Why Companies Use KPIs and How to Set Them
“What gets measured gets improved.”
This quote is attributed to business and management guru Peter Drucker. He understood that businesses needed to measure
Companies turn to key performance indicators, or KPIs, to measure the results of their business. They have access to more data than ever before, and they pour through data with the hopes of improving results.
If you want to grow your business, using business metrics can help you. It also helps to understand why companies use KPIs.
Why do companies rely on key performance indicators and how can you use them in your business?
Read on to find out.
Table of Contents
Benefits of KPIs
Key performance indicators are measurements used to gauge whether someone or some entity reaches set goals.
There are a number of reasons why companies use KPIs. The first is that they can measure the financial health of the business.
They create KPIs for revenue, customer retention, profit and loss, and cash flow. Companies use KPIs in departments and they measure individual performance.
KPIs give companies historical data, too. It’s possible to measure results against previous quarters and years. The historical data allows them to spot patterns and trends.
They can make better decisions and spot opportunities because they rely on the numbers in front of them, not intuition.
How to Create KPIs
Your company has access to so much data, you can measure every single aspect of it. That might seem like a smart idea at first, but your efforts to improve and manage the business won’t go far.
There’s no focus on key areas of the company, which is why you have to choose the right key performance indicators.
Take a look at the strategy of the business. What are the most important things to help you accomplish the strategy?
A company that has a large percentage of market share might focus on customer retention to drive results. That leads to more efforts to improve the customer experience.
The company’s KPIs measure customer service, retention, the average spent per order, and the lifetime value of a customer.
That’s one example to connect a business strategy to KPIs. They’ll be different for every business, so you have to assess what KPIs are the most meaningful.
The next step is to choose the method to measure performance. KPIs are one way. OKRs are another.
OKRs are objectives and key results. They’re similar to KPIs, but they are tied to specific outcomes in the business. You can see more here to learn how they work.
Finally, set your business metrics at each level in the business. There will be company-wide KPIs, department-level KPIs, and KPIs for individual employees.
Communicate With Employees
You don’t want to catch employees off-guard by implementing key performance indicators without their knowledge.
Explain to employees what’s getting measured and why. This initial engagement helps employees feel less threatened by KPIs.
They could have important feedback that improves how you collect and read business metrics.
Take Baseline Measurements
If you’ve never used business metrics before, you’ll need to take initial measurements. These are the baseline measurements.
The KPI reports will get compared to the baseline measurements. You’ll see if the business is falling behind or moving ahead in the right direction.
Periodically Generate a KPI Report
There’s a balance between relying too much on data and not collecting enough data.
Anxious marketers who launch a new campaign look at analytics every hour to see how it’s going. The unfortunate truth is that looking at data that often doesn’t tell you anything.
Data should give you a larger picture of your business. For instance, the anxious marketers can look at analytics every two weeks.
That allows them to collect enough data to spot trends. They could find that certain days generate more traffic during the week than others.
You should measure results periodically throughout your business. Decide if you want to
The next step is to interpret the results. This isn’t always an easy task because you have to tie a number to a behavior.
That leads you to have theories about why the numbers are what they are. You could find that an employee’s performance dipped over the last month. You could assume that they’re not engaged in their work.
Without extra questioning, you’ll base future decisions on that theory. You exclude them from meetings because you think they no longer care about their work.
The truth is that they were dealing with personal issues that impacted performance.
Always ask questions as to why and know what your theories are before you take action based on data.
How do you improve your measurements? This is the essence of good management.
Approach data with a curious mind and learn why you have the results that you do. That allows you to pull the right levers to improve.
Improving results is a team effort. You need to bring everyone involved into the conversation. You’ll gain insights that lead to better decisions.
It also keeps employees engaged in the process. That helps increase overall engagement and productivity.
Every year, assess where the business is. Go over your strategies and decide if you need to let go of some KPIs and introduce new ones.
That process allows you to consistently measure, manage, and improve the most important aspects of the company.
It’s Easy to See Why Companies Use KPIs
Key performance indicators allow you to take snapshots of your business. You can see the overall health of the business while uncovering opportunities.
KPIs give you the information you need to make smart business decisions. It’s why companies use KPIs and see growth. Use them wisely and you’ll see incredible results throughout the business.
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