Developing Effective Key Performance Indicators: More Than Guesswork

Imagine sitting in a staff meeting that went something like this:

Boss: “So Ted, how are things going in sales?”

Ted: “Pretty good. I sold some widgets last week. A few were returned, but I sold a few more.”

Boss: “Did the email campaign help?”

Ted: “Maybe. I sent the messages, and got a few responses.”

Boss: “Did we make any sales from the offer?”

Ted can’t provide the information, and his boss leaves the meeting frustrated and worried about whether or not the company will finish in the black this year.

Sadly, conversations like this happen in organizations of all sizes every day. Businesses set goals — a certain amount of sales, a reduction in business costs, a better reputation in the industry — but fail to determine how they will gauge the success or failure of their efforts toward those goals. As a result, they often end up spinning their wheels, performing the same tasks over and over again, or spending money on new marketing or training programs with only limited success. They wonder why they aren’t seeing the results they want, and why their company seems stuck in neutral — or worse, sliding toward financial ruin.

For many companies, the solution isn’t to start over and completely revamp all of their policies and processes nor is it to set arbitrary goals they hope they can meet. Instead, the answer usually lies in key performance indicators.

KPIs Defined

Key performance indicators, or KPIs, are commonly misunderstood. Many leaders incorrectly label their goals as KPIs, i.e., “We want to increase sales by five percent this year,” or “Reduce employee turnover by 15 percent.” While it’s important to develop specific and measurable goals, a KPI isn’t the goal itself, but rather the benchmarks and measurements that the organization uses to measure progress toward the goal to clearly show whether it is on the right track or not.

For example, if you want to increase sales, your KPIs may be related to closing and conversion rates, cost-per-sale and item-return rates. Rather than focusing on the overall goal of increasing sales by a specific percentage, looking at what is happening with each level of a sale can help determine where changes and improvements need to be made, and increase the likelihood of success. You can focus your efforts on improving those areas that need work (perhaps your cost per sale is too high, for example) and maintaining the status quo on those areas where you’re succeeding.

Developing KPIs

Creating key performance indicators for your organization requires doing some research and being strategic about the areas to look at. Again, you want to treat the KPIs as guideposts, showing you whether or not you’re on track to your final goal. Benchmarks must provide honest and accurate determinations of progress. It’s nice to know that your website gets 1,000 unique visitors every month, but if 999 of them do not make a purchase, then something isn’t right.

Once you’ve determined which points you want to measure — in general, three to five KPIs for each specific strategic goal will give you a good idea of your progress — you need to determine where you currently stand on those points and where you want to be. For example, if you are trying to reduce your cost per sale, you may need to evaluate your current cost and compare that to the ideal rate that will allow you to meet your goal. By comparing those numbers, you’ll set a specific indicator, such as “Reduce cost per sale by one percent this quarter.” After you’ve developed the specific points of measurement, create a dashboard — or use a mobile business intelligence platform — that will allow you to view your progress on each point.

Perhaps most importantly, for KPIs to be effective, they must be closely monitored and updated on a regular basis. Most organizations review progress toward goals quarterly, using the success or failure of each measure as a guide for their strategic planning for the next 90 days. When the KPIs are appropriately and effectively developed based on solid, existing data, it’s easier to pinpoint weaknesses and correct them.

Using KPIs and analyzing your company’s performance on an ongoing basis allows you to more effectively manage your resources, both in terms of people and money, and prevents surprises at the end of the year when you’re evaluating your performance. By asking the hard questions and looking for honest answers, you can keep your company on track to high performance and profitability.

About the Author: Tanya Lorette works as a writer and consultant to small businesses, helping them improve their online sales and marketing efforts.