Why are KPIs Important? The Importance of KPIs

By Jessica Wishart

Why are KPIs Important? The Importance of KPIs

Measuring the right Key Performance Indicators (KPIs) is vital to the health and success of your Why are KPIs Important? The Importance of KPIsbusiness. However, when we onboard new clients, we find that some of them are uncertain about what they should be measuring and how they can use these powerful tools.  They often ask "Why do we need KPIs?" or "Why use KPIs?" or "Why are KPIs important" or even "What are KPIs?" as they think their way of doing things isn't broken.  Effective KPIs are important metrics to make sure that you can accomplish any business objective.  The importance of effective KPIs can't be understated to achieve greater business performance.

The most common mistake companies make when they start measuring their KPIs is to try to measure too much. The problem with this approach is that if you don't know which KPI to measure, how do you know whether or not you're making progress? If you have no idea what you're trying to achieve, you'll never be able to tell if you're succeeding or failing.

KPIs are more than the numbers and metrics you report out weekly - they enable you to understand the performance and health of your business so that you can make critical adjustments in your execution to achieve your strategic goals. Knowing and measuring the right KPIs will help you achieve results faster.  A Key Performance Indicator is a measurable metric that demonstrates how well a company is performing against its key business objectives, quarterly rocks, business objectives, and progress towards your 3-5 year strategic plan.

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The Importance of KPIs

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KPIs to Monitor Company Health

 KPIs are a scorecard for company health. You only need a handful of KPIs to monitor your company's vital signs. Only measure what you want to move so you can put energy where you want to effect change. We’ve found that it is important to measure a few KPIs in each of the 4 categories: Employees, Customers, Processes, and Revenue.  These fall under the disciplines of human resources, customer satisfaction, business processes, and business strategy.  First, make sure you choose the right KPIs for your business, then worry about who is accountable for them (leadership accountability.)

KPIs to Measure Progress Over Time 

Key performance indicator (KPI) refers to any measurable result that indicates whether an organization is meeting its objectives. It could be revenue, gross margin, number of locations, number of employees, customer satisfaction, product quality, employee productivity, or anything else. You set these KPIs for yourself and your team every quarter so you know where you stand. Then you track them weekly to see if they're moving in the direction you want them to go. If not, adjust your actions accordingly and notify other departments if you are off track.

KPIs to Make Adjustments and Stay on Track 

In addition to your current performance, you should also monitor your leading indicator KPIs so you can see how close you are to achieving your goals. These metrics give you an idea of whether you are on track to reach your desired outcomes. You can then adjust your strategy accordingly. For example, if you notice that your sales are dropping off, you may decide to focus more on marketing efforts instead of product development.  Leading indicators have two characteristics: they are measurable, and you can directly influence them.  They are good KPIs to have on your dashboard to keep your projects on track.

KPIs to Solve Problems or Tackle Opportunities

Use a combination of KPIs in a dashboard so that you have the right information at your fingertips to solve problems or tackle opportunities. Let’s say you are in a sales slump. Identify a handful of KPIs that can help you turn the tide (maybe it is # of outbound calls, # of appointments kept, # of trade shows attended). Put them on a dashboard and track them weekly to see if you’ve found the right lever that helps you generate more predictable sales. Or, let’s say you have a great idea for a new product. Maybe you test it out with a few clients and use KPIs to validate your business model before launching it on a large scale; you might monitor # of customers interested, $ to support the new product, NPS score, implementation time, # of defects, etc.

KPIs to Analyze Patterns Over Time

If you measure the same KPIs quarter over quarter, you can begin to detect patterns in your numbers. There are countless ways these patterns can help you in your business. Maybe you can predict when your slowest quarter will be and use that time to do a system update or company-wide training initiative. Maybe you can tell that your sales manager always forecasts that you’ll come in 5 deals over or under where you usually end up at the end of the quarter. Maybe you can see that you’ve got some team members who are habitually under-performing or over-performing on their KPIs and can use this data to talk about consequences, bad or good.

An effective KPI dashboard has a mixture of KPIs that follow the balanced scorecard.  You want to ensure that you are covering all the important aspects of your business required to monitor your company's progress towards its critical goals and objectives.  Therefore, the top businesses always have at least 2 KPIs (including one leading indicator KPI) from each of the following categories:

  • Financial Perspective
    • Net Profit
    • Net Profit Margin
    • Revenue
  • Internal Business Perspective (Operational KPIs)
    • Revenue Per Employee
    • Capacity Utilization

  • Customer Perspective
    • NPS (Net Promoter Score)
    • Repeat Customers

  • Employee Perspective
    • Employee NPS
    • Turnover Rate


To learn more about the importance of KPIs to grow your business, download our free KPI Guide, or check out our list of CEO KPIs.

Download our Free KPI Guide to Stay Focused, Aligned and Accountable

I know that many of you are also using OKRs, which are similar to KPIs.  To learn more about the difference you might be interested in reading OKRs vs KPIs to make sure that you have the right metrics that to help you improve your productivity.

Watch this quick video to find out how using KPIs can make your weekly meetings more productive and have your Key Performance Indicators drive your performance.

 

Need help getting your team aligned to achieve your growth goals? Rhythm systems software was ranked the #1 easiest software to use, highest ROI, fastest implementation, and highest adoption rate on G2.

Learn More About Rhythm

 

Rhythm Systems KPI Resource Center for all you need to know about Key Performance Indicators.  Looking for some KPI Examples to help get you started? Check out our additional KPI and KPI dashboard blog articles:

21 Production KPI Examples to Improve Manufacturing Performance

CEO KPIs: 23 KPIs Every CEO Dashboard Should Consider

5 Simple Steps to Create Useful KPIs (Video)

10 Best Employee KPI Examples

5 Tips to create, evaluate and use Key Performance Indicators (KPIs) to drive results in your business

33 KPI Examples to Measure Productivity & Prevent Organizational Drag

Employee KPI Examples: How to Measure What (or Who) You Want to Move (Video)

KPI Examples for Successful Sales Teams

Huddle Meetings: Keep your KPIs on track

 

Photo Credit: iStock by Getty Images 

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