What is KPI? Classifying KPIs? Effective KPI Construction Methods

Understanding KPIs: Effective Classification, Evaluation, and Implementation

What is KPI? 

KPI stands for Key Performance Indicator. It is a critical performance metric reflecting the level of goal achievement. Nowadays, individuals, departments, and companies all use KPIs as their targeted objectives. KPIs are built based on the Balanced Scorecard (BSC) method. 

In simple terms, the BSC method is a strategic map. The BSC has mapped out specific strategic goals. Every map will have 4 objectives, including financial, customer, internal process, and growth. After determining business objectives, individuals will specify metrics with measurement indices. 

In general, KPIs should correspond to the function, position,... of the department. Most management departments will provide KPI indicators to assess work effectiveness. Consequently, managers will calculate, pay salaries or reward employees who achieve KPIs better. 

• Further Reading: What is an identification code? How to quickly look up identifiers

The Role of KPIs in Business

Why do businesses, individuals nowadays all use KPI indicators? What is KPI that is so important? Below we have compiled some reasons to use KPIs in business operations. Specifically: 

Accurate Work Capability Assessment 

The reason businesses use KPIs is to accurately assess employees' work capabilities. Nowadays, every company applies specific KPIs to check the work efficiency of subordinates. Each department, individual in the company has KPI indicators to ensure work quality. 

Business Strategic Planning 

Enterprises and individuals alike require KPIs for business strategic planning. KPI metrics will accurately measure the effectiveness of business strategies when implemented. 

Boosting Motivation, Sense of Responsibility

KPI metrics also serve as a factor to help businesses, individuals take responsibility for their work. To achieve KPI goals, people will be motivated to work harder. 

Receiving Critical Information

Individuals can rely on KPI metrics to have an overall view of businesses, individuals. Before collaborating, if your KPI metrics are high, the probability of successful cooperation will be higher. 

Goal Measurement

Enterprises, individuals can accurately measure their goals. You will identify the right and wrong points of the goals. Thus, there will be reasonable adjustments and faster goal achievements. 

Classifying the Most Common KPIs  

Currently, there are many different ways to classify KPIs. However, the two most common KPI metrics are Strategic KPIs and Tactical KPIs. Each type will have its own characteristics, specifically as follows: 

Tactical KPIs 

These are KPI metrics closely linked to various minor activities. Tactical KPIs often help businesses, individuals move closer to achieving strategic goals.

For example: if the strategic KPI target is to achieve revenue of $100 billion/year. To accomplish this goal, the business needs to achieve 400 contracts valued at $250 million/year.

Strategic KPIs 

The characteristics of Strategic KPIs are goals such as revenue, profit, profit, marketing share, market share,… These indicators often determine the majority of the business's 'survival' when operating. Additionally, they support businesses in achieving their set strategic objectives. 

For instance, if the strategic KPI target is to achieve $100 billion/year in revenue, failure to meet the strategic goal will impact profits. This can lead to consequences such as investors withdrawing funds, company disruptions, and more. 

Effective Methods for Constructing KPI Systems

In reality, the drawbacks of KPI metrics only occur if you don't know how to build a KPI system. Below, we provide guidance on the process of building a useful KPI system for your reference: 

Identifying Individuals/Departments for KPI Development

There are two main ways to identify suitable individuals/departments for KPI development. This includes department heads or specialized personnel, specialized departments. Each approach has its advantages as follows: 

• KPI Builders: Department Heads/Managers: They have the deepest understanding of the tasks at each position. This ensures the feasibility of KPIs in their work. 
• KPI Builders: Specialists, Specialized Departments: This method is more objective. However, it's difficult to ensure the effectiveness of each task, function at each position. 

Defining the Functions, Tasks of Each Department

To build a KPI system, businesses should define the working functions in each department. Every individual needs to excel in their own tasks. Work performance will be better with this step in KPI system building. 

Defining Each Task

Every task in the KPI system is crucial. If individuals/departments fulfill their tasks well, overall work efficiency will move in the right direction. 

Defining Performance

This is a crucial step in building a KPI system. Every business, individual needs to measure work performance with specific KPI indicators. Defining performance will aid in achieving the final goals effectively. 

Adjustment

When measuring KPI indicators, individuals/businesses will draw objective conclusions. If the work system hasn't met its goals, adjustments can be made accordingly. This will steer work objectives in the right direction. 

