashboards. I read all of them and I even kept some for later. Loved all the examples.”

- Audrey Hardou, Strategic IT Procurement Manager, Air Canada

6. Using KPIs as part of your performance management frameworks

The most common elements between most performance management frameworks are setting objectives, measuring performance, and managing all related activities.

According to classic old adage, Goodhart's Law, "any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes."

Charles Goodhart was an economist in 1975 whose research was used in helping criticize government decision making processes, specifically with regards to monetary policy. This concept was then made mainstream by Marilyn Strathern, “when a measure becomes a target, it ceases to be a good measure.”

A performance indicator or key performance indicator is just one type of performance measurement. There are many performance management frameworks that are both similar yet different. Each of these frameworks brings forward elements that can be pulled together to help drive success backed by data. Let's dig in.

Step 1: Aligning Business Strategy

A popular theme in startups these days is the One Metric That Matters (OMTM). The key takeaway from this simple, yet extremely powerful tool is that you have to have a thorough understanding of your business model in order to hone in on that metrics and get the entire organization aligned.

Many will argue that sales is the most important metric when it comes to measuring the success of a business. The challenge with this metric is the measured outcome.

Ask yourself: What is the one metric that would help drive more sales?

One answer to this question could be tracking the number of customers who have integrated your product with 3 other applications. This measure would be indicative of level of engagement, and their probability of churning would likely be reduced.

The reason being that once customers are locked in, they churn less which then creates the right unit economics for the company to grow. So in this case instead of looking at sales numbers, we would only count a customer if, and only if, they connected with 3 apps.

This is merely an example, and doesn’t mean that there is only one metric you should care about! This framework helps with keeping everyone focused on the one thing they should care about most.

Step 2: Cover all of your bases

With business comes trade offs.

You have probably heard the saying, "You can have cheap, good, or fast. But you can only pick 2".

Let's start with a classic framework that helps to navigate these trade offs. The Balanced Scorecard (BSC) helps you break down the key areas of your business (perspectives) where activities need to be monitored.

The four perspectives that need to be in balance are:

1. Financial Perspective

2. Customer Perspective

3. Internal Business Process Perspective

4. Learning and Growth Perspective

These four key areas of your business are intertwined and all must be aligned. When one is impacted, there is impact on another, in other words, there will be a trade off.

Step 3: Putting your BSC strategy framework into action with OKRs

The Balanced Scorecard (BSC) strategy suggests that for each perspective you develop objectives, measures (KPIs), set targets (goals), and initiatives (actions). A more recent framework that is getting popularized is the OKR Framework. Popularized by its use at Google, the OKR (objectives and key results) framework is used to define and track objectives and their outcomes. Many would argue that this framework sits in between a KPI strategy and the Balanced Scorecard approach.

OKRs are used as a performance tool that sets, communicates, and monitors goals in an organization so that all employees are focused in the same direction. The system encourages employee success through clear work objectives and desired key results. The beauty of the system is that it provides a simple, practical, and straightforward framework for defining, tracking, and measuring goals, both as something to aspire to and as something that can be measured.

Step 4: Monitoring with a KPI Dashboard

A KPI dashboard provides you with an at-a-glance view of your business performance in real-time so you can get a better picture on how the entire organization is doing.

Common terms found in these frameworks that are worth understanding include:

Key risk indicator (KRI): a measure used in management to indicate how risky an activity is. Key risk indicators are metrics monitored by organizations to provide an early warning of increasing risk exposures in various areas of the business.

Critical success factor (CSF): is a management term for an element that is necessary for an organization to achieve its mission. Critical success factors should not be confused with success criteria. Success criteria is most commonly used in project management to determine if the project was a success or not. Success criteria are defined with the objectives and can be quantified by using KPIs.

Performance metrics: measure an organization's behavior, activities, and performance at the individual level and not organizational level. For example, an individual who works in a call centre may have performance metrics such as Number of Calls Answered, Average Wait Time, Number of Successful Calls Processed, and Average Length of Call.

