The Ultimate Guide to Setting Key Performance Indicators (KPIs)

In business, Key Performance Indicators ("KPIs") are tools used to gauge the overall health of your business and operations, and to motivate activities that move the business forward.

Key Performance Indicators are a subset of the different numbers (also called metrics and measures) that are tracked in your business. So while a Key Performance Indicator is a metric, all metrics are not good Key Performance Indicators.

Key Performance Indicators for the overall business provide a snapshot of a business's health at a given moment. KPIs for teams and individuals help drive and align day-to-day operations with strategic goals and ensure everyone stays focused on priorities. For this reason, it's crucial to define KPIs that support your overall company vision.

This guide will walk you through determining, communicating, and tracking the essential KPIs for your company. This saves you from reinventing processes or struggling to decide what to measure. Well-defined KPIs foster better ownership, accountability, and decision-making across the organization.

Why You Need Key Performance Indicators (KPIs): Exploring the Benefits

Key Performance Indicators ("KPIs") are effective tools to gauge business health and performance.

They also provide insights into overall health, and let you see where adjustments and improvements are needed. KPIs serve as the health indicators of the business at a given moment. They are great measurement mechanisms, just like using blood pressure, weight, height, cholesterol, etc. to measure physical health.

Key Performance Indicators ("KPIs") build ownership and accountability.

When people "own" and are responsible for specific KPIs, it fosters accountability, ownership of outcomes, and improves everyone's understanding of the business aims to achieve. Well-defined KPIs enable better decision-making, engagement, and help manage execution across teams. This prevents knowledge gaps, process inefficiencies, and execution breakdowns that can occur when success metrics are unclear.

Key Performance Indicators ("KPIs") bring your company vision into focus.

KPIs also help bring the overall company vision and big picture strategy into focus, keeping everyone aligned on what they need to do. Knowing exactly how success is measured enables better decision-making and drives ownership for each individual in the organization.

Key Performance Indicators ("KPIs") improve autonomy.

KPIs immediately raise visibility into performance, your ability to experiment and adapt, and create autonomy. With clear target numbers, there is less need for micromanaging work. It's far easier to delegate when individuals are responsible for their KPIs. This lets you grow, adapt, and set clear goals by focusing on the key numbers that truly matter.

Key Performance Indicators ("KPIs") feed into frameworks like Objectives and Key Results (OKRs).

When working with goal-setting tools like Objectives and Key Results (OKRs), KPIs provide excellent points of focus to help align the team. Focusing on essential metrics helps teams understand where to direct efforts and how to make decisions that drive progress toward goals faster.

Key Performance Indicators ("KPIs") form a solid foundation for your operating rhythms

A strong set of KPIs give you week-to-week wins that resonate with people in a way that prompts positive change and adjustments. Adaptation and improvement is critical for teams in the continually changing modern world.

Key Performance Indicators ("KPIs") help everyone focus on priorities.

Attempting to measure and manage too many metrics dilutes focus and hinders progress. Creating a small number of KPIs provides organizations with the clarity and alignment they need to move swiftly toward their objectives. Companies must be able to keep their focus on the vital few metrics that matter. KPIs align effort to the outcomes by tying specific objectives directly to well-defined KPIs, ensuring that efforts at all levels are directed toward achieving the outcomes outlined in goals and strategy. When KPIs are shown in a scoreboard or dashboard format, it's easier for people to make mental connections between the work being done and the results achieved.

Understanding the Types of KPIs - Leading and Lagging Key Performance Indicators

An important distinction in creating KPIs is the difference between leading and lagging indicators. While the terms can seem complex, this is a simple concept.

Rear View Mirrors: Lagging Key Performance Indicators

A lagging indicator is a number assessed after the activities creating that number happened. For example, my blood pressure indicates how I ate and exercised over the last three to six months. These are activities I can't change today to immediately impact it. A lagging indicator lags those activities over time.

Looking Ahead and Adjusting Course: Leading Key Performance Indicators

A leading indicator is something done because you believe it contributes to lagging indicators, usually created as a hypothesis. We hypothesize going to the gym and working out every day will improve blood pressure. It's a Key Performance Indicator ("KPI") motivating daily/weekly activities.

Leading indicators are useful for operations. They are things identified to measure specific activities, see if they contribute to the lagging indicator, and then refine based on results. It's a simple process.

Use the Types of Key Performance Indicators Together

Know the distinction to avoid confusion. A common problem is choosing a lagging indicator and getting demoralized if it doesn't move immediately after taking steps. With lagging indicators, it takes time for activities to impact the measured number.

Cash flow is another business example - a lagging indicator of expense management, prospecting, closing deals/customers, and delivering to customers. Those activities over time contribute to cash flow Key Performance Indicators like money in, out, and profitability.

KPI Frequently Asked Questions

Question: What are KPIs?

