The Importance of KPIs (Key Performance Indicators) for Businesses
“No wind favors he who has no destined port.”
Montaigne
Technology has granted us the ability to aggregate the data we need for our analyses. Today’s technologies are more than sufficient and advanced for this purpose. Thus, we might find ourselves swimming in a vast ocean of data. However, if we lack a proper compass to carry us to our objectives, even though we know where we want to go, we are left to the mercy of chance. Whether a business is large or small, it doesn’t matter; in this era, when data is so valuable, focusing on what is “truly” important will set you a step ahead of all your competitors.
In this article, we will talk about a valuable tool that will serve as a compass for businesses while processing their data: KPIs, or Key Performance Indicators. First, we will clarify what these tools can be by defining them. Then, step by step, we will share useful details on what the characteristics of these indicators should be, their types, the fields they are used in, their sources, and how companies can establish KPIs aligned with their goals.
What are KPIs (Key Performance Indicators)?
In a nutshell, they are strategic, real-time, measurable, and objective performance values selected by businesses in critical areas where they aim for progress and improvement.
What is the purpose of KPIs?
Effective and accurate decision-making is one of the factors leading to success in today’s competitive and fast-paced business environment. The importance of KPIs becomes even more crucial as the speed and magnitude of the spread of strategic mistakes can be more damaging through platforms like social media and complaint forums, where interaction is intense and unwanted information spreads at the speed of a virus. KPIs are a guarantee for taking steps without making mistakes. Simply put, this measurement and evaluation tool, referred to as KPIs, allows businesses to make informed decisions to improve and develop themselves and to objectively assess their current situations.
Today, we collect more comprehensive and voluminous data in businesses every day than ever before. Unfortunately, collecting data that we cannot use or evaluate does not provide any benefit. This raw data only becomes valuable if it can be interpreted and converted into action with the help of KPIs. All modern businesses, large or small, aware of this potential of data, must prioritize making sense of and meaningfully organizing this data.
KPIs have already become indispensable for sustainable success for businesses of all sizes. The goal is not just to keep the business alive but to develop a productive, efficient, profitable, and proactive work discipline. Therefore, it would not be wrong to say that KPIs are the lifelines that connect the objectives of businesses to their daily operations.
How to set KPIs?
What characteristics can make KPIs beneficial for businesses? When you ponder this question, you will realize that the features listed below will accelerate your business. You can also use this list as a checklist when determining your KPIs.
Must be measurable: The key performance indicators to be analyzed must be measurable. This allows them to be listed and compared in tables.
Must be related to objectives: Randomly chosen KPIs unrelated to objectives lead to wasted time. Be original. Define the right strategies and reach your goals with KPIs tailored for you. When deciding on your KPIs, focus on whether they will be beneficial in achieving your set goals. Each business should evaluate itself with its unique KPIs. This is because every business has its unique employee profile, company culture, customer portfolio, and product features.
Must include continuity: If we experience interruptions in data collection, we must improve this for KPIs to provide accurate results. Incomplete information is equivalent to incorrect information. Therefore, KPIs must have a continuity feature to be comparable.
Must be accessible: If there is not enough data on a critical issue, data collection sources should be revised. The technology you use must be capable of processing the desired data and extracting this information from your information pool.
Must be feasible: Do not ask for the impossible. Asking for the impossible, exhibiting a perfectionist approach, is to be avoided. It negatively impacts employee motivation, leading to time and consequently financial losses.
Must be time-based: You can only track how you have evolved and changed in a type of indicator by looking at what changes occurred during which time intervals. You can understand how your business’s changes have been reacted to by your customers, how global or local economic developments have affected your business, and observe the changes in your business during the specified time periods by conducting periodic trend analyses.
Must be regular: For indicators to be comparable, they need to be constructed in a certain order.
Must be current: You cannot perform real-time evaluation with outdated, old data. This makes it impossible to understand your current situation.
Must be specific: Ambiguity creates confusion. KPIs designed within a specific framework should be both understandable and clear enough to avoid any confusion.
Must be unique to your business: The KPIs needed by each business differ. If you focus on the areas where you have problems, you can easily determine which data needs to be processed.
Must be flexible and adaptable: Change is inevitable. If you build structures that can be adapted to changes, you will not have difficulty catching up with the current.
What is the SMART Concept?
If you had to choose the indispensable five characteristics of KPIs, what would they be? The 'S.M.A.R.T.' concept, referred to in response to this question, is a concise approach that highlights the most crucial of these characteristics. Each letter signifies a feature: Specific, Measurable, Attainable, Relevant, Time-based.What are the types of KPIs?
