How to Create KPIs to Boost Performance
By Indeed Editorial Team
Published 27 May 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
In every business, performance assessment is a vital process that assists supervisors in outlining an organisation's roadmap. Performance indicators are crucial in shaping the direction business leaders take when assessing how to improve operations, distribute resources and plan for future business success. In this article, we discuss key performance indicators (KPIs) and how Hong Kong businesses can create KPIs to enhance productivity.
What are KPIs?
KPIs are a set of indicators that allows senior management to measure project success against objectives, targets or competitors. These indicators can be financial or anecdotal. Financial KPIs can include net profit, liquidity and working capital. Anecdotally, KPIs measure customer experience, employee retention, foot traffic and other factors unique to your business.
Also known as key success indicators (KSIs), KPIs are measurable and can be quantified to determine future performance. These indicators can be broken down into the following categories:
Quantitative KPIs are those indicators that you can measure numerically.
Qualitative KPIs are abstract indicators that cannot be measured numerically.
Process KPIs measure the efficiency of different processes in an organisation.
Directional KPIs provide a clear direction of the company and highlight areas that need improvement.
KPIs are important navigational instruments for companies to compare past and present performance and give a clear direction for the future. You can use these indicators to track the performance of projects, individuals or departments against specific goals.
Why do KPIs matter?
KPIs are crucial management tools that heads of department can use to gain insight and take action on key business issues. They provide you with specific information, making it easier to identify how particular factors are affecting the business.
Tieing KPIs to your strategic objectives enables you to track progress and know when to abandon non-performing product lines. Keep in mind that effective KPIs are relevant, meaningful and strategic.
Besides strategic KPIs, operational KPIs are also fundamental for smooth operations. They give you real-time information about workflows and facilitate the creation of analytic reports. This information is invaluable to managers because it can help you take corrective operational actions before it gets too costly.
What makes a great KPI?
When setting goals, you should ensure that they are SMART (specific, measurable, attainable, relevant and time-bound).
A good success indicator should be:
Specific: A KPI should outline a paticular performance measure. For example, a good financial KPI measures the profit margin an organisation should set to achieve within each quarter of the fiscal year.
Measurable: Whether a KPI is directional, operational or financial, there should be a clear way of measuring it. For instance, if your business goal this year is to diversify, starting a new product line would be a good and measurable KPI.
Attainable: The indicators you create should be realistic to achieve. This means the business should have resources in terms of time, money and personnel to achieve the desired goal.
Relevant: A good KPI should align with the business's mission, values and long-term objectives.
Time-bound: Since an organisation's objectives can change with time, KPIs should be measurable within a specific period. Most businesses in Hong Kong prefer measuring KPIs on a quarterly basis.
It is easy for individual teams and employees to translate high-level objectives into daily tasks when the success indicators are SMART.
Importance of KPIs
Business leaders must keep track of their objectives to achieve their organisation's vision and mission. While success indicators are important for managers to measure the productivity of a business, they are also fundamental tools your employees can use to gauge their individual performance.
An organisation's culture is the driving force for success. Supervisors seek to cultivate a culture that motivates and supports employees through recognition and reward. Thus, tracking KPIs related to employee engagement, appraisal process and individual achievements can boost employee self-esteem and productivity.
As companies grow, they achieve more goals and earn more profits. KPIs attach an individual's efforts and goals to the larger objectives and achievements of the company. Key success indicators ensure that your team feels responsible for the progress the organisation is making.
Key performance indicators are crucial metrics for evaluating the performance of a process, product or system. They allow everyone to align their hourly, daily and weekly tasks to the bigger organisational purpose.
Managers can use KPIs to bolster transparency and accountability. Clear goals give your employees a better understanding of their responsibilities which they can assess themselves on over time.
As sales, operations, budget and human resources teams combine KPIs in a dashboard, they can organise and compare information easily. KPIs can help you to identify gaps and missing links and work on them to improve performance.
Monitoring growth to identify core growth factors
Using KPIs to monitor growth across major business functions is important since it has a direct quantitative output on sales, cost savings and other critical success factors.
It is a good idea to back up KPI results with analysis. Analytical reports are vital for strategic decision-makers to reassess goals or change business tactics.
How to create KPIs
In creating your key performance indicators, ensure that they are SMART KPIs. While these indicators can vary from business to business, the following steps highlight the core process of developing KPIs:
1. Identify strategic objectives and goals
Before you begin a project, think about what you want to achieve. Start by creating SMART KPIs that consist of smaller goals which relate to the overarching mission of your business.
2. Identify and select measures for each objective
When you understand your objectives, identify ways to measure each goal. Choose relevant and actionable metrics that provide data for you to rethink your approach should problems arise.
3. Define criteria for success
Define your goals, ensure they are achievable within a certain timeframe and set clear guidelines on how to track and measure progress. Goals must be realistic because changes take time and resources to implement. Use technological platforms and tools to help measure critical success factors.
4. Identify data needs and collect necessary data
Collecting data will determine your efficiency in developing and measuring KPIs. Identify resources your company might need to collect credible data. Whether you will need to install new IT infrastructure or you will outsource data collection tools, data collection is an important process that needs proper attention.
5. Decide on KPI formula
While some KPIs require a single metric, others rely on a combination of various factors. Each KPI will have its formula. You can use existing mathematical formulas to measure key success indicators by using test data to examine if the formula gives you the results you expect.
6. Assign ownership to KPIs
Using KPIs effectively involves knowing who is in charge of data collection and synthesis, monitoring and interpretation of KSIs and preparation and presentation of KPI reports on the dashboard.
7. Promote KPI understanding across the organisation
Strategic partners, business leaders, employees and other stakeholders should understand the KPIs and how they can use them to boost performance and ensure business success. Communicate clearly how each KPI measure is critical towards attaining individual and organisational goals.
8. Continuous assessment and review
Reviewing measurable metrics regularly ensures that they are useful and relevant. Each KPI you develop should act as a tool for boosting performance, making data-driven decisions and gaining a competitive advantage.
Key performance indicators vary across organisational departments and industries. Some focus more on financial goals and objectives, while others track concepts that may help business grow. Here are some of the most commonly used KPI types and examples of each:
These are goals that determine the financial soundness of a company. They include:
Operating margin: This is the ratio between the operating income and net sales and represents the organisation's operational efficiency.
Return on equity: This is a measure of the funds from shareholders.
EBITDA: This ratio measures a company's value against revenue before interest, taxes, depreciation and amortization.
Return on investment: Commonly known as ROI, this KPI evaluates the performance of a business by dividing net profit by net worth.
Debt-to-equity ratio: Measures the value of the shareholders' equity to the cost of financing a company's assets.
Current ratio: This KPI measures the liquidity of a company by dividing current assets by current debts.
These are key success indicators that measure the performance of employees. They include:
Employee turnover rate: This metric measures employee satisfaction and shows whether a company has a favourable workplace culture.
Employee productivity: This KPI assesses the contribution of an individual employee to the overall performance the team.
Employee engagement: This metric showcases an employee's level of collaboration, teamwork and communication by considering how they share information.
Do companies need to prioritise certain KPIs?
When developing KPIs, organisations often prioritise goals that affect the business operations and processes directly. Financial, employee and customer KPIs are examples of indicators companies are likely to put greater emphasis on.
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