The key performance indicators (KPIs), also known as key success indicators (KSIs), differ amongst firms and industries based on the performance criteria they seek. This post will guide you through everything you need to know about KPIs.
If we were to define KPIs, we can say that they refer to a set of quantifiable measures used to assess the overall long-term performance of a company. KPIs specifically contribute to the determination of a company’s strategic, financial, and operational achievements, especially compared to other firms in the same industry. KPIs measure a company’s success against a set of competing targets or companies in the industry.
Why Bother with KPIs?
One of the most crucial aspects of driving success is maintaining a deep understanding of how each element of your organization functions. Staying on top of progress ensures you know what is working and what isn’t, allowing you to recognize problems immediately and capitalize on successful projects.
Good KPIs provide objective evidence of progress toward the desired outcome. Business without them is like sailing without a compass. Make sure you have everything you need to know about KPIs to be able to see the bigger picture and make better decisions.
You will get comparable data that measures the degree of change in performance over time. Among others, you can track efficiency, effectiveness, quality, timeliness, compliance, behaviors, economy, project performance, staff performance, or resource use.
A well-constructed set of key performance indicators helps organizations translate visions into strategies and track the impact of initiatives. Companies thus benefit from progressive achievements toward their desired goal, a better perspective on their business, and real-time information to make the best decisions.
How to Choose a Good KPI?
Not every measurable value is a good KPI. For example, statistics such as the number of employees or the number of invoices issued cannot be considered comparative or predictable benchmarks in terms of performance evaluation. Good KPIs answer questions about the company’s present and future, such as “Where are we?”, “What is our progress toward our goals?”, “How do we get there?”
A good KPI for one company or industry may be irrelevant for another. For example, an IT company that strives to achieve the fastest growth in its industry can consider year-over-year revenue growth as the primary indicator of its performance. Alternatively, a chain of retail stores might consider sales per store as the best way to gauge growth.
Keep in mind that as your company’s goals change, you need to review your KPIs regularly. You must also remember that key performance indicators are all about presentation. Even the best planning, knowledge set, and methodology can make a company’s efforts to achieve goals prove futile if KPIs fail to communicate their goals effectively and clearly.
Characteristics of a Good KPI
A well-structured KPI includes:
- A method of measurement. Each KPI must measure something. Usually, the best KPIs are the most representative measurements of a process.
- A target. Any business should have a target to strive to achieve. A good KPI will measure the improvements toward the pursued goal within a certain period.
- A data source. Each KPI must be based on a clearly defined data source so that there is no gray area in the way each process is measured and tracked.
- Reporting frequency. KPIs may have different reporting requirements, but it is a good idea to report them at least monthly.
Examples of KPIs
- the number of new contracts signed over time;
- the value of new contracts signed over a certain period;
- the number of potential customers involved in the sales channel;
- hours of resources spent tracking sales;
- average conversion time;
- the average cost for conversion;
- net sales.
- revenue growth;
- net profit margin;
- gross profit margin;
- operating cash flow.
- the number of returning customers;
- market share;
- the average value of the purchase order;
- percentage of returned products.
- order fulfillment time;
- time required for purchase;
- employee satisfaction assessment.
- monthly website traffic;
- number of potential customers;
- the conversion rate for purchases coming from the content or ad campaigns;
- keywords in the search engine results and their ranking;
- audiences for ads.
What Can a KPI Track?
One can divide KPIs into quantitative and qualitative indicators. Quantitative indicators measure numerical results: financial, working hours, etc. Qualitative indicators measure non-numerical variables such as opinions, tastes, etc. Then it applies a scale to them. For example, you have to rate a service or product on a scale of 1 to 10.
In some cases, KPIs represent the progress toward achieving future targets or results already achieved. They can measure:
- Inputs. Defines the characteristics of the resources used to produce results.
- Processes or activities. A description of what makes a process efficient, effective, or consistent.
- Outputs. A comparison between the results achieved and the work performed for it.
- Results. Focus on achievements or impact and are classified as intermediate results, such as brand awareness ( for example, marketing campaign results) or end results, such as customer retention or sales ( determined by the increase of intermediate results).
- Project objectives. Answer questions about the status of deliveries and significant progress on important projects or initiatives.
- Operational functions. Focus on tactics and operations designed to provide information for making the best decisions regarding, for example, the daily delivery of products/services or other operational functions.
- Risk. Focuses on the factors that can threaten the company’s success.
- Workforce. Aim at assessing the human behavior, skills, or performance needed to accomplish the strategic objectives.
KPIs related to the financial situation usually focus on revenue and profit margins. Net profit, the most widely used result indicator, is the amount of income that remains, as profit for a certain period, after accounting for all expenses, taxes, and interest payments of the company for the same period. Analysts must convert it into a percentage of revenue, known as the net profit margin, for use in benchmarking.
