Yes, we know that you know that KPI stands for Key Performance Indicator. You probably also know that they are various sorts of metrics that should tell you how your business is doing. Bernard Marr, author of Big Data, defines KPIs as  “ … a way of measuring how well we as individuals or how well entire companies or business units are performing. A KPI should help us understand how well a company, business unit or individual is performing compared to their strategic goals and objectives.”

But metrics are numerous, complicated and could be about anything. How should you keep track of all that’s important then, without getting lost in all the data?

A metric is something you can measure. You can measure and track the time a user spends on a website or whether a particular page has a high “bounce rate” (which says that it’s often the last page a user visits). You can measure how much revenue the site makes. You can also measure how many times the letter A is used on the home page. All of these things are measurable; however, just because they are measurable, it doesn’t mean that those measures are informative. Before you decide to track something, you should probably first answer to “Which decisions do these metrics trigger?” and “What would we do differently if the numbers rose or dropped?” If you can’t identify the actions that would follow these changes – you probably don’t need the metrics in the first place (or at least not as much as you think).

Key Performance Indicators use metrics, but not every metric is a candidate for a key performance indicator.

In order for something to be a KPI, it must meet several requirements:

  1. First of all, it must suggest some performance. Knowing that the letter A appears 120 times on the home page tells you nothing about how your business is doing. Knowing that you sold $2000 last week tells you something about how your business is doing. However, it still doesn’t necessarily make it a KPI.
  2. Next, it has to be key for your decision making – it must tell you something important. If you’re a business that’s all about selling things, then sales are probably important. It’s probably more important than the number of new visitors to your web site, because unless those visitors buy something, you can’t pay the bills.
  3. Finally, in order to be useful, it has to have the ability to predict the future – that’s what makes it an indicator. If sales are the thing you’re most worried about, last week’s sales isn’t really a KPI because its change doesn’t give you any warning. You need to find something that will predict what sales you’ll get; and hopefully with a decent lead time, so if it looks like sales will go down, you have the time to do something about it.

Of course, there are many important numbers in your business that you have to worry about – not just KPIs, but also general health indicators, or simple performance indicators. The difference is that a good KPI gives you warning and more importantly, it provides you with the time to react. Not just any metrics can give you this kind of opportunity.

If you strive for your business to progress, data-based decision making is essential. Yet, having too many KPIs could be worse than having no KPIs. It dilutes focus for your business on the actions that are going to drive success. Also, keep in mind that no KPI is forever – they should reflect your current strategy and targets and need to be revised regularly.

In essence, KPIs are communications vehicles. They enable top executives to communicate the mission and focus of the organization and grab the attention of employees. A good way to make your employees aware of what’s happening with your KPIs is with the help of GeckoBoard. This software shows metrics you marked as important on a beautifully designed dashboard, which you can display on a screen in your office. It gives a whole new perspective on how the business indicators are changing on a daily basis and becomes a central place where conversations are started. The best part? It drives an immediate action when things aren’t according to  plan and everyone understands why they need to change their actions.