Key Performance Indicators (KPIs)

Strategic management tools that enable organizations to measure their success in both financial and non-financial aspects

Author: Farooq Azam Khan
Farooq Azam  Khan
Farooq Azam Khan
I am, working as Business Analyst for WSO. Process Optimization, Financial Analysis, & Financial Modeling
Reviewed By: Austin Anderson
Austin Anderson
Austin Anderson
Consulting | Data Analysis

Austin has been working with Ernst & Young for over four years, starting as a senior consultant before being promoted to a manager. At EY, he focuses on strategy, process and operations improvement, and business transformation consulting services focused on health provider, payer, and public health organizations. Austin specializes in the health industry but supports clients across multiple industries.

Austin has a Bachelor of Science in Engineering and a Masters of Business Administration in Strategy, Management and Organization, both from the University of Michigan.

Last Updated:November 9, 2023

What Are Key Performance Indicators (KPIs)?

Key Performance Indicators (KPIs) are important strategic management tools that enable organizations to measure their success in both financial and non-financial aspects.

These are critical indicators of the firm's success. Specific and measurable goals must be achieved for the firm's strategy to succeed.

Indicators can be financial and non-financial. These are important for gaining a sustainable competitive advantage. It aids managers in learning the importance of financial and non-financial indicators of success.

Some of the definitions that define KPIs include:

Peter Drucker, Father Of Modern Management:

“You can’t control what you can’t measure.”

Macmillan's Dictionary defines them as:

“A way of measuring the effectiveness of an organization and its progress towards achieving its goals.”

Kaplan/Norton, Creators of the Balanced Scorecard:

If you can’t measure it, you can’t manage it.”

KPIs can be categorized in different ways, such as based on hierarchy, function, or strategic objectives, providing organizations with diverse perspectives for measurement and evaluation.

Key Takeaways

  • KPIs are vital strategic management tools that enable organizations to measure their success in both financial and non-financial aspects.
  • They offer valuable insights and benchmarks for evaluating organizational performance and guiding businesses toward achieving strategic objectives.
  • These can be categorized into various types, including Sales, Marketing, Financial, Operational, and Customer KPIs.
  • KPIs provide a holistic view of overall performance and are measured against predetermined targets or benchmarks.
  • KPI reports should be created with clear goals in mind, focusing on SMART criteria. It's crucial to stay flexible, adapting KPIs as business priorities shift.

Why are KPIs important?

KPIs are essential strategic management tools that enable organizations to measure and evaluate their success in both financial and non-financial aspects. They provide valuable insights and benchmarks for organizational performance, guiding businesses toward achieving their strategic objectives

KPIs are important because:

  • It aids in understanding and monitoring business performances
  • It helps in identifying the areas for improvement
  • Successful implementation leads to the best execution, resulting in achieving strategic goals
  • It assists in analyzing patterns over time
  • It solves problems and tackles them
  • It identifies opportunities

Companies want to focus on leading indicators of future success. Customer satisfaction leads to customers coming back for the service provided. In addition, a decrease in defects ensures an improved process and fewer resources expensed in rework.

Types Of KPIs

There are several types of Key Performance Indicators (KPIs) that can effectively measure your organization's performance. Let's delve into the key categories you should be tracking:

1. Sales KPIs

These gauge the performance of your sales efforts. They encompass metrics like revenue, customer acquisition cost, average purchase value, retention/churn rates, and more.

2. Marketing KPIs

This assesses the effectiveness of your marketing campaigns. They include metrics such as website visitors, conversion rate, social media engagement, and others. Insights from Marketing KPIs are often combined with sales data for a comprehensive overview.

3. Financial KPIs

Financial KPIs focus on financial metrics such as revenue growth, profitability, return on investment (ROI), and cash flow. These indicators offer insights into the financial health and stability of your organization.

4. Operational KPIs

These measure the efficiency of your operations and processes. They encompass metrics related to production output, quality control, and inventory management, providing valuable insights into operational efficiency.

5. Customer KPIs

Customer-centric KPIs evaluate your success in meeting customer needs, expectations, and preferences. Examples include customer retention rate, average customer lifetime value, and customer satisfaction index.

By monitoring these specific KPIs, you can comprehensively understand various aspects of your organization's performance, enabling informed decision-making and strategic planning.

How To Set A Good KPI

You can develop and set up good KPIs by:

Understanding Your Strategy

A clear and apt understanding of the organization's strategy is a must to set the performance indicators most beneficial.