Key Factors to Meet When Building KPIs 

During the proper KPI building process, businesses should note key factors. Meeting these factors will enhance overall work efficiency. Specifically including: 

• Implementing the BSC process
• Developing and allocating a system of indicators for departments/individuals
• Standardizing the organizational structure
• Having a unified strategic direction
• Establishing an accurate strategic map
• Creating evaluation regulations

Effective Deployment of KPI Systems 

What is KPI? Accurate evaluation of KPIs will lead to high efficiency when businesses operate, achieve strategic objectives. To operate the KPI system, all leaders should start with the most basic things. 

First, the business needs to understand the organization's goals. Then, plan to achieve the goals. Businesses need to allocate tasks for each specific position. Then, build a KPI system suitable for their business sector. To do these, all businesses should ask themselves some questions: 

• What are the desired strategic goals to achieve?
• Why are those results, goals important?
• What benefits does that goal bring?
• Who is responsible for the work's effectiveness?
• How many tactical KPIs, goals are appropriate?
• How to measure, know that KPIs have been achieved?

After finding answers to the above questions, businesses will have a more effective KPI system. Ideally, KPIs for individuals and businesses should have practical value. This is an aspect that needs to be emphasized to reap the great benefits that KPIs bring. 

Common Questions

What are the characteristics of a good KPI system?

All KPIs (objectives or targets) of departments/individuals need to align with the allocated tasks. 

- Meeting SMART Criteria: A good KPI system should have reasonable SMART objectives. Businesses, individuals need to meet criteria including: 

• Specific – Clear: Each KPI metric needs clear delineation for convenient task execution
• Measurable – Quantifiable: KPIs must be measurable
• Achievable – Attainable: KPIs should be within the department's/individual's capability
• Realistic – Considerate: Account for factors influencing the final goal to consider planned metrics
• Time-bound – Specific Timeline: KPIs, KPI systems need to have precise completion deadlines

Reasons Why Businesses Fail to Achieve KPIs?

Despite understanding what KPIs are, many businesses and individuals still struggle to achieve their KPI targets. Do you wonder why? Could it be affecting you or your business? Here are some compiled reasons for a more accurate understanding: 

• Unclearly defined, non-SMART objectives 
• Incomplete dissemination of KPI system information 
• KPI implementation lacking consensus from departments, individuals 
• Unrealistically high KPI targets 
• Lack of monitoring, supervision in KPI execution 
• Incorrect, complex KPI development process 
• Insufficient departmental/individual capabilities to achieve KPIs 

Why Do Strategic KPIs Succeed While Strategic Goals Fail?

This is a common concern for many business individuals when developing a KPI system. In reality, the main reason is that strategic KPIs lack connectivity with strategic goals.

For example, a tactical KPI for a company could be 'Number of website visits.' The marketing team might focus on using keywords with high search volumes, which may not be relevant to the company's products or services. As a result, the customer conversion rate is low (goal) despite high website traffic (tactical KPI). 

In cases where tactical KPIs are met but strategic goals are not, the main challenge is adjusting KPIs upward. However, one should not be too greedy with tactical KPIs when building a KPI system. This often leads to the consequence of diverting the focus of business operations. 

Advantages and Disadvantages of KPIs 

Understanding the pros and cons of KPIs helps you grasp what KPIs are. If you intend to work with a KPI system, here are some pros and cons to consider: 

• Provide an overview of a specific business goal 
• Format, quantify accompanying data to define specific figures 
• Assist businesses in making more accurate work decisions 
• Visually evaluate individual, departmental work achievements, performance 
• Contribute to the most objective performance rewards, sanctions  
• Create motivation and drive work spirit 
• Bring about work unity to achieve common goals 

Additionally, the KPI system also has several limitations such as:

• Unintentionally causes negative impacts if KPI indicators are not clearly defined 
• Diminishes employees' willpower to complete tasks if KPI indicators are too vague 
• Weakens the bond between employees and the company due to unclear KPI indicators 
• Poses risks if KPI indicators set are too large, inaccurate
• Decreases work efficiency due to excessively uncontrolled KPI indicators 

Conclusion 

What is KPI? Businesses, individuals should classify, evaluate, and implement KPIs effectively. Hopefully, the article by Mytour has helped you find accurate answers to the above questions.