We’ve all probably been to the doctor, and had our “vital signs” checked… your pulse, your blood pressure, your weight, etc. before we even get in to see the doctor. This information gives the doctor the necessary information they need to assess your current health situation, and possibly even predict how your health will be in the future. Just like those vital signs that the doctor checks, there are also vital signs that should be checked within your business, and this is where Key Performance Indicators come in.
KPIs are typically quantifiable measurements that reflect the Critical Success Factors of an organization. There are many different types of KPIs, and the selection of which KPIs are important is going to be driven by the type of business you are wanting to measure and manage.
In order to identify and select the right KPIs for your business, you must first identify what is important to the area of the business that you are looking to track, and this usually depends on, and is highly influenced by, the function you are tracking i.e. you would likely have very different KPIs for your Sales organization vs. those assigned to your Operations group.
For the most part, indicators will typically fall into one of two categories, either Leading or Lagging. Lagging indicators reflect past performance, and are usually used to determine the effectiveness of a particular strategy or process improvement initiative, whereas leading indicators are used to predict future performance.
For example, tracking and reporting on quality of defective materials or number of new customers acquired during a given period are lagging indicators. Projecting the anticipated number of new customers in the upcoming quarter, based on current leads in the pipeline and current conversion rates, would be an example of a leading indicator.
Additionally, a tool used to manage the overall information tracked by KPIs is a Balanced Scorecard, which takes into account which lagging and/or leading indicators need to be consistently measured in order to provide an accurate perspective of the “health” of the organization. This balanced scorecard ensures that you are examining each of the key areas of your business… sales, marketing, operations, finance… and this information is typically displayed on a “Dashboard” for ease of analysis. Just like the dashboard of your car, this tool can provide, at a glance, all of the crucial information the business owner needs to know to ensure that his or her business is performing up to expectations, and it should also provide immediate feedback if there are areas of the business that need to be reviewed and adjusted.
In order to have a successful business, it is vital that business owners have the necessary information available to them at all times, and KPIs provide the tools to ensure that’s possible.