Answer: KPIs are used to drive goal-setting, annual and quarterly planning, budgeting, and identifying the success of a strategy. Without KPIs, you cannot measure performance, and without measuring performance, you cannot manage it, prioritize, or set focus on meaningful business outcomes.

Question: What is the difference between KPIs and OKRs?

Answer: A Key Performance Indicator (KPI) is a number you choose to help manage performance in a specific area, while Objectives and Key Results (OKRs) typically express the targets for the KPI you want to hit. For example, revenue would be a KPI. Achieving 20% growth in revenue would be a key result (the "KR" in "OKR").

Question: How many KPIs should I have?

Answer: Keep the number small - 3 to 5 for an individual at most, with 5 only being advisable when they are well-crafted and coordinated; 6-9 for a team. Any more and it can become difficult to focus.

Question: Are KPIs the same as business analytics?

Answer: No; business analytics drill into any number of data points. KPIs serve to define a small number of data points on which you will focus. Business analytics are typically used to uncover insights that can help you work toward KPIs.

Question: Are KPIs the same thing as metrics?

Answer: KPIs are a subset of metrics. A metric is anything you measure. You can have any number of metrics, but only a few should be made to be your Key Performance Indicators.

Question: How often should KPIs be reviewed and updated?

Answer: Leading Key Performance Indicators (KPIs) should be updated and reviewed weekly to manage performance. Lagging Key Performance Indicators are typically best reviewed monthly and quarterly.

Question: How often should I change my KPIs?

Answer: Ideally, your business level KPIs will not change more than yearly; you can change tactical KPIs (those for a team or individual) any time it becomes clear they are not producing the intended outcome, even though they are being met, or any time the outcome they were designed to create is no longer relevant. KPIs should not be changed frequently as people must have time and focus to produce results.

Question: What are some examples of common KPIs for different industries or departments?

Answer: Common KPIs vary by industry and department, but examples of categories that are often used include revenue growth, customer acquisition/retention rates, profit margins, operational efficiency metrics, employee productivity/engagement scores, and project success rates. Check out our KPI Scorecard Jump Start for 12 KPIs to prioritize to unlock growth and value.

Question: How do you ensure KPIs align with overall business goals and strategy?

Answer: KPIs should be directly derived from and linked to the organization's strategic objectives and priorities. Regular review and communication across teams help ensure alignment. Use your normal operating rhythms to review.

Question: What are some best practices for effectively communicating and tracking KPIs across an organization?

Answer: Best practices include clearly defining KPIs and targets, using intuitive dashboards/visualizations like the one in ResultMaps, regularly reviewing progress with stakeholders such in ResultMaps weekly meeting, and fostering a data-driven culture of accountability by assigning ownership of each KPI both individually and as part of your definition of a role/seat.

Question: How do you determine the right targets or benchmarks for KPIs?

Answer: Targets should be ambitious yet achievable, based on historical data, industry benchmarks, competitor analysis, and the organization's strategic goals and growth plans.

Question: What are some common challenges or pitfalls to avoid when implementing KPIs?

Answer: Common pitfalls include setting too many KPIs, misaligning KPIs with strategy, failing to review and adjust KPIs regularly, lacking clear ownership/accountability, and overemphasizing metrics at the expense of overall performance.

Question: What is a KPI scorecard?

Answer: A KPI scorecard is a visual representation or dashboard that displays an organization's key performance indicators and their current status or progress towards defined targets. It provides an at-a-glance view of the current score and the recent trends across various metrics.

Question: What is a KPI bowler?

Answer: A KPI bowler is a visual representation of KPI targets and processes that is identical to a scorecard. Where the scorecard analogy borrows from the sport of golf, with each hole being analogous to a week or month in the scorecard grid, the bowler analogy borrows from the sport of bowling, with each frame being analogous to the week or month in the scorecard grid.

Question: How do I manage KPIs?

Answer: See the section titled How to Employ KPIs to Drive Strategy Execution.

How to craft your KPIs

To get to a strong set of KPIs, start with this simple exercise. You can use this template to complete the exercise or use our free KPI Jump Start.

Identify all the things you believe to be potential lagging indicators for your business.
Rank the candidates by relative importance (numbering from 1, 2, 3, etc) and availability of the data.
Choose your top 3-5 metrics as your KPIs.
List out each core function in your business - typically sales/marketing, operations, service or product delivery, operations and finance.
For each key function you identified, repeat steps 1-3, arriving at your top 3-5 leading indicators for each.
Begin tracking them using a tool like ResultMaps.
Use them to guide your daily, monthly and weekly activities.
Track your efforts each day using a daily update.
Review your KPIs monthly and quarterly until you feel comfortable they are creating the intended effect. KPI use cases

Your KPIs may include aggregate revenue numbers, revenue for different products, acquisition metrics, or other relevant factors. The goal is to have clear indicators, ideally no more than half a dozen, to measure success. Take about four minutes to brainstorm and jot down your thoughts.

