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The Trouble with KPIs: How to Define Real Key Performance Indicators

The Trouble with KPIs: How to Define Real Key Performance Indicators

This is a guest post by Nils Boeffel

Key performance indicators are often used, sometimes abused, and seldom properly understood or well implemented. How often do you see numbers cited, called a ‘KPI’, yet when they change dramatically nothing happens and no decisions are taken? This is prevalent in many organisations, and hurts the manageability of a company.

Real KPIs should be defined, monitored and acted upon when they move in a certain direction or beyond a certain range. They are the element which tie the operational level of a company together with strategic decision making.

So what makes a good KPI, and how can they be defined? Let’s consider how to think about KPIs, and the questions to ask when developing them.

Indicators

Indicators consist of basic data, facts and figures. They depict a value of something, but don’t automatically convey meaning to those viewing the numbers. They are usually not specific enough to really be of value to us in and of themselves. They are, however, a critical basis for KPI definition.

Questions to ask to ensure that you have good indicators:

  • Do they reflect reality?
  • Is the data timely (i.e. up-to-date) and reliable?

Performance Indicators

Performance indicators measure the benefit of something. Analysing them is a good step towards understanding how well something is working, and whether it could (or should) be improved.

Questions to ask to ensure that you have good performance indicators:

  • Is the measured performance relevant? Does it tell me something useful?
  • What performance level is normal, high, low?

Key Performance Indicators

Good KPIs focus on areas which are critical to the success of a business. They indicate where things are running normally and also highlight (potential) problems. KPIs help to run a business by providing an indication of whether the business is stable, or if any problems are emerging that need to be addressed.

Questions to ask to ensure that you have good key performance indicators:

  • Do the KPIs reflect critical success factors in my business?
  • Do the KPIs provide insights about the future of the business and the competitive environment?
  • Is action necessary when a KPI is outside of its normal range?

Always remember that KPIs are early warning indicators showing the need for action, but they do not provide an answer for the specific action that should be taken. No single KPI will ever depict the complete picture, it will only provide focus on the problem. A company still has to analyse the specific situation and has to discuss the appropriate response.

Examples

The ‘Land-to-Like’ KPI is very valuable for an e-commerce site. This particular KPI measures the number of clicks it takes for a potential customer to go from landing on a website to rating a purchased product.

This KPI reflects a lot about a website, as it contains both static elements (logging in, registering, checkout, product rating), and dynamic elements (finding, comparing, and selecting items to purchase). By analysing the consumer behavior, conclusions can be drawn that will help a company improving its website as well as the customer experience that will (hopefully) lead to a rise in sales.

Another example: the question you should ask yourself about this article is not how long it is (an indicator), how long it took you to read it (a performance indicator), but rather if the time spent reading it was worth it (measuring utility, a real KPI).

Nils Boeffel is an experienced consultant and IT expert at enable2grow, the first growth consultancy focused on digital business in Europe. He also founded the e-franchising shop-in-shop concept yourmegastore.com and supported the set-up and launch of startups such as CVex and bikeguide24.

About Silicon Allee

Silicon Allee
Silicon Allee is an independent English-language news website which has been covering the startup scene in Berlin and across Germany since June 2011. It is foremost international news source for the exploding startup scene in the German capital.

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