You’ve probably heard the term “KPIs” being casually thrown around in the boardroom, but do you understand what it means? Can you be sure those colleagues who refer to them know what they are talking about? I think it’s a fair question to ask given I myself have misused them in the past!
We know KPI stands for Key Performance Indicator, but that doesn’t stop professional businesspeople interchanging this term with RESULTS. For example, classifying profit as a KPI is a classic misnomer I come across often with clients. Every business uses profit to measure success, but it is not a KPI because it is not an indicator of performance. Rather, it’s the actual result!
Now that we’ve cleared that up, we can delve a little deeper into the many faces of KPIs.
Understanding the different types of KPIs
Did you know that there is more than one kind of Key Performance Indicator? This may sound like a headache waiting to happen, but filtering down KPIs into different categories makes understanding them a whole lot easier.
Leading KPIs are the precursors of success. They are the input necessary to drive a process or a trend. A good example of a leading KPI is the number of quotes your sales rep sends out to get a sale. They haven’t got the sale yet, rather the quotes are the thing that must happen before a sale can be acquired.
Lagging KPIs are what you measure after a process or trend has occurred. They are output-oriented, making them more useful for recording changes that have occurred rather than influencing change (leading KPIs are best for this.) An example of a lagging KPI would be the percentage of targets hit per sales rep.
Another handy way of understanding the difference between leading and lagging KPIs is to think about them from an activity perspective. A leading KPI is activity-based because you have to do something for it to happen, whether that’s sending out quotes, calling clients or scheduling meetings. KPIs that are activity-based, as well as leading, are where powerful changes can be made. Non-activity based KPIs, which are generally lagging KPIs, are more focused on measuring activities and processes after they have been completed.
Which KPIs should you focus on?
When it comes to KPIs, less is more. Whenever I’m shown a dashboard packed full with hundreds of KPIs, drivers and measurements, one word crosses my mind – clutter! You should target only two or three KPIs that when improved upon will influence your company’s success. If you spend just three months working hard driving those two or three KPIs, you can make real change in your company. When you feel as though you’ve worked those numbers as hard as you can, then simply change your KPIs for the next quarter.
Knowing precisely which KPIs you should focus on really comes down to what drives your specific business. One business owner told me that they focus on the two greatest costs for their business and set KPIs around these. There is some sense to this; after all, big costs are where mistakes are often made and small improvements here can have huge effects. My advice to you is to keep your KPIs simple, get everyone necessary to zero-in on them for a few months and you should see positive results in no time.