Introduction to Key Performance Indicators (KPIs)
Key performance indicators is the term for a type of performance metric used to evaluate how a company is progressing towards their business goals. It is one of the efforts businesses use to measure productivity using trackable numbers. It varies from department to department and when it comes to creative work, it could get pretty tricky to track. Here is all you need to know about this crucial component in the business strategy.
Importance of Key Performance Indicators
Key performance indicators are vital in documenting how businesses should meet their objectives. Underlying this popular practice is the idea that success is simply the “repeated, periodic achievement of some levels of operational goal (e.g. zero defects, 10/10 customer satisfaction, etc.).” In other words, success could be defined as the continuous and consistent movement towards reaching a strategic goal. As such, Key Performance Indicators are also called Key Success Indicators (KSI), Critical Success Indicators (CSI), or even Critical Success Factors (CSF). They all refer to the same thing — manipulating the work environment for optimal chances of success.
And so, KPIs help business decision makers keep track of daily tasks and understand how it relates to the larger goal. Aside from being part of the initial business strategy portfolio, it is also the regular check-up for the overall health of the organization. Through its regular reports, the effectiveness of business functions is monitored and reviewed. If a project seems to be headed in the wrong direction, it could be detected early enough for prompt actions to be taken in order to divert operations back on track. This is why KPIs are routinely tied with “performance enhancement initiatives”. KPIs are not just for convincing investors in pitches, it goes on to be part of developing your business into maturity.
For individual employees, a study by the Harvard Business Review recognized the foundational power of “small wins” in boosting employee motivation. In addition, performance trackers enable companies to provide their employees with a way to measure their daily progress on the bigger scale of things. In this way, they get to enjoy that little victory at the end of their workday and have the much-needed push to get up for work the next morning. Meanwhile, imposing unrealistic daily quotas dampens employee motivation.
Types of Key Performance Indicators
As mentioned before, Key Performance Indicators can differ from one organization to the next and from one business function to the next. This is because an effective KPI metric requires a specific target to hit. A department can make continuous progress in one task but if it does not line up with the business goals, it still ends up falling off the mark.
Therefore, developing KPIs rely heavily on defining what is important to the organization and the performance criteria of each department. It is also useful to note that a business KPI is not synonymous with its goal either. It is more of a case-to-case basis, instead of a one size fits all solution.
For example, if an online retailer’s aim is to be the market leader in their industry, then it should work towards increasing sales, which may come at the price of compromising their revenue to compete with market prices. And so, this retailer may be looking at their sales growth while another retailer who aims to earn more is looking at their revenue growth for their KPI. Although being a market leader is its end goal, the business is looking at its sales for measuring its progress.
In an internal scale, a sales team’s metrics should also differ from the marketing team’s, and so on for a business to function properly on its own. We’ll discuss these further along.
High-level and Low-level KPI
High-level KPIs are concerned with the general company objectives which span across all the different departments while the low-level KPIs are focused on the specific tasks that make up each business function.
Qualitative and Quantitative Factors
KPIs are more known for its quantitative metrics, which presents the objective, uncontestable facts in tracking production output. However, there are some qualitative metrics used to gauge the value of the output for the unquantifiable tasks, such as feedback.
Leading and Lagging Indicators
Lagging indicators are more commonly known as the “output” while leading indicators are the “activities” you do to achieve this output. To put it simply, lagging indicators are those factors which are easy to measure but would take multiple and sometimes complex steps in order to influence. Leading indicators, on the other hand, are those factors you need to achieve in order to influence the lagging indicator.
Some examples include:
- Total Sales Volume
- Margin Sold or Discount Given
- Growth in Recurring Contracts
- Acquisition Costs
- Average Contracted Length
- Cross-sale on Current Clients
Some examples include:
- Proposals sent
- Sales meeting
- Opportunities added and lost
- Compliance to sales process
- Sales team open positions
- Quality of pipeline
Industry and/or Department-specific KPIs
Each business function is different and requires its own methods of measurement. Here are some of the factors that can be measured for KPI metrics by department:
Marketing and Development Project Execution
- Value earned
- Estimated Duration
- Manpower spent/month
- Money spent/month
- Planned spend/month
- Planned manpower/month
- Average delivery time
- Sum of costs of “killed”/stopped active processes
- Average time to complete the task
- Project overhead/ROI
- Planned delivery date vs actual delivery date
Sales and Customer Service
- Acquisition and attrition of customers
- Customer demographics and levels of approval, rejections, and pending numbers
- Customer satisfaction and relationships
- Sales Growth
- Sales Cycle
- Turnover (i.e., revenue) generated by segments of the customer population
- Outstanding balances held by segments of customers and terms of payment
- Collection of bad debts within customer relationships
- Duration of a stockout situation
- Customer order waiting time
- Working Capital
- Annual Income and Expenses
- Inventory Turnover
- Debt-to-Equity Ratio
- Return on Equity
- Recent Payments
- Current Accounts Receivable and Payable
- Gross Profit Margin
- Net profit margin
- Sum of deviation in money of planned budget of projects
- Mean time between failure
- Mean time to repair
- Unplanned availability
- Average time to repair
- The average time lag between identification of external compliance issues and resolution
- Frequency (in days) of compliance reviews
Human Resource Management
- Employee turnover
- Employee performance indicators
- Cross-functional team analysis
- Product performance
- Sales forecasts
- Procurement and suppliers
- Reverse logistics
- Utilization rate, the percentage of time employees spend generating revenue
- Project profitability, the difference between revenue generated by a project and the cost of delivering the work
- Project success rate, the percentage of projects delivered on time and under budget
- Overall equipment effectiveness (OEE) = availability x performance x quality, the set of broadly accepted non-financial metrics which reflect manufacturing success
- Availability = runtime/total time, the percentage of the actual amount of production time the machine is running to the production time the machine is available.
- Performance = total count/target counter, the percentage of total parts produced on the machine to the production rate of machine.
- Quality = good count/total count, the percentage of good parts out of the total parts produced on the machine.
- Cycle time ratio (CTR) = standard cycle time / real cycle time
- Rejection rate
Is Your KPI Telling You to Outsource Your Contact Center?
Businesses can utilize Key Performance Indicators to establish and monitor progress for any specific goal, from cost avoidance programs to low-cost country sourcing targets. To see if your business still has room for optimizing, analyze your KPI strategy. When you do, consider streamlining your processes with outsourcing.
KPIs are important to the BPO industry. As business solutions providers, it is crucial that they can prove their services worthy to partner companies to remain in business. To this end, Anderson Group BPO Inc. offers business process outsourcing solutions for companies looking to restructure and optimize their workflows cost-effectively.
We have customer support teams for inbound calls, outbound calls, email, chat, and social media management. Our skilled back-office team can also help you keep your operations flawless with data entry, data cleansing, data analysis, and market research.
Reach out to us and find out more about our services.