Knowing this classification will provide businesses with a multifaceted perspective. Take a look at which of the listed KPI types are used in your business. Strive to incorporate all types of KPIs into your business to develop a holistic approach.
- Process KPIs: These are created with business process data. Data such as customer response times and inventory turnover rates fall into this group.
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- Efficiency indicators
- Effectiveness indicators
- Capacity indicators
- Quality indicators
- Value indicators can analyze our processes.
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- Result KPIs: These indicators represent the final state resulting from all the activities of the business, such as profitability, industry size, and recognition.
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- Production indicators
- Profitability indicators
- Competition indicators, etc.
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- Input KPIs: We call all the resources used on the path to achieving a goal, such as expenses and working hours spent to increase sales, input KPIs. Data on the quality and quantity of resources are also classified as input KPIs.
- Lagging KPIs: The percentage of customers who stop using your services in a certain period, the customer churn rate, is the best example to understand this classification. Now that you’ve lost your customers, this indicator is a delayed measure of your efforts to satisfy and retain your customer. Learning from past experiences is important on the path to success. Therefore, lagging KPIs are always a go-to resource.
- Leading KPIs: Considered as early warning signs, these KPIs provide insights for predicting the future. You can effectively use these KPIs in the proactive decision-making process.
How are KPIs Used?
We can talk about four main areas where KPIs are used:
- The first is financial performances. Since the primary goal of a business is to make a profit, financial indicators have significant weight in the business’s KPI portfolio.
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- Revenue
- Expenses
- Net income
- Cash flow
- Asset value
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- The second fundamental area is customer performances created with data from customers. Customers’ demands and satisfaction are the reasons for a business’s existence.
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- Customer Satisfaction Rate (CSAT)
- Customer retention time
- Customer Lifetime Value (CLV)
- Market share
- Brand strength
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- Another area is employee performances. Issues such as how effective the training you provide are in productivity and whether your employee profile is sufficient are evaluated under this heading.
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- Employee satisfaction
- Turnover rate
- Average tenure
- Employee skills
- Employee training
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- Operational efficiency and marketing performances offer the opportunity to evaluate the infrastructure you have established in your way of doing business.
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- Inventory
- Orders
- Resource allocation
- Turnaround time
- Quality control
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What are the data sources for KPIs?
Firstly, we can talk about two types of data sources: internal and external. Data subject to KPIs are collected through these data sources.
- Internal data sources
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- Transaction and operational records
- Customer records
- Employee performance records
- Website performance, etc.
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- External data sources
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- Environmental sources
- Economic data
- Market research
- Social media channels
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How are data for KPIs collected?
The reliability of the data in terms of how they are collected is of great importance.
- Manual: Manual data entry can be done both by your employees within your business and by your customers through your interaction channels such as website memberships and newsletters. The data that contains the most errors and omissions are usually via manual entries. For this, you can build a system where you can compare the data. You can add control and correction processes in case of inconsistency.
- Data transfer with automation may seem like a fast and reliable solution, but it's important to be prepared for possible malfunctions and not to lose control.
- Getting data with integration is an easy and practical solution if you trust your source. For this, you need to have the technological infrastructure that will enable integration.
- Using the data obtained by getting feedback from your employees and customers is another method.
How to analyze with KPIs?
KPIs do not benefit businesses when the ability to analyze is lacking. First, you need to know what you are looking for. You should look to answer these five basic questions that are at the focus of every business:
Basic questions:
- Are we able to achieve our sales targets?
- Can we ensure customer satisfaction?
- Is our working system sufficient for our operational efficiency?
- Are our costs consistent with our forecasts?
- Can our employees produce efficient work?
The ability to ask the right questions at the right time plays a big role in success. You can only answer these questions with the help of KPIs. This way, your daily actions can be shaped according to your strategies.
How can analysis be converted into action?
- Identify and concretize your goals.
- List what is needed to achieve the goal. These will be the subjects where you will establish KPIs.
- Evaluate your organization from the individual performances of your employees, moving up to higher structures, departments, and other layers. Similarly, establish this layered structure in all areas.
- Continuously and periodically monitor data and indicators.
- Measure and identify areas of progress and regression.
- Act in areas of regression to improve your employees, processes, products, or services.
- Encourage your employees to be individuals with high company loyalty and who take responsibility for their work.
- Update your goals by making comparisons with your competitors in the industry.
- Develop target-oriented business plans in line with your general strategies.
In conclusion, the KPIs you define for your business and regularly track and measure provide the opportunity to manage your business with a stronger reference than the intuitions of your managers. Of course, intuition is one of the important values that humans possess. However, managing your businesses based on your intuitions invites potential losses. With KPIs, you can look to the future with confidence and gradually realize your goals.