Creating good KPIs for your organization is an iterative process.

10 criterion to consider when designing key performance measures

Consider this list of criteria when building out your key business performance measurement systems:

1. Be based on quantities that can be influenced, or controlled, by the user alone or in cooperation with others

2. Be objective and not based on opinion

3. Be derived from strategy and focus on improvement

4. Be clearly defined and simple to understand

5. Be relevant with an explicit purpose

6. Be consistent (in that they maintain their significance as time goes by)

7. Be specific and relate to specific goals/targets

8. Be precise – be exact about what is being measured

9. Provide timely and accurate feedback

10. Reflect the “business process” – i.e. both the supplier and customer should be involved in the definition of the measure

Let's use Tesla as an example

Step 1: Tesla's One Metric that Matters is number of new cars delivered per quarter. This is a hot topic for investors to measure their success.

Step 2: To build as many cars as possible, while still maintaining quality, Tesla needs to balance their core assets from their balance scorecard.

Financially: They may make the decision that delivery of cars is more important than profit in cars.

Customers: Customers have submitted their orders and are waiting for their delivery, the longer it takes the less excited and more likely they will cancel. So keeping customers happy is extremely important.

Step 3: Now that we have set some objectives with KPIs we need to set key results

One KR for customers that is a standard measure in supply chains could be: Deliver performance (DP) is set at 90% measured as the fulfillment of a customer promised delivery date.

Step 4: Using a KPI Dashboard to monitor key results

Dashboards often provide at-a-glance views of KPIs relevant to a particular objective or business process.

7. Three ways KPIs can help build a better team

There is a temptation in the business world to assume that key performance indicators (KPIs) are the sole purview of “organizational leaders”: CEOs, presidents, board members and other C-suite executives who make important strategic decisions.

The reality couldn’t be further from the truth.

KPIs, the principle metrics that define strategic success and act as a yardstick for areas that might need improvement, are an essential tool for developing your team and achieving high-quality organization-wide results.

They might even offer an innovative solution to the intractable problem of employee engagement.

The problem with employee engagement

Employee engagement is something with which many organizations are struggling. Just 33 per cent of workers in the United States (and a measly 15 per cent worldwide) define themselves as being “involved in, enthusiastic about and committed to their job and workplace” at work, according to Gallup.

This is profoundly impacting many businesses’ bottom lines. To cite just one statistic: Organizations with a highly-engaged workforce see an average 20 per cent increase in sales, Gallup says.

1) Unlocking the power of employee engagement

Employee engagement is one of the most elusive – and misunderstood – concepts in the business world today.

Many executives are struggling to cope in a world where employee expectations seem to soar by the day. Workers are more mobile than ever before, moving between jobs at a pace that would have seemed impossible only decades ago. In a world where the other side of the fence is as close as a search on Glassdoor.com and articles about what workplace culture should be proliferate on LinkedIn, it’s also more informed than ever.

Catered lunches or a foosball table in the break room might be enough to cut it in some workplaces, but these are at best temporary fixes.

So how, then, can managers breathe life into a disengaged workforce?

There is, of course, no one solution. But one area that should be a bigger focus is informing employees about, and getting them involved in developing, your organization’s purpose.

Connecting employees to your organization’s purpose

There’s a story (which may or may not be true, but we’ll leave that aside for the time being) that frequently makes the rounds on blog posts about employee engagement. It relates to a visit John F. Kennedy made to NASA during the 1960s. The president approached a man working at the facility to ask what he did for a living.

“Mr. President,” the janitor replied, “I’m helping to put a man on the moon.”

This response is frequently held up as the pinnacle of employee engagement. What business owner, manager or director wouldn’t want each and every one of their employees to feel this level of connectedness with their organization’s purpose?

