Why KPIs are Critical for Business Strategy

Quantitative measurement is critical to a strong business strategy. Surprisingly, however, it is often overlooked. While there are any number of reasons why, many companies make the mistake of believing Key Performance Indicators (business metrics) are obvious and therefore don’t need to be clearly articulated as part of a strategic plan. However, thoughtfully planned KPIs offer clarity, act as guide markers, provide a concrete, shared understanding of success, and, perhaps most importantly, help to drive growth.

Just how to drive business growth has taken on new meaning in the last couple of years, as economic headwinds impact industries worldwide and outside funding becomes harder to come by. With a heightened focus on a path to profitability, organizations are taking a critical look at how they are meeting expected KPIs and whether those KPIs are the right ones to measure against in the first place.

Creating the right standard of measurement for your organization can be tricky. As Farokh Shahabi, co-founder and CEO of Formaloo explained, founders make two common mistakes when establishing KPIs. First, they often get caught up in splashy numbers—everything from website traffic to volume sales employee growth to valuation. These numbers are touted by the media or spotlighted on earnings calls and founders assume these are the numbers they should chase as well. Second, and perhaps more likely, founders look at other companies in their space or close competitors and create KPIs based on what those businesses are doing.

The problem with both scenarios is that neither takes into account the unique nature of your organization. What is right for one company is likely not right for another. Everyone is at different stages and, ultimately, has different long term goals. 

This is why your strategic plan is so important. Determining the right KPIs is done in large part with your strategic vision in mind. As Shahabi explains, “The goal of our KPIs is to answer whether our strategies are working or not.”

So what makes a good KPI?

One rule of thumb that remains unchanged in business is to keep your KPIs simple and S.M.A.R.T., meaning they are specific, measurable, achievable, reachable, and timely. It’s also important to understand the difference between a strategic KPI, something that monitors progress over time and is tied to bigger business goals, and an operational KPI, something more immediate in nature, helping you to assess the efficacy of ongoing business activities.

KPIs should also be dynamic. Even measurements that have always been a part of your organization or strategy need to be evaluated on an ongoing basis. Have customer expectations changed? Have market dynamics shifted? Have priorities for growth been realigned? Has the structure of the organization been adjusted? All of these activities, and many others, should have an impact on KPIs. Don’t allow yourself to get locked into assessing success against the same metrics year in and year out.

Don’t make the mistake of focusing on easy-to-measure or flashy metrics, either. It can be tempting to create KPIs that yield positive results, or at the very least, are easy to quantify. The harder task is to determine whether that KPI is impactful to the business. 

For example, imagine you wanted to increase the exposure of your company and you hire a PR agency to help tell your story to the media. An easy KPI would be to measure the total number of articles published or the reach of the audience for each publication. Even if your agency hits those numbers out of the park, you may not notice any discernible difference in awareness of your organization among your key audiences. Why? Because these easy-to-track metrics don’t tell the bigger story. Perhaps your business is better served by smaller, niche publications that are read by your specific customers and prospects or perhaps the messaging in the article isn’t what you need to best differentiate your organization from a competitor. Either way, you’ve sacrificed an easy-to-measure KPI for a less tangible, but likely more meaningful assessment.

How do you know you’ve got the right KPIs in place?

One clear indication of the efficacy of your KPIs is your progress. If you’re hitting all of the defined KPIs but aren’t achieving success, you likely don’t have the right metrics in place. Conversely, if your company is meeting its strategic targets, and you can map results directly to the KPIs you are tracking, you’ve likely found your secret sauce.

Predictive or prescriptive KPIs are best for looking ahead, while descriptive or diagnostic KPIs are necessary to determine where you’ve been. When all four levels of analysis can work in tandem, you likely have the necessary 360-degree vision to assess progress from every angle. 

Finally, KPIs should be a joint effort by key leaders within the company and in various departments. They should be well understood and supported by team members, and key stakeholders should be involved in their regular evaluation.

Strategic KPIs must align with your organization’s vision. They must be specific, measurable and highly relevant for each initiative they are meant to evaluate. They should be ambitious, yet realistic and they must be evaluated regularly to ensure they are still the best indicator of performance and results. 

Creating KPIs or other key metrics designed to measure company performance does not need to be overly complicated. Let us show you how to leverage our high-visual strategy planning tool designed to take the complexity out of identifying and properly measuring metrics, helping you turn your strategic vision into tactical execution. We offer real-time and historical variance analysis to assist in determining your descriptive KPIs, future trend forecasting to meet your predictive data analysis needs and help to guide your process for establishing the right prescriptive KPIs. Contact us today.