For example, if the average net profit margin in a specific industry is 50%, a new business in that sector will know what performance it needs to achieve to remain competitive. Gross profit margin, which measures revenue after accounting for costs directly related to production, is another profit-based KPI.
A company’s current assets are compared to its current liabilities to calculate the current ratio, which measures liquidity. A financially sound company usually has enough money on hand to meet its financial obligations for 12 months. However, different industries rely on debt financing. Therefore, a company should only compare its current ratio with that of other companies in the same industry to determine how its cash flow fits into the pattern of that economic segment.
Although many SEO experts and online marketers will disagree with this statement, keyword growth can be a KPI. A site can increase or decrease in keywords depending on the efforts made by SEO optimization specialists. The more important the activity, the more a site can be at the top of the first page or can appear on the next ones.
Also, it is good to know that some sites appear randomly above others, depending on the number of people who visit them frequently. In this sense, it is very advisable to observe the trends in SEO and the weekly or monthly searches. Track keyword increases to understand how they relate to KPIs.
Analyzing KPIs and almost everything you need to know about KPIs in SEO comes with the help of Google Analytics. Thus, you see the long-term dynamics of site development. As a result, you will see the evolution of the website over time. In addition, Google Analytics allows you to establish and track actions that result in conversions, such as buying a product, downloading a PDF business offer, signing up for a newsletter, and completing an online order.
How Many KPIs to Track?
The number of key performance indicators required by each organization will vary. Good plans use sets of 5-7 KPIs to manage and track the progress of their development plan. The number of main objectives in your corporation will determine the final number of KPIs. You can also aim for a minimum of 2-3 KPIs per goal to ensure a range of indicators without overburdening the image.
Each business goal should have at least 2 KPIs, one leading and one lagging indicator. Consequently, you can forecast future performance and compare it to your business goals. Many strategy discussions refer to leading and lagging KPIs, but what is the difference between them? The leading KPI indicator shifts before the firm follows a particular pattern or trend.
It is imperative to use KPIs to forecast changes in the organization and future performance. While they are predictors, they cannot always be accurate. On the other hand, a lagging KPI tracks an organization’s actual performance.
Leading key performance indicators are frequently simpler to impact than lagging KPIs. However, assessing them might be more complex in general. In contrast, lagging KPIs tend to be easier to assess, but far more difficult to change.
Similarities between KPI and Machine Learning
The forecasting of key performance indicators is becoming increasingly significant before making an investment decision. This method is the best way to get early insight into a company’s health and earnings report.
In principle, fitting a model to historical time series data and forecasting KPIs should be comparable to forecasting stock prices. In actuality, there are significant disparities in method and implementation when it comes to estimating corporate KPIs.
KPI forecasting is far more accurate than price predicting since the data is less noisy and less susceptible to external variables. KPI forecasting is most difficult due to a lack of training data. To train a machine learning regression model, you need a wealth of values.
KPIs are frequently reported quarterly, so 20 years of historical data would only yield 80 KPI results. That is not enough data to train on. Alternative data sources, such as social network sentiment, the internet of things, or even site scraping, are only a few years old.
Alternative data might indeed be presented at various time intervals, but all data frequencies must be translated to the lowest common denominator: daily. The objective is to achieve uniform distribution across all data sets. Thus, a machine learning regression or a classifier will have a much easier time selecting features and building multi-factor models from orthogonal datasets.
For example, if we wished to interpolate or extrapolate the daily values between two quarters, the following typical approaches are given in order of efficacy:
- Naive. Carry the last known value forward each day until the next quarterly value is released.
- Interpolate. Divide the values equally across two neighboring quarters.
- Quadratic Interpolation. Use a formula that takes into account values from Quarters 1 and 2. As time passes, the formula weights values from days closer to Quarter 2 more than days closer to Quarter 1.
- Curve smoothing and seasonality. In industrial time series forecasting, algorithms such as Autoregressive Integrated Moving Averages (ARIMA) and Holt-Winters provide curve smoothing and season-based forecasting.
Utilizing the most recent and cutting-edge deep learning research is essential when applying machine learning to a limited training set. Decision trees or logistic regressions are better than multi-layered deep learning networks. Training deep learning infrastructure with a small set of data is not possible. It can only be effective if there is a large amount of training data.
Forecasting KPIs has applications well beyond financial research, which is fascinating. Any company that wants to anticipate its key performance metrics based on internal and macro data can use data science and machine learning.
In essence, creating successful performance indicators is all about understanding the company’s aspirations using a clear and structured process. Developing meaningful performance indicators that track and visualize performance requires some planning. A KPI should address a specific business objective and provide accurate and timely data to assess progress towards that objective.
This is about everything you need to know about KPIs. Measure your success and advancement using KPIs. Making informed business decisions, improving performance, and understanding your company’s development can be achieved. You may track your professional development using meaningful KPIs to make better decisions, fulfill objectives, and enhance performance.