Key performance indicators, often abbreviated to KPIs, refer to statistics that measure how well a business is doing as it achieves goals set forth by management and company leadership. KPIs differ in size and scope depending on what departments need particular data. Managers and executives use this information to make decisions to try to bring in more revenue and profits.
Characteristics of KPIs
This type of specialized information takes thousands of forms, but each KPI has the same basic characteristics. Each one should reflect some aspect of the company's goals. If the firm's main goal is to create happy returning customers, the metrics should reflect how well the customer service department works to bring more revenue to the business.
KPIs must have some kind of quantifiable aspect so leaders can view the information, know what it means and take action on the results. A company must define the KPI and then know what it needs to measure it needs to obtain that information. Once it has the correct information, the business needs to interpret the data.
For example, a business wants to increase its new customers by 100 each month. The system must be able to differentiate between new customers and customers who have bought products or services from the business before. The company should collect customer information in some way so that managers can show how many new customers the firm actually gains. This might mean employees need to know the customer's name and contact information, such as by persuading the customer to sign up for a loyalty card, in order for the computer to add that person to the database.
KPIs take into account a company's data based on specific information collected by a firm's computers. Therefore, each set of KPIs should be unique within every business. Software then crunches the numbers to create charts, graphs and spreadsheets so that employees can interpret the vast amounts of information.
What KPIs Measure
KPIs can measure just about any statistic a company needs, helping to measure a company's profits, sales, quality of customer service and efficiency. Some types of information, such as financial results, run monthly. Sales figures often run daily as a manager or the owner tries to determine how much money the business made each day. Companies compare these numbers to the goals of the business versus past weeks, months and years to see what factors, if any, changed from one period to the next.
Another important aspect of this information includes how close a company gets to achieving its goals. When a business achieves 60 new customers in the first three weeks of the month, clerks know they have to get 40 more in one more week to achieve the goal of 100 new customers in one month. If a restaurant's goal is $5,000 in sales per day and the register collects $4,800 before dinner time, then a manager may conclude that the restaurant had a busier-than-normal lunch crowd. How managers interpret the information determines how a business needs to change to achieve the goals set forth by the company.
Examples of KPIs
Companies need data so that managers can analyze the information. Once leaders know what the information means, the company can take action based on the results. KPIs occur in four main areas of business operations: cost reduction, customer service, revenue improvement and business process.
Companywide metrics that are important include sales, revenue, profits, expenses and efficiency. Each of these types of KPI measure how well a company is doing during a particular month. If a business sees that its profits increased 3 percent from the previous month despite a decrease in takings, managers need to know why that happened and what changed.
Some KPIs remain relevant to certain departments instead of the entire company. Human resources needs to know how much revenue a company generates per employee, the turnover rate, employee satisfaction, the response to open positions and the training return on investment. For instance, a company wants to change the turnover rate of employees from two years to three years. The HR manager should look at the company's KPIs that indicate why employees leave, such as low salaries, lack of promotions or dissatisfaction.
Companies that rely on customer service delivery have many metrics that gauge how well employees interact with customers. Customer ratings, time per call, volume of calls and the number of customer complaints all take into account the effectiveness of customer service. If the volume of calls increased by 10 percent on one day, managers need to know why so the company can take action to alleviate the extra load on employees. Do the extra calls mean more employees need to come into work the next day, or do more calls indicate a problem with a product? It's up to the leaders in the company to determine what the data indicates.
The Bottom Line
KPIs help a company earn profits more efficiently. This information, shared among managers, department heads, executives and leaders, helps businesses order raw materials, hire more staff, increase sales and improve customer service. Not every KPI statistic remains relevant to a business, so companies should choose their metrics wisely.
The key to KPIs is how well a firm collects the information. Specialized computer software helps in this regard, so firms should invest in the best possible solution for their current and future needs.
Photo Courtesy of David Castillo Dominici at FreeDigitalPhotos.net
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