What is a Key Performance Indicator (KPI)?

What are Key Performance Indicators (KPIs)?

KPIs help us to measure how well companies, business units, projects or individuals are performing compared to their strategic goals and objectives. Well-designed KPIs provide the vital navigation instruments that give us a clear understanding of current levels of performance. 

KPIs as navigation tools

Just like on an ocean-liner, where the captain and crew need navigation data to understand where they are relative to their planned sailing route. Indicators like GPS location data, speed, fuel levels, or weather information allow the team in charge to make decisions about where to steer next. 

This is exactly the same for companies or government organisations. Here, KPIs are the vital navigation tools that managers use to understand whether the business is on a successful voyage or whether it is veering off the prosperous path. The right set of KPIs will shine light on the key aspects of performance and highlight areas that may need attention. Without the right set of KPIs managers are sailing blind. 

The problem with selecting the right KPIs

The trouble is that there are 1000s of KPIs to choose from and companies find it hard to select the right ones for their business. Managers mostly struggle to identify the vital few management metrics and instead collect and report a vast amount of everything that is easy to measure or simply pick the KPIs everyone else seems to be using. The other extreme is where companies, business units, project team or individuals have little or no KPIs to understand their performance levels. 

Our research finds that less than 10% of all the metrics that are collected, analysed and reported in businesses are ever used to inform decision-making. 90% of the metrics are wasted, or worse, used to drown people in data while they are thirsting for insights.

KPIs as key decision-making tools

Effective decision-makers and managers understand that they need information on the key dimensions of performance and that this can be achieved by distilling them into the vital KPIs. Similarly to the way a doctor would go about trying to understand someone's health. Instead of measuring random things a doctor would focus on key health measures first, such as body mass index, cholesterol levels, blood pressure, and sugar levels.

In our organisations, the most effective KPIs are closely tied to strategic objectives and help to answer the most critical business questions. A good starting point is therefore to identify the questions that the decision-makers, managers or external stakeholders need to have an answer to. One or two so-called Key Performance Questions (KPQs) should be identified for each strategic objective. 

Once the most important business questions have been articulated it then allows companies to select or develop the right KPIs that best help answer them. That way all KPIs will be strategic, relevant and meaningful. 

To learn more about KPIs and metrics browse our free KPI library, read our books, articles and case studies or get in touch if you would like to discuss our KPI consulting or training services.