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A KPI, Key Performance Indicator, is an outcome-based tracking mechanism that defines the results your Business As Usual is required to accomplish. Business As Usual typically consists of processes that you execute on an ongoing basis. A KPI, therefore, defines what your critical Business as Usual is (or should be) and enables you to easily monitor if it’s successful.
A KPI is an important instrument for every results driven organization. To get the most out of KPIs, you need to be sure you are working on the right KPIs. And you need to be sure that everyone in your organization and team understands the KPI. This article explains how to achieve that.
Before we proceed, make sure to also check our article The anatomy of a KPI so that you understand the different components that make up a KPI.
Getting the most out of KPIs
Here are the 5 steps to help you get the most out of KPIs:
- Identify the right metrics for your KPIs.
- Find the right way to calculate the current value (harder than you think).
- Agree on a target value.
- Make sure everyone involved understands the KPI.
- Regularly review your KPIs.
Let’s go through each step in more detail.
1. Identifying the right metrics for your KPIs
While this may feel like a daunting task, this is actually quite simple. KPIs and metrics have been around for such a long time and so many organizations are using them, that lots of example metrics are available today. You just have to pick the ones that you deem most relevant for you.
A B2B/SaaS company like Perdoo will always have MRR (or ARR, the annual equivalent of MRR) in one of their KPIs. Most companies today care a great deal about their employees and thus they have KPI that contains the metric Employer NPS. Marketing teams of online businesses will use website visitors, leads, and visitor-to-lead conversion rate.
The challenge is to focus on those metrics that really are key for your team or organization. KPI stands for Key Performance Indicators, and not all your “performance indicators” will be key.
I sometimes see teams with 30 KPIs, which is ridiculous. They’re avoiding the hard choices on what’s key and what isn’t. Ask yourself: Is this really reflecting our most critical business as usual? Is this really a metric that we need to be looking at every week?
Sometimes wanting to track too many metrics is the result of focusing too much on the details. A few examples to illustrate this:
- An HR team can track Employer NPS for each department individually, but they can also track Employer NPS for the company as a whole. When Employer NPS drops below the desired target level, they can then zoom in on the details to see if it’s a problem within a specific department or if the problem exists across the organization as a whole.
- A Software-as-a-Service business should track the metric MRR in a Company KPI, and leave NewBiz MRR to Sales and Churn MRR to Customer Success.
- A Customer Success team could track the metrics Expansion MRR, Contraction MRR, and Churn MRR in separate KPIs, but they could also look at Net MRR Churn Rate which incorporates all 3.
In Perdoo, to ensure you’re staying focused and working on KPIs that really matter, our system will flag when you have too many KPIs.
New to KPIs? Don’t overthink it!
If you’re new to KPIs I urge you not to overthink this step. Agree on an initial set of metrics (we recommend max 6), finalize the KPIs (step 2 to 4), work with them for a while, and then review them to make sure they’re the right ones for you (step 5).
2. Finding the right way to calculate current value
This is probably harder than you think. There are different ways to calculate the current value and each approach has its own pros and cons. I can’t tell you what the best formula is for your situation, but I can highlight the differences for you.
- Rolling X days vs. Fixed timeframes
If you’re focusing on rolling X days, your current value can change every day. If you’re focusing on fixed timeframes, such as monthly or annual, then your current value will only change once that timeframe is completed.
Do you need to get daily feedback on your KPI? Would you like to get immediate feedback when something changes? Then rolling X days is probably the better option. But if you don’t want to be disturbed too much, checking your KPI once a week or once a month, then a fixed timeframe would be better.
- Numbers vs percentages
For some KPIs, like your sales target (eg, Close $5 million in deals) it’s obvious that you want to look at numbers. For others, such as Visitor to lead conversion rate, it’s obvious that you want to look at percentages. But for some KPIs this is less clear. Imagine that you need to make sure your sales people are having enough demos with prospects. Will you be tracking the total number of demos booked, will you look at the % conversion rate on your demo booking page, or will you look at the % availability that your sales team has left? Each option will have its own pros and cons, so it’s important to decide what exactly you want this KPI to accomplish and then verify if your current setup is accurately reflecting that.
- Large vs small data sets.
The larger the data set that you’re focusing on, the more accurate your number probably is. For example, your NPS for the past 3 months is probably a better indicator of how happy your customers are than today’s NPS.
