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How to set key performance indicators for your business

14 January 2014

If you want your business to grow over a sustained period, you're going to need a strategy. This applies no matter what size your business is. This is where key performance indicators or KPI's come in. They help you achieve a strategy and map progress.

The term KPI, though, is very widely used, sometimes being applied simply to indicate something that can be measured. But measuring the wrong things, or to be more precise, things that don't fundamentally matter, is just a waste of time. In fact, it's more than that, it's counter-productive. Because it not only creates a focus on the wrong areas, it can confuse people.

The first task then is to define what your business strategy and goals are. After that, you need to identify the most important questions you would like answered to discover whether your strategy is progressing and you are on course to reach your goals

Here are six points to help create KPIs for a business:

  1. Keep it simple, get to the nub of things and measure what really matters. Make sure everyone can easily understand what's reported. It doesn't always have to be the case, but it's a good idea to measure the same areas your customer will make assessments about: time to delivery, speed at handling an inquiry and so on. To establish KPIs you need to break down how your business works and identify the components of its processes. Then you can work out the best way of measuring these.
  2. Make sure each KPI, even if it's ambitious, can actually be achieved. They must be based on past data and realistic expectations, otherwise they will cease to have real value.
  3. Be careful to differentiate between factors you can control and those you can't. There are many things affecting your business, which will be measurable, but which you can't do much about. The price of petrol, for example.
  4. Make sure your KPIs can actually be measured. The classic management maxim applies: 'What you can't measure, you can't manage'. This rule demands that your KPIs are very tightly defined, so avoid vagueness like 'increase sales'. You need to define what 'increase' means, is it volume, profit margin, new sales channels, or what? And then it's important to set a clear target, not just 'increase'.
  5. Make sure a person or a team is responsible for or 'owns' each KPI.
  6. Keep your KPIs up to date. Things change and so what needs to be included in your progress map may also need to change. That's why it's important to continually review KPIs to ensure they are still relevant.

Finally, when setting your KPIs, keep the SMART rule in mind – they need to be:

  • Specific
  • Measurable
  • Achievable
  • Relevant
  • Time phased
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