Objectives must align with the strategy, contributing toward the result-oriented approach. Activities and plans lead to the implementation; implementation signifies improvement, and these improvements are measured.

Identifying and selecting Performance Indicators based on strategy

Once the strategy set is clear, the success factors should be clear. The performance indicators may vary across the organizations and industries. Performance indicators can be of 2 types:

  • Lagging indicators/outcome measures: Measure the current and past performances. Only known after an event has already occurred. It confirms and clarifies the pattern and trends over time
  • Historic in nature: Example: Profitability, market share, employee skills, etc
  • Leading indicators/performance drivers: Indicators that might predict future favorable outcomes. They are indicators and drivers specific to the strategy of the business unit.
    • Example: Cycle times, setup times, patents, etc

Get Buy-In

Securing support and dedication from employees and stakeholders is important for successful KPI implementation.

Employee engagement or support ensures a motivated workforce, while stakeholder support enhances financial backing and confidence in management decisions, fostering a conducive environment for effective KPI development.

Deploying Measurable Goals

The management should have indicators identified and selected, plus the support and confidence of employees and stakeholders. Then, it would be the time to implement the performance measures.

These measurable goals should be based on accurate data and owned with the right responsibility.

Variance Analysis

Quantitative indicators allow for precise analysis to assess goal achievement. By comparing actual performance against targets, organizations can identify areas of non-achievement and focus on necessary improvements.

Interpret Results

Favorable results are indicators moving toward their targets, even exceeding them. Unfavorable results are the ones moving away from the targets.

But the key is to see the variation between the normal and the abnormal ones. This can be identified by:

  • Consideration of Patterns and Trends
  • Looking for ways to change and not control the outcomes
  • The user must be ready for a lot of questions instead of answers
  • Taking a deep dive into the source of information and data

Take Action

Indicators are likely managed and monitored over time when moving in an unfavorable direction. Two types of actions are available but aren't limited to:

  • Remedial Activity: It involves specific, immediate actions taken in response to deviations from KPI targets under normal conditions, ensuring prompt corrective measures
  • Strategic initiatives: These include complex, organization-wide changes aimed at addressing underlying issues and driving long-term KPI improvements, often requiring comprehensive planning and execution

The list of steps and priorities while developing key performance indicators varies between companies and industries. Also, it depends upon the professional/author's views and goals.

    Key Performance Indicator Vs. Metric

    Let us understand what is the difference between a KPI and a metric.

    Take a look at the table below:

    Key Performance Indicator Vs. Metric
    Basis Key Performance Indicator (KPI) Metric
    Definition Measures the organization's overall performance towards achieving specific strategic goals and objectives. KPIs are critical to the success of the business. Measures a specific aspect of a business process, providing quantifiable data. Metrics are often components of KPIs.
    Focus Focuses on the most important objectives and long-term goals of the organization. KPIs are high-level and strategic, reflecting the organization's strategic direction. Focuses on specific details or components within a process or operation. Metrics are more detailed and granular, providing specific data points.
    Relevance Directly linked to the organization's mission, vision, and strategic priorities. KPIs align with high-level business objectives and are critical for decision-making at the executive level. Relevant to specific tasks, processes, or operations within a department. Metrics provide detailed insights into operational performance.
    Measurement Provides a holistic view of overall performance. KPIs are often measured against predetermined targets or benchmarks. Provides specific numerical data about a particular aspect of the business. Metrics can be quantitative or qualitative, depending on the context.
    Use Used to assess the success of the organization in achieving its strategic goals. Top management uses KPIs to make high-level decisions and assess the organization's overall health. Used by various levels of management to track progress, identify trends, and make operational decisions within specific departments or processes. Metrics help in optimizing specific areas of the business.
    Example Customer Satisfaction Index (CSI) for the entire company, measuring overall customer satisfaction and loyalty. Website Conversion Rate, measuring the percentage of website visitors who complete a desired action, such as making a purchase or filling out a form.

    Advantages of KPIs

    The advantages of KPIs are:

    1. Future Strategies

    It is tracking the progress from day 1 of its implementation. Any deviation from the goal or any leads is accounted for. Feedback could be given to set the ship to sail in a fruitful direction. 

    In the development stage of indicators, the Strengths, Weaknesses, Opportunities, and Threats (SWOT) are carefully analyzed, with the help of which strategies are formed. 

