7 Criteria for Effective KPIs
Efficiency
October 6, 2022

7 Criteria for Effective KPIs

Gaussian Team

In the modern business climate, we hear a lot about being as quantitative and performance-driven as possible, and Key Performance Indicators, or KPIs are a crucial part of this.

What are Key Performance Indicators (KPIs)?

KPIs are the measures of the progress and success of an individual, team, or organization that are the most important to the overall business and mission. For every individual, KPIs must only be a select few metrics (hence the word "key" in "key performance indicator"), but they are important enough to summarize the entire performance of that individual or team.

Individuals or teams at different levels of the organization have different scopes of KPI. An assembler's KPIs might relate to the number of goods they assembled and their efficiency, while a factory VP's KPIs might related to total number of goods assembled and the overall efficiency.

KPIs are used not just as a way for employees to know how their work is progressing, but also for leaders to quickly understand the performance of the team or teams under them, without micro-managing or knowing the status of every task that is being executed. For this reason, we often say that KPIs are a crucial component of the interface between a leader and their teams, where teams communicate performance up, and leaders communicate guidance down.

Beyond communication, KPIs are also a critical for accountability. Accountability is the social contract between a leader and their teams or direct reports to achieve an expectation, and it is clearly fundamental to any organization. A CEO might ask the Head of Marketing to generate a certain number of leads, and, by agreeing to this expectation, the Head of Marketing is now accountable to it—which in turn allows the CEO to make other decisions based on the expectation of lead generation. Without accountability, the CEO would have no idea what the lead generation outcome would be, and would be unable to make any dependent decisions, or to guarantee the trajectory of the whole business.

Examples of KPIs

Every individual (often) has more than one KPI. Here are some examples of one potential KPI for a number of different roles:

  • For a business unit president: Net income for business unit over trailing 4 weeks (excluding non-payroll operating expenses)
  • For a compliance coordinator in a healthcare Quality department: Number of current outstanding corrective actions at their site
  • For a product director: Average rating of customer feedback (1-10) over trailing 8 weeks
  • For a manufacturing-line assembler: % of assembled items scrapped
  • For a director of operations: Total spend on legal fees over past 3 months

The 7 criteria for effective KPIs

Having instituted KPIs across dozens of clients, advisees, and portfolio companies, with organization sizes from 10 to 100,000, here's what's emerged as the common critical criteria for good KPIs:

  1. Fully quantitative. The strength of KPIs lies in their objectivity. It must be crystal clear when a KPI is on-track and achieved (or not). In order for that to happen, they must be measurable and verifiable, and not opinionated, subjective, or qualitative.
    Note that concepts that are qualitative can always be expressed in a quantitative format (eg "how fast are we releasing our product" can be reframed to yield "how many roadmap milestones did we miss last month")
  2. Actionable. An individual's or leader's KPIs must be metrics that they themselves can influence through actions within their control. If someone cannot meaningfully influence the metric, then there is little value in holding them accountable to that metric (and furthermore, they will be demoralized at being unable to have an impact). A customer support agent should not have a KPI of company revenue, for instance.
  3. Easy to understand. KPIs are about communication and understanding, a way to summarizing complex systems with simple numbers. If it's hard to explain to a team or to peers exactly what a KPI represents, or how it is calculated, then the measurement itself is untethered and useless.
  4. Easy to pull from existing data systems, repeatedly. The harder a KPI is to pull, the less likely it is to be (a) pulled (b) internalized by necessary stakeholders. It's better to use an easily visible metric that is somewhat imperfect than to use a hard-to-extract metric that requires 10 hours of reporting and can only be pulled every 3 months. If KPIs are a burden to pull, teams will find every opportunity not to pull them.
  5. Prioritized (no more than 4-5 KPIs for an individual). Why such a small number? Not only will a large number of KPIs split a team's focus across too many objectives (thereby weakening the delivery of all of them), but also our short-term memory (as humans) is only limited to a small number of items. More KPIs than this make it harder for staff to remember, and so harder continually take action on those KPIs.
  6. Comprehensive. Collectively, KPIs should describe 80%+ of a team’s responsibilities, otherwise they are not an effective summarization of the entire performance of the team or individual.
  7. Not overlapping with peers. While it is fine to have shared goals across multiple teams or team members (such as Net Promoter Score) for the purposes of collaboration, cross-pollination and ideation, using these shared metrics as indicators of performance is difficult, as it is impossible to know (without continual root-cause analysis) which teams and which tactics caused performance to be good (or bad). This can lead to complacency, finger-pointing, and missed opportunities for celebration and learning. High-performance companies keep shared goals separate from KPIs, using them for different purposes.
    A shared goal can always be "broken down" into mutually exclusive sub-metrics which can be given to different individuals or teams—for instance, "Net Promoter Score" may be broken down into "First Month Net Promoter Score" versus "Long-Term Net Promoter Score", and separately given to the Onboarding team and the Product team, respectively.
    Note: overlap between an individual and their manager is completely fine.

What a KPI must not be

Conversely, KPIs should not be the following:

  • Qualitative
  • Centered around feelings or intuitions
  • Hard to verify or re-obtain
  • Low priority for the team or individual

How well do most companies do against these criteria?

Averaging across our internal data points (our clients, investments, advisees, and peer organizations), here are the proportions of organizations that predominantly achieve each of these 7 criteria (before taking steps to make improvements):

  • Fully quantitative: 9 out of 10 organizations
  • Actionable: 8 out of 10 organizations
  • Easy to understand: 8 out of 10 organizations
  • Easy to pull from existing data systems, repeatedly: 4 out of 10 organizations
  • Prioritized: 2 out of 10 organizations
  • Comprehensive: 6 out of 10 organizations
  • Not overlapping with others: 3 out of 10 organizations.

The biggest KPI challenges across the board

To summarize, in our experience, the biggest gaps in KPI design are:

  1. Prioritization, resulting in a small number of KPIs per person
  2. Splitting of shared, overlapping KPIs into mutually exclusive KPIs (while maintaining shared goals)
  3. Choosing KPIs that, while imperfect, are very easy pulled from systems

Top companies roll out KPIs thoughtfully

KPIs are a powerful tool, but should be designed and rolled out with care, to have the biggest impact on an organization. From Gaussian's data points, many organizations initially struggle with some key aspects of KPIs, especially prioritization and goal sharing, though once alerted to the challenges, most of these orgs are able to easily address them.

For more information on accountability, performance, and measurement, don't hesitate to get in touch with the Gaussian team or read more about the Gaussian Consulting services around KPI design and accountable organizational structure design that are trusted by industry leaders everywhere.

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Photo by Diana Polekhina.

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