• Key performance indicators (KPIs) are numerical markers that demonstrate the performance of an organization, group, or individual against a set ideal, baseline, or goal.
• KPIs offer a holistic view of progress and highlight potential areas for improvement.
• KPIs fall into one of four categories, depending on their purpose: functional, leading/lagging, operational, and strategic.
• KPIs, akin to other performance metrics, bring many benefits, like process improvement, but they may also lead to negatives, like data overload.

Key performance indicators (KPIs) illustrate an organization’s progress toward its set goals. As every organization has distinct goals and objectives, the metrics and their measurement methods differ accordingly[2].

However, KPIs aren’t confined to one business area. They cover nearly all aspects of an organization, including marketing, sales, customer relationship management, operations, and finance.

KPIs should be objective and unbiased, which is why it is common to use numerical KPIs[3].

Why Are KPIs Important?

KPIs are crucial as they allow businesses to make decisions grounded in real data, eliminating guesswork.

Publicly sharing unbiased data about the performance of an organization, departments, teams, or individuals enables them to understand their standing relative to the organization’s primary goals.

KPIs also assist managers in monitoring progress and giving feedback on employee performance. This feedback can enhance performance and foster accountability. In addition, KPIs can shed light on customer satisfaction, highlighting areas for improvement[4].

In any case, KPIs contribute to an organization’s success by offering critical insights that guide managers in resource allocation decisions.

KPIs are classified into separate categories according to their specific features, timeframe necessities, and target audience.

Specifically, KPIs can be broken down into four categories[5]:

Functional KPIs

These metrics assess the success of individual departments and functions like sales, marketing, finance, and operations. As a result, they offer an understanding of how well a department or function is meeting its goals and objectives.

Leading/Lagging KPIs

Leading KPIs evaluate performance before an event or action happens. In contrast, lagging KPIs examine the outcomes of a past event or action. These indicators review previous behavior and pinpoint improvement areas.

Operational KPIs

Operational KPIs provide detailed insights into a business’s current performance. These indicators help scrutinize performance minutely and spot bottlenecks or inefficiencies rapidly.

Strategic KPIs

These metrics offer broad insights into an organization’s overall success. They track progress toward long-term goals and objectives and evaluate the success of strategies, tactics, and roll-out investments.

Businesses employ numerous KPIs. However, the specific KPIs an organization uses depend on its unique goals and objectives[6].

Here are some examples of KPIs companies may employ:

• Revenue growth — tracks the rise in total revenue over a specified period, gauging a product’s or service’s performance.
• Customer satisfaction — measures customers’ happiness with their experiences, typically through surveys or interviews. It can help organizations spot improvement areas and modify their strategies[7].
• Inventory-to-Sales Ratio (ISR) — calculates the rate at which inventory is sold compared to the total inventory.
• Employee turnover — gauges the frequency of employee departures from the organization and aids managers in identifying improvement areas for staff retention.
• Net profit margin — determines an organization’s profitability by comparing its net profits with total revenue.
• Social interaction — measures the engagement level of an organization’s social media posts.
• Monthly website traffic — computes the visitor count to a website in a given month.

Crafting KPIs isn’t an exact science, but certain best practices can maximize their benefit to the organization[8].

Below are four tips on creating a KPI:

1. Define the Goal

Clear goals and objectives are crucial as they guide KPIs in tracking progress toward these targets.

2. Identify the Data

Reliable and up-to-date data is important. This data can originate from internal sources like financial reports or external ones such as industry reports.

3. Choose an Appropriate Metric

Choose a performance metric, like cost per lead or customer satisfaction score, relevant to the goal for easy progress tracking. Ensure the metric is simple to understand and interpret.

4. Set Benchmarks and Goals

Set a benchmark, the starting point, to establish the baseline for performance measurement. Define goals for the KPI to help monitor progress and assess if the organization is reaching its targets.

Though KPI creation can be a potent tool for progress tracking and data-based decision-making, it comes with both advantages and disadvantages.

Advantages

• A KPI can offer data-based insights into an organization’s pursuit of its goals, facilitating improved decision-making[9].
• Businesses can pinpoint areas needing improvement and modify their strategies as needed.
• KPIs usually come in straightforward, easy-to-understand language.

KPIs should be easy to understand to derive meaningful information from them.

Disadvantages

• KPIs can often oversimplify and mask the complexities of an organization’s performance.
• An excess of KPIs can lead to data overload, hindering the extraction of meaningful insights from the data[10].
• The creation and maintenance of KPIs can take substantial time due to regular data collection, analysis, and reporting needs.

1. Key Performance Indicators. (n.d.) Application Performance Management. Retrieved from https://www.applicationperformancemanagement.org/performance-testing/key-performance-indicators/ 
2. What is a Key Performance Indicator (KPI)? (n.d.) KPI.org. Retrieved from https://www.kpi.org/kpi-basics/
3. Key performance indicator (KPI). (n.d.) Sitel Group. Retrieved from https://www.sitel.com/glossary/key-performance-indicator-kpi/ 
4. What is a KPI? (n.d.) Klipfolio. Retrieved from https://www.klipfolio.com/resources/articles/what-is-a-key-performance-indicator
5. What is a KPI? (n.d.) Qlik. Retrieved from https://www.qlik.com/us/kpi 
6. KPI Examples and Templates. (n.d.) Qlik. Retrieved from https://www.qlik.com/us/kpi/kpi-examples 
7. Jackson, T. (n.d.) 30 KPIs To Measure Performance (& How To Choose & Track Them). Clearpoint Strategy. Retrieved from https://www.clearpointstrategy.com/18-key-performance-indicators/ 
8. Twin, A. (2022, August 17.) Key Performance Indicator (KPI): Meaning, Types, Examples. Investopedia. Retrieved from https://www.investopedia.com/terms/k/kpi.asp#toc-examples-of-kpis
9. Patrick, N. (n.d.) Key Performance Indicators (KPI’s). Managers-Net. Retrieved from https://www.managers-net.com/KPI.html 
10. Zwart, H. (n.d.) Disadvantages of KPIs. Better You. Retrieved from https://www.betteryou.ai/disadvantages-of-kpis/