    With favorable actions toward achieving the organizational goals and objectives, strengths may become formidable traits. Weaknesses will be minimized, opportunities will be cashed, and threats will be averted through the most acceptable risk management policy.

    2. Close Learning Gaps

    The learning & growth perspective focuses on the employees and their satisfaction. This also helps them in their professional development. This may include encouraging employees to take courses contributing to their position, enrollment in certification courses, and continued professional education.

    Empower employees to take action toward the achievement of targets set. Aligning an employee's work efficiency with performance evaluation will allow the supervisors to judge actual performance against the expected performance. 

    Aligning employee performance with specific KPIs ensures that individual efforts directly contribute to organizational goals and objectives. Clear and measurable KPIs provide employees with a focused direction, ensuring their work aligns with the organization's overall strategies.


    Incentives, salary hikes, and promotions should be awarded based on favorable performance.

    3. Rewards

    Supervisors and managers head the performance reviews. Employees are rewarded for their contributions. KPIs help in setting targets, actions taken, and reaching those targets. Achievement of targets should be rewarded accordingly.

    4. Measure outcomes and results

    The sole purpose of the performance indicators is to check progress. KPI results are displayed in specific metrics and data points, allowing for precise analysis and comparison with predetermined benchmarks.

    This clear presentation enables organizations to assess their progress accurately and make data-driven decisions.

    Limitations of KPIs

    The Limitations of KPIs are:

    1. Time-consuming

    Once implemented, the indicators should be subject to evaluation and monitoring. And, to witness fruits, especially from a non-financial perspective, might be time-consuming.

    Example: You may have implemented an employee training program. Checking the benefits and the learning of employees will be challenging to quantify.

    2. High Learning Curve 

    It's better to stick to one or two indicators in the initial stages. Although there could be more than two performance indicators for one subject, the increased number of indicators will cause confusion and hassle.

    3. Data Collection

    Before developing performance indicators, information for building accurate and stable indicators is collected. The process, along with being time-consuming, is energy-consuming, too, given the resources engaged in collecting the data.

    4. Integration With Strategy

    The indicators must be aligned and integrated with the firm's strategy. These indicators may differ among the industries and operations and must be selected with the utmost attention.

    What Is The Best Way To Measure KPI?

    One practical method is using the SMART framework.

    Firstly, what does SMART stand for? It represents five essential criteria for good KPIs: Specific, Measure, Attainable, Relevant, and Timeframe.

    Let's break down these aspects into simple questions:

    • Is your goal specific?: Your KPI should focus on a clear and defined area, such as sales, customer satisfaction, or website traffic.
    • Can you measure progress?: Your KPI should be quantifiable using objective data, like percentages, enabling you to track your performance.
    • Is the goal achievable?: Ensure your KPI is a realistic target within a given timeframe. Avoid setting unattainable goals.
    • How relevant is the goal to your organization?: Your KPI should align with your business objectives and reflect a crucial area for your success.
    • What's the timeframe for achieving this goal?: Determine if your KPI target is for the month, quarter, or year. Setting a timeframe allows you to compare periods, enabling better tracking of your progress and growth.


    To enhance the SMART framework, consider making it SMARTER by adding steps for evaluation and re-evaluation. KPIs shouldn't be fixed; regularly assess them to ensure they remain achievable and on the right track.

    How to Create a KPI Report

    Dealing with the increasing volume of data companies collect can be daunting when trying to identify the most useful and impactful Key Performance Indicators (KPIs) for decision-making.

    When creating KPI dashboards or reports, consider these steps:

    • Clarify goals with partners: Understand the objectives of your business partners before compiling any KPI reports. KPIs are only valuable when they align with the users' goals and intentions.
    • Define SMART KPIs: Establish KPIs with clear restrictions, adhering to SMART (specific, measurable, attainable, realistic, and time-bound) metrics. Vague or unrealistic KPIs lack value. Focus on available information that meets SMART criteria.
    • Stay flexible: Be ready for new business challenges and shifts in focus. KPIs should adapt as business and customer needs change. Numbers, metrics, and goals should evolve in line with operational changes.
    • Avoid overwhelming users: Resist the urge to overload reports with excessive KPIs. Beyond a certain point, KPIs become hard to grasp, making identifying the most important metrics challenging. Keep the focus on essential and relevant indicators for better comprehension.

    Researched and authored by Farooq Azam Khan | LinkedIn 

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