Part of this, of course, comes with defining your organization’s mission. “Making money” isn’t enough. If you want an employee who is truly engaged, you need to find the unique quality that should make your employees want to get out of bed in the morning. (And no, “getting a paycheque” isn’t going to cut it).

Once you’ve decided on it, you need to find a way to show your employees how they connect to it.

That’s where KPIs come in.

Connecting employees to your organization’s purpose

Ask any employee why they don’t feel engaged at work and you’ll probably get some variation on the same theme.

They feel disconnected from the organization’s larger purpose.
They fail to see any impact their daily efforts – the activities which occupy most of their time – have on larger organizational goals.
They don’t understand the strategic direction of the organization.

These are in some ways distinct problems. But in other ways they all stem from the same issue: Poor communication, about strategy, between management and lower-level employees.

KPIs help solve this problem.

KPIs are, by their very nature, strategic. Because they differ from metrics, they help companies to really focus in on what’s important. Not everything can be a KPI. KPIs force you to focus in on those metrics that really underscore the end goals of your organization.

KPIs force an organization not just to measure how their strategy is performing, but to decide what their strategy is in the first place. They show employees a lot about what actually matters to management in the first place.

For example: Profit for a charity would be unlikely to qualify as a KPI. Why? Because a charity is a charity – it exists to achieve some sort of larger impact beyond simply turning a quick buck. An organization like that would be far more concerned with the amount they’re investing in scientific research, maybe, or perhaps the number of laws they were able to change.

Wouldn’t it be nice if your employees could see the end goals towards which they are working?

2) The role of KPIs in employee engagement

Here are the three main ways that adopting some KPIs can help your organization build a better team.

They get everyone pulling in the same direction

One problem with which team-builders perpetually struggle is bringing together the disparate elements of an organization to focus on key goals. Sales is worried about the minutiae of drawing in new clients and converting them into customers. Your product development team is focused in on the latest technology and trying to get it to market. Your human resources team is concerned with filling any openings and keeping your workplace engaged.

Adopting some KPIs can help bring it all together.

By focusing in on the key metrics that really underscore business success, you’ll be able to show your employees the role their work plays beyond just what they do on behalf of their particular departments.

They help connect employees’ work to organization-wide goals

KPIs are a great way to communicate strategy to your employees. They help wade through the at-times messy, cryptic and ambiguous world of tactics and connect them to the end goals of your organization.

Many of us have experienced this. We get so caught up in our own little work bubbles, trying as hard as possible to ensure we stay on top of our own specific set of tasks that we frequently fail to see why we’re doing it in the first place.

Is it any wonder that frustration and, eventually, disengagement sets in?

KPIs help cut through this muddle. They take a step back from the chaotic world of tactics to identify the end goals towards which everyone is working.

More effectively reach key goals

Micromanagement creates a lot of problems for employee morale. But one of the worst is the brake it puts on employees’ creativity.

Say you’re a manager who’s in charge of the launch of a major new product. That you want to make the product launch a success should be self-evident. But there’s a big difference between telling your team about the sales numbers you’d like to achieve and diving right into the nitty gritty of what you want the website to look like, which marketing channels you’d like to use and even when to send out social media posts.

Some managers might think they are just doing their job or even being helpful with employees by offering their “suggestions”. In reality what they’re doing is choking off their workforce’s creativity and likely frustrating them to no end.

No one expects managers to stay completely hands off with what their employees are doing. But the line between setting an end goal and telling your employees how to get there is a fine one.

The advantage with setting KPIs is that they allow you to set an expectation for what you want accomplished, while leaving the specifics up to the creativity and ingenuity of your team.

