The use of business key performance indicators and metrics means that a business is run like an experiment. In a true experiment, the investigator creates a condition or changes a condition (the variables the experimenter can control--independent variables) then observes the effects on the outcome variable (variables that would show effects, but are not directly controlled--dependent variables).
The Role of KPIs
If we look at all businesses through the eyes of an investigator conducting an experiment, the daily operations a business generates would be considered independent variables. How does this relate to the role of key performance indicators?
Performance indicators are important because they represent the effects of independent variables on a business. For example, if a business implements a new technology (the independent variable), they will want to see how that technology affects the profit margin (the dependent variable).
Some of the most important key performance indicators measured by companies are metrics that are associated with the well-being of the company, such as sales numbers, profit numbers, output numbers.
The Process of Selecting KPIs For Your Business
Only managers of the business know exactly what outcome KPIs to select and how to measure them. This kind of data varies from business to business, depending on business goals and the way businesses are run. Choose KPIs that are directly related to your business goals. Your KPIs can also change from time to time depending on short-term projects or as your business goals change. The KPIs can be used to test special campaigns, such as testing goal-reaching in sales-marketing alignment campaigns within the business. Under certain conditions, KPIs may have more to do with reducing costs than maintaining revenue.
Examples of widely used KPIs (dependent outcome measures).
- Current sales revenue is the total dollar value of sales
- Sales growth is a derived measure: current sales revenue minus previous sales revenue
- Conversion rate is the ratio of sales (in dollars) divided by number of customers who enter the store
- Gross margin is the difference between income and costs
- Type of sales contact
Examples of process measures (independent controlled measures).
- Number of sales calls (do more sales calls result in greater profit margins?)
- Revenue per sale (do sales get larger or smaller?)
- Types of sales contacts (do the kinds of sales change?)
- Ratio of first-time customers to established customers (are new customers coming to the business?)
- Stakeholder or customer satisfaction survey measures
- Lead response time (how long does it take staff to return sales calls?)
- Product mix measures (how many different kinds of products are offered?)
Monitoring Your Business With KPIs
The best use of KPIs is to measure and report them in as close to real-time as possible. Timelines are very important in business measurement. To establish that a given KPI is the result of a particular business change, you have to know the exact time the change was instigated and the timing of the change in performance. Many businesses use online dashboards that display the process numbers as presented by staff with the outcome measures coming out of sales and production figures side by side on a timeline. If the graphics of the measurements are neatly presented, the effects of business changes can be immediately seen.
Running averages and other statistical tools applied to the metrics can filter out random short-term variations to reveal long-term change and trends and show the effects of process changes in the business. Running averages can be computed in real-time by programming the computer to average over a given number of previous months.
When you interpret outcome KPIs, you have to be careful not to over-interpret small random fluctuations. Many businesses make the mistake of basing decisions on small fluctuations that do not reflect real change.
KPIs often comprise the content of annual reports or short-term progress reports. They add a lot of credibility to statements about the success of the business and statements about the success of particular changes in the business operation.
5x Technology is an IT solutions provider that uses business intelligence, data warehousing and data integration to immediately increase profitability and productivity. Download our free reference to Using Advanced Analytics to Gain Insight into Your Revenue Stream.
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