KPIs: meaning, why and risks
26 May 2022
KPIs means “Key Performance Indicators”, a quantitative measure that assesses how a company is achieving progress in their performances.
Which are the main elements of KPI?
A KPI is composed by two main elements:
- a key business objective, that should be S.M.A.R.T (Specific, Measurable, Achievable, Relevant, Time-based)
- a metric that needs to be specific and relevant to the objective’s business. The metric should be available and comparable through time.
Attention: a KPI is not the objective, but it is the indicator that measures how the company is achieving the key business objective.
What are KPIs for?
Key Performance Indicators provide a measurable value, allowing data collection of the progress trend through time. KPIs can be high-level, therefore focused on the overall performance of the company, or low-level, which means specific to a team or department. These two level of KPI are essential to have specific business’ KPIs.
The main advantages of KPIs
This goal setting tool shows different advantages:
- KPIs are a goal setting tools suitable to different and multiple context;
- The metric allows to fetch data on performances;
- Data are an objective proof of progress;
- This allows the comparison between performances through time.
KPIs’ risks and common errors
KPIs are widely used by different contexts thanks to their flexibility and adaptability.
One of the most evident characteristics is the metric’s choice based on the nature of the context. The KPI should be linked to the end-to-end process of business. It happens, instead, that the metric’s choice is not strictly linked to the context.
I.e.: To monitor the marketing project of the team, we should use the “how many contacts do we gain in a limited period of time?” metric instead of “how much money we gain thanks to the contacts collected by the marketing team?”.
The choice of a metric that is not related to the specific business outcome can lead to consequences that we are going to explore in the following paragraph.
What happens if KPIs are not related to the business’ context?
The consequences of not having the key business objective and its metric linked to the business end-to-end process are mainly two:
- having unreliable data, because the collected numbers are not related to the team work. In other words, from data analysis it is not possible to know if there are improvements, or not, due to the team’s performance or to external causes.
- disinterested and not engaged people. If people are evaluated according to a metric not based on their competence, then the decisions taken after the data analysis are misleading for their activities. So, people are poorly engaged in the process. Moreover, they are not motivated at bringing improvements, because they are considered for what is not their tasks.
Other critical points about KPIs
There are other two focus points:
- Going on with time, KPIs could become fraudulent. It is easy to keep choosing the wrong metric for the business, if you do not have an actual value on the performance trend: in this way, no one will be actually evaluated.
- Since KPIs are concerned with assessing performance, they are often related to incentive systems such as bonuses or prizes. This happens without taking into consideration the actual involvement of people in the process or in the organisation. To the contrary, these systems become a way to measure the negative difference between performances and, therefore, KPIs could become a reprimanding tool.
Key Performance Indicators are a tool used to evaluate how successful a company, a team or a person is at reaching the goal. If KPIs are used in a good way, they can tell you the path to take towards business improvement. The actual data can be an incentive to act/react. To the contrary, if KPIs are set according to the wrong context analysis, data could be unreliable and not engaging to people.
KPIs should be used with awareness, as well as for OKRs, another business goals setting methodology deepened in this article. But what is the difference between KPIs and OKRs? Which one should a company use? We will answer these questions in the next article.
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