Summary: Learn how Key Performance Indicators (KPIs) can be used to keep track of employee performance.

A restaurant has been open for two years, and though it has managed to stay afloat, it’s struggling, and it’s not entirely clear why. A car manufacturer is doing well but wants to increase the efficiency of its production unit. How will these organizations figure out how to improve?

One answer is to use key performance indicators to help them measure different aspects of their businesses and find areas they can change or improve. This article is all about what key performance indicators are, what they’re used for, and how to create them effectively.

What Are Key Performance Indicators (KPIs)?

Key performance indicators, or KPIs, are metrics used to measure success in achieving the most important goals of an organization. KPIs help companies and other organizations track their progress toward specific goals. They’re selected as the best ways to measure progress and achievement, but can also be used to indicate problems and inefficiencies.

KPIs allow data-driven analysis to support decision-making and focus on the most critical functions and operations within an organization. They generally measure change over set periods like year-over-year (YOY) and month-over-month (MOM) changes.

KPIs can be used by organizations of all types, from small businesses to large enterprises, and include non-profits, government agencies, and educational institutions. They can also be created for all levels of organizations, from the individual level to the entire organization.

KPIs can also be either quantitative, measuring specific numeric values, or qualitative, giving measures of non-numeric characteristics.

How are KPIs Different from Goals?

KPIs and goals are inherently related, though they are two different things. Key performance indicators are things that can be measured over time to assess change. The purpose of setting these KPIs, however, is to measure success or progress toward a set goal. 

Let’s look at the example of a sales team to help clarify how these two factors are related. The sales team wants to improve, but what does that mean?

The team looks at the number of customers it currently works with and sets the goal of increasing this number by 15% each quarter. This is the team’s goal. To assess the achievement of this goal, it makes sense to measure the team’s rate of new customer acquisition. This would be its KPI, which, in this case, is quantitative.

Goals should follow the SMART framework and be specific, measurable, achievable, relevant, and time-bound. Key performance indicators should be relevant to these goals and selected as the best way to measure progress toward them.

Levels of Key Performance Indicators

KPIs can be created for all levels of an organization’s operation, from the individual level all the way up to indicators that measure the performance of the organization as a whole.

Individual / Machine Level

Individual KPIs: KPIs can be set at the individual level to measure job performance for different roles. These indicators are particularly relevant in performance evaluations as they provide the metrics upon which employees are judged. This transparency is important as it helps employees to focus their efforts toward particular goals and to be aware of what they will be evaluated on.

Managers also use KPIs to help employees align their performance goals with the overall objectives of their organizations so that everyone is working toward the same things. Examples of individual KPIs include things like personal project completion rates and sales lead conversions.  

Machine KPIs: Likewise, a single piece of machinery or equipment can be evaluated in terms of KPIs as well. A machine used for production, for example, can have problems and need downtime for repairs or regular maintenance. When a machine is working, its rate of production, production quality, and proportion of time available can be measured.

A common measure for machines is overall equipment effectiveness (OEE) which is a KPI that combines these three components to essentially show how efficient the machine is at performing its task.

Team / Unit Level

Small teams or business units often set their own KPIs to align their goals and give managers ways to measure performance, much like they do at the individual level. However, with team KPIs, the focus is on collective performance. Managers usually choose their KPIs to measure performance, but can also design them to measure how well their teams are functioning internally.

External KPIs can include metrics like team project completion rates and customer satisfaction ratings. Internal KPIs can measure communication efficiency or team happiness and satisfaction.

As with individual machines, collections of machines and equipment can also be evaluated using KPIs. An example would be totaling up the OEE of all of the machines in a production chain.

For example, the bottling unit of a soft drink manufacturing plant might include a sterilizer, filler, capper, labeler, and various conveyor belts to move bottles between these machines. Finding the overall equipment effectiveness of this unit can help compare it to other units and determine any rates of improvement.

Department Level

As most organizations are organized into departments, it makes sense to set KPIs to measure success toward each department’s goals. These KPIs usually start with a baseline or initial measurement and then collect data points to measure changes.

Keep in mind that KPIs used by different departments may measure internal performance or use data available to those departments to evaluate external metrics. 

Some examples of KPIs for different departments include: 

Accounting:

  • Invoice processing rate – how fast invoices are processed and paid
  • Automatic reconciliation rate – a measure of automation in transaction reconciliation
  • Cost per invoice – total processing cost divided by the number of invoices

Customer Service:

  • Customer satisfaction scores – average of ratings provided by customers
  • Average ticket resolution time – time to resolve queries and complaints
  • Customer channel use – counts of contacts per customer service channel

Distribution:

  • On-time delivery rate – % of on-time deliveries versus total deliveries
  • Order cycle time – average time to process an order and deliver it to the customer
  • Return rate – % of orders returned by customers

Finance:

  • Budget variance – difference between the planned and the spent budget
  • Revenue growth – % change in revenue over set time periods
  • Revenue per employee – overall revenue divided by the number of employees

Human Resources:

  • Employee satisfaction level – how happy employees are working for the organization
  • Time-to-fill – average time for recruiters to fill open positions
  • Employee turnover rate – the frequency with which employees leave the organization

IT:

  • Ticket resolution time – average time to successfully close IT support tickets
  • System performance – efficiency and speed of IT systems and networks
  • Uptime – % of time that systems are available for use

Marketing:

  • Social media engagement – numbers of likes, shares, clicks, etc. 
  • Lead to customer rate – % of leads that are converted into customers 
  • Customer acquisition cost – total marketing cost divided by the number of new customers

Production:

  • Employee productivity – total production divided by the number of employees
  • Production output – number of units produced in a set timeframe
  • Production cycle time – average time from start to completion of manufactured goods

Sales:

  • Sales contact rate – number of contacts to customers (calls, emails, etc.) in a set period
  • Sales target attainment – % of sales targets reached in a set period
  • Profit margin – average profit generated per sale

Organizational Level

At the highest level, KPIs can be selected for entire organizations. These are generally related to efficiency and profitability and are directly related to the organization’s overall goals.

Organizational KPIs can be based on internal data but may also use external surveys and rating systems to help organizations measure their success with customers and clients. Examples include:

  • Net promoter score (NPS) – customer loyalty score based on % of detractors subtracted from % of supporters 
  • Market share – % of customers patronizing a business compared to all customers patronizing all businesses in the same industry
  • Net profit – gross income minus all expenses

How to Set Key Performance Indicators

  1. Set goals: Set organizational goals that reflect the needs and desired outcomes of a business or other organization.
  2. Select KPIs: Choose the best way to measure the attainment of each goal. You must be able to collect data, whether it is quantitative (ex,. number of sales) or qualitative (employee satisfaction ratings). 
  3. Decide on data collection methods: Decide who will collect data, how it will be done (surveys, statistics, etc.), and how frequently data points will be needed.
  4. Take baseline measurements: The first data point for a KPI should be the present state to be used as a baseline. If data allows, measurements can also be extended back into the past to measure change from the present.
  5. Communicate KPIs: Once KPIs are selected, communicate them throughout the organization so all people understand them and their roles in their measurement.

Key Performance Indicators Summary

KPIs are selected as the best metrics to measure success, whether this is at the individual, team, department, or organizational level. KPIs must be clearly linked to goals and be designed to measure progress toward them. This gives your organization important data to drive decision-making and lead to future success.

FAQ

It can be. If your organization sets a goal to grow its revenue monthly, you’ll need to measure revenue each month and compare it to past months to see how much growth has occurred.

Good indicators effectively measure change over time and are directly linked to organizational goals. They offer objective evidence instead of guesswork and provide measurements that can inform decision-making.