Defining KPIs

KPIs, or Key Performance Indicators, should be defined carefully in order to be effective and not be a waste of time.

Let’s start out with my guidance for defining KPIs and then we’ll dive into exactly how to get the job done.

Points to Keep in Mind When Defining KPIs

Here are the key points to keep in mind when defining KPIs:

1. KPIs roll up.
   Whereas OKRs align from the inside out or the top down, KPIs roll up. That is, in bigger organizations, they start at the Team level, roll up through the Department, the Business Unit or Division, and up to the Business. They are truly a centralized view of how the business is performing.
   
   
2. KPIs are numeric.
   This is not a time for qualitative indicators. KPIs are numeric measures or metrics. Actual numbers.
   
   
3. Give preference to metrics, but use measures when it makes sense.
   This was addressed in the article on Measures and Metrics at length. In most cases when you’re tempted to use a measure, you can work a little more and find a metric that will provide the same and additional information. Metrics are usually preferred because they tend to lead to better goal setting and therefore better performance. However, I have often found that sometimes a simple measure just makes more sense. So do what makes sense to you.
   
   
4. Use a good mix of Performance Metrics and Outcome Metrics.
   Do focus on a good mix of both Performance Metrics and Outcome Metrics. You should hold as your goal to discover all or almost all of the Performance Metrics that explain all or almost all of your Outcomes. Nailing down what leads to excellent performance can have multiplying results on the business in very short order.
   
   
5. Less is More.
   It’s easy to get carried away creating KPIs. Remember that you’re going to need to gather all of this data at least monthly and some you’ll want to look at weekly. Give preference to a lean set of numbers that tells you the most about your business for the least amount of work.

 

Steps to Defining Key Performance Indicators (KPIs)

Let’s get down to the business of defining KPIs and looking at some sample definitions. These are the exact same steps I take my clients through when I’m introducing a new client to the KPI and Performance Budgeting process.

It’s important to realize that when I talk about laying out KPIs, I do it in two steps:

1. First, I define the KPI itself. That’s what we’re doing in this article. That just means agreeing on the KPI to track, agreeing on its definition and why its important, and agreeing on where and how we’re going to measure it.
2. Second, I have my clients lay out a Performance Budget. That is a month-over-month plan for the performance in each KPI, much like a financial budget. Most folks don’t do that and just track their performance. That’s not the way I roll. I use KPIs in performance acceleration.

Let’s get to the planning. First click on the example below. We’ll refer to it as we step through.

1. Identify your “Departments”
   Even if you’re a solo or a small 2-4 person leadership team, it helps to think of your business as having “departments.” This helps you think of the critical facets of your business, the roles you need to fill, and the critical aspects you want to measure.
   
   The default departments I start my clients off with as a starting point in my KPI Tracking and Performance Budget Workbook are:
   1. Finance
   2. Sales
   3. Marketing
   4. Operations
   5. Human Resources
      
      
2. Identify your candidate KPIs within each department
   First, take a pass through each department and just jot down some metrics you think might make good KPIs. Don’t get hung up with anything like numbers or definitions at the moment. Just move quickly, making not of what comes to mind.
   
   If you expand the example above, you’ll see I’ve got some example KPIs already entered on the Sales tab. In the KPI Tracking and Performance Budget Workbook, I’ve got sample KPIs already entered on every page. Some will match your business and your business model perfectly, and others won’t make any sense and will need to be adjusted or deleted.
   
   
3. Take a pass through and “define” each KPI
   If you look at the sample above again, you’ll see I’ve got several columns that, taken together, serve to define the KPIs in a very specific way. Suffice it to say I’ve learned a few things through experience. For example, sometimes when you’re defining a KPI, actually defining it (for example, does Revenue include returns and credits? Or do we subtract out returns and credits?) may take some discussion. Without fail, if we don’t write down what we decided, as little as a month or two down the road, we forget what we decided and we have the same discussion again, and again, and again.
   
   So here are the columns in the spreadsheet and how I use them to define KPIs:
   1. Metric, or KPI Name. What is it that we’re measuring? What are we calling this thing? For example, “Work in Progress” or WIP is a very common measure in service based businesses that pre-book backlogs of work. We’re just interested in the name.
   2. Definition. How do we define this thing? This is especially important when there are similar measures and metrics, where it took us a long time to decide, etc. It is amazing how often we’ll get 3-4 months down the road and disagree on how something should be defined. For example, if you have metrics named “Overall Turnover,” “Short-term Turnover,” “Involuntary Turnover,” and “Voluntary Turnover,” this is where you define each so you can keep them straight.
   3. Importance. A definition doesn’t always make it clear WHY a KPI is important. This is your chance to give the purpose of value statement that’s attached to a particular KPI.
   4. Source. This tells what data we’re using to source the KPI. NOTE: the examples in the downloadable spreadsheet are necessarily generic. Yours should be specific. You should name the names of actual reports if possible, or data sources, etc.
   5. Comparison. (as used in my spreadsheet) Determines whether our mathematical comparison is made as less than, equal, or greater than plan. Possible values:
      1. <
      2. <=
      3. =
      4. >=
      5. >
   6. Type. (as used in my spreadsheet) Determines the comparison type for the Year to Date and Overall comparisons. Possible values are:
      1. Cumulative. For example, monthly planned revenue of $100,000 measured under a Cumulative Type would add up to $1,200,000 over the full plan.
      2. Average. For example, monthly planned revenue of $100,000 would average out to $100,000 over the full year plan.
      3. Point-in-time. For example, the amount that would be reported would be the last month with a value. In the case of a revenue budget, if the last planned value was $100,000, that’s what would be reported.
   7. Threshold. (as used in my spreadsheet) Determines the Red/Yellow/Green thresholds the represent KPI health. Three possible values are possible and fully adjustable. To adjust the thresholds, see the Threshold Value adjustment on the Instructions tab in the spreadsheet. The pre-determined values are:
      1. Default: 20% Green to Yellow; 40% Yellow to Red
      2. Set 2: 1% Green to Yellow; 5% Yellow to Red
      3. Set 3: 10% Green to Yellow; 20% Yellow to Red
   8. Base. The approximate starting value for the KPI. Not used in calculations for your reference when setting your plan.
   9. Target. The target ending value for the KPI. Not used in calculations for your reference when setting your plan.

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