3) How deciding on KPIs can take your employee engagement to the next level

It starts a debate about strategic direction: You’d be surprised about how few organizations actually articulate their strategic direction in a clear, codified manner. Instead employees – including some fairly senior managers – are left to read between the lines to discern their organization’s strategy. Make money? Sell widgets? “Make a difference”? Establishing KPIs helps start a discussion about strategy. It forces you (and your employees) to ask the question: “OK, what is it we’re ACTUALLY trying to do here?”
It helps to establish how KPIs connect to strategic goals: Setting out a bunch of KPIs for your employees and saying “here, achieve these” isn’t good enough. Without context, KPIs are just a meaningless jumble of digits. Engaging in an exercise like this one will allow employees to not only know what the KPIs are, but to see how they connect to an organization’s end goals.
It engages employees directly: People like to be listened to! If nothing else, taking the time to hear about what your employees to say will have inherent engagement benefits.

Get smarter about your data in daily bite-sized emails.

“I loved the short straight-to-the-point emails about KPIs and dashboards. I read all of them and I even kept some for later. Loved all the examples.”

- Audrey Hardou, Strategic IT Procurement Manager, Air Canada

8. Are KPIs still relevant?

KPIs often have a negative connotation associated with them. Unfortunately, many business users are beginning to see KPI monitoring as an obsolete practice. This is because KPIs fall victim to that most human of all problems: lack of communication.

The truth is that KPIs are only as valuable as you make them. Key performance indicators require time, effort and employee buy-in to live up to their high expectations. Bernard Marr, best-selling author and enterprise performance expert, sparked an interesting conversation on this subject in his article, "What the heck is a KPI?" The comments make it clear that while key performance indicators may have fallen out favour (depending who you ask), their potential value remains in the hands of those that use them.

So then why are key performance indicators so important?

Setting key performance indicators for an organization usually happens during the strategic planning phase, whether you do that yearly, quarterly or even more frequently, the goal is to ensure the entire organization is aligned towards the same objectives. Imagine a large row boat with ten people, if 3 people think the boat is heading left, 5 people think the boat is supposed to be heading right and 2 people think the boat is supposed to turn around. What happens to the boat?

The boat will start spinning around. Therefore, ensuring alignment from top of the organization all the way to the front line employees is the difference between a boat moving forward in unison vs getting nowhere.

9. Key performance indicators in action

Alright so now that you have defined all your key performance indicators now what?

KPI Report

Whether you share a KPI report daily, weekly, monthly, quarterly, annually or all of the above, setting up a good KPI report platform is key to your success. At Klipfolio we monitor a few KPIs but then track more deeply all the measures and activities that can effect that KPI.

For example, if we track Monthly Recurring Revenue (MRR) we know that # of quality leads, # of trials started, # of successful onboards and many other measures will impact the success of MRR. So we track a daily number of new leads created with an email report every morning at 8am. We have a dashboard to track several key activities to ensure the product trial starts are going smoothly in real-time and we track monthly the number of onboards completed successfully by the customer success team.

KPI Dashboard

With KPI dashboards becoming more and more prevalent in today's fast moving organizations such as SaaS and cloud-based businesses, they usually represent a consuming format where an individual can review their data in real-time whereas reports tend to be specific snapshots in a moment of time.

One of the most common uses cases of KPI dashboard tools are in startups who share their core organizational performance measures to get alignment from all the employees. When you walk around their offices, TV's will be placed near specific teams highlighting the results in real-time such as number of support tickets resolved today or number of new wins.

So what about key business performance measures?

If key performance indicators are your most important objectives for your business, how do you align your organization to get there? Performance measurement as defined by Wikipedia says "Performance measurement is the process of collecting, analyzing and/or reporting information regarding the performance of an individual, group, organization, system or component".

Therefore, business performance measures can be viewed as a way to quantifying (i.e. measure) the effectiveness and efficiency of an action or outcome that can align or impact your key performance indicators. Before picking and defining a business performance measure, managers and leaders need to know how to write them. There is a lot of great literature and research on this topic including Andrew Neely from the University of Cambridge, who wrote in designing performance measures you can leverage a structured approach by going thru a list questions to consider as you build your performance measurement system.