However, the larger the data set the longer it takes for your current value to move. Today’s NPS will change every day, while your NPS for the past 3 months will change much slower. If things recently started to deteriorate, you would see that immediately in today’s NPS but it would take much longer before you would see that in your NPS of the past 3 months.
3. Agreeing on a target value
Now that you know how best to calculate the current value for your metric, it’s time to decide what you want that current value to become. It’s time to set your target value.
The target value tells you what good performance looks like. Without it, the KPI can’t be an useful indicator of performance since — apparently — you don’t know what good performance looks like.
Less than or greater than
The target value is the minimum or maximum value that you want that metric to have. So you have 2 options for your target value:
- Greater than or equal to (≥)
- Less than or equal to (≤)
It doesn’t need an explanation that “greater than or equal to” is for metrics that you want to have a high value, such as Close ≥ $10 million in deals, Employer NPS ≥ 30, or Gross profit margin ≥ 70%. $10 million, 30, and 70% could be your targets, but anything higher than those would be even better of course.
Same for “less than or equal to”. This is for metrics that you want to have a low value, such a Gross Monthly Churn ≤ 2%, Annual Employee Turnover ≤ 10%, and Written-off invoices ≤ €25K. 2%, 10%, and €25K are your maxima, lower is better.
Healthy vs unhealthy
Your target value will define whether the KPI is healthy or not. If the current value exceeds your maximum target value, it will be unhealthy. Same if it drops below your minimum target value. An unhealthy KPI requires attention, which means you may need to create an OKR to fix it.
If it stays below your maximum or above your minimum, the KPI is healthy and there is no need to put extra focus on it.
KPIs that are unhealthy are marked with an orange triangle in Perdoo. You will also be notified about this in your feed, and via the Weekly Progress Reports.
Finding the right target value
It’s not always easy to find the right target value, but industry benchmarks (if available) can point you in the right direction. Is your website’s conversion rate currently at 4% and the industry benchmark states that for companies like yours 8% is considered a good conversion rate, then you know you probably still have a lot to win with your website.
When looking at industry benchmarks, it’s important to look at benchmarks for companies that are similar to you. For example, if you ask for credit card details during signup, your benchmark conversion rate is probably much lower than if you didn’t require this.
If industry benchmarks aren’t available, then you can verify your target value by asking yourself “What if we’re at this target value, will our business still be in good shape?”. For example, if you believe that a lead-to-customer conversion rate of 3% is good, but you know that your business needs to acquire 100 customers per month and your company currently acquires 2000 leads per month, then you know that the numbers don’t add up. You either need to acquire a lot more leads (can you reasonably expect that to happen?) or focus on a lead-to-customer conversion rate of 5%.
4. Making sure everyone understands the KPI
To make sure everyone understands a KPI, you need to provide proper context and ensure that it’s not open to more than one interpretation.
For each KPI, answer the following questions, and store these answers on the KPI so that they’re easily accessible for everyone in your organization:
- Why is this a KPI?
This question forces you to think critically about the KPIs that you are creating for your Team or Company. Your explanation for why you believe this should be a KPI helps others follow your train of thought. It helps them put the KPI into context, which is especially valuable in larger teams and organizations where you don’t have the chance to talk to everyone directly.
- How is the current value calculated?
However you calculate the current value, it is critical that everyone who will be looking at the metric understands how it is calculated. Share your formula.
- Explain how you got to the target value
Every KPI should have a target value, and everyone needs to understand why that is the target value. Is it based on a benchmark? Share your sources!
In Perdoo, you can store the answers to these questions in the description field of each KPI, so that they’re easily accessible to everyone across your organization.
5. Regularly review your KPIs
There is only one way to make sure that you’re working on the right KPIs and that is to regularly review them. At Perdoo, we review all our KPIs at the beginning of each quarter, at the same time when we’re closing past quarter’s OKRs and are drafting new OKRs.
Sometimes we realize that we never looked at a particular KPI, which could be an indicator that the KPI wasn’t really important. Other times we realize that the KPI didn’t influence our behavior, which could be an indicator that it wasn’t set up correctly.
Regularly reviewing your KPIs is also important because what could be the right KPIs for your team or organization for one year, doesn’t automatically mean that they’re the right KPIs for the next year.
Download the eBook: The ultimate guide to KPIs. Learn everything you need to get started with KPIs and get the most out of them!