Tips:

Choose numbers that represent the health of the business for your lagging indicators, and the meaningfulness of activities for your leading indicators.
For leading indicators, it helps to think about numbers that can reflect wins on a weekly basis, and will resonate for your employees in a way that prompts changes and adjustments.
If you are working with a team, involve them in the process of defining your KPIs.
Organize your KPIs into a clear visual such as a scoreboard or scorecard.
The right target creates some discomfort without total freak-out; it should energize people to make changes and iterate until the numbers align with the objectives.

How Key Performance Indicators ("KPIs") Fit Into Your Operating Rhythms:

Key Performance Indicators (KPIs) are reviewed as part of normal weekly, monthly, quarterly, and yearly operating rhythms.

Your objectives for the year and each month or quarter must include moving your business-level, lagging key performance indicators in order for you to get maximum benefit from your KPIs.

Monthly and quarterly reviews of lagging key performance indicators for the business are a must to manage well. Use your monthly and quarterly review meetings for this purpose. In ResultMaps, you can view your scorecard and generate a monthly or quarterly report.

Weekly reviews are a must for all leading Key Performance Indicators. Use your weekly sync meetings or Level 10™ meetings for these reviews, so that you see the progress in the lagging indicators used in your monthly, quarterly and annual reviews of progress.

KPI Use Cases

Gross Margin

Gross margin shows how profitable a company's sales are after subtracting the costs directly associated with producing its products or services.

It's calculated as: Gross Margin = (Revenue - Cost of Goods Sold) / Revenue

If a company has $100,000 in revenue and it cost them $60,000 to produce the products or deliver the services sold, their gross margin is:

($100,000 - $60,000) / $100,000 = 40%

A high gross margin means a company is earning substantial profits on each sale before accounting for other expenses like R&D, sales and marketing. A low gross margin signals lower profitability of sales.

Tracking gross margin helps companies:

Assess profitability of specific products or services
Determine pricing and discount strategies
Identify production inefficiencies causing higher costs
Benchmark against competitors

Sustaining a high gross margin over time means a company is able to retain more profit as they scale. Declining gross margin indicates problems with production costs or pricing.

SAL to SQL Conversion Percentage

Sales Accepted Leads (SALs) are leads that the sales team has reviewed and agreed to pursue as potential opportunities.

Sales Qualified Leads (SQLs) are leads that sales has vetted and confirmed match their ideal customer profile and buying needs.

The SAL to SQL volume metric looks at how many SALs get further qualified as SQLs ready for active selling.

For example, if 100 SALs resulted in 75 SQLs, the SAL to SQL volume would be 75.

Tracking this volume helps businesses:

Gauge how well sales is qualifying leads
Identify gaps in qualification criteria
Assess productivity of lead follow-up
Set standards for quality lead handling

Higher SQL volume indicates sales is effectively qualifying leads for pursuit. Lower volume suggests improvements needed in lead handling procedures.

Monitoring changes to this volume over time shows sales productivity in converting leads into qualified opportunities. Improvement indicates better lead management.

👉 Read the full master list of 47 KPI examples and why they matter.

Expert assistance on KPIs: Bernie Smith (Made to Measure KPIs)

Bernie Smith is a KPI jedi. As founder of Made to Measure KPIs and author of KPI Checklists, Bernie coaches businesses to develop meaningful KPIs and present their management information in the clearest possible way to support good decision making. We interviewed him and unpacked his KPI philosophy - some of the most important and useful insights from that chat (although every minute of it was brilliant) are listed here for your convenience.

The secret to KPIs

What a lot of people try and do is find one metric that applies to every level of the organization. So this idea of this golden thread running all the way through. Now, there are some things like profit, which impacts on everyone. But, if you're fixing a machine or answering a phone, you don't have direct major control over profit. You have a tiny part in it, but there may be a hundred thousand other people involved. So where people get tied in knots is trying to find something that works on all levels.

What you have to do is align towards the objective you can influence. Now if I'm fixing a machine, then actually, the objective I can influence is machine up-time or, maximum stable speed on that process. If I'm answering a phone call, then customer satisfaction, first touch resolution, average handling time, for me, that's the thing I can influence. Now, there is a thread that goes all the way up to profit, to growth, and so on, but it's not a direct link.

The main obstacle to unlocking the power of KPIs

The thing that tends to hold people back is fragmentation and uncertainty. So, if you take one individual, he or she may have really strong opinions about what to measure or they may not. Then, you have 3 or 4 people, and the chances of them aligning and agreeing easily and readily rapidly diminishes, and then you imagine you've got a hundred thousand people in the organization, the chance of accidentally stumbling across a package of measures that give a balance here of the whole organization that everyone agrees on, if you don't have a method, it's pretty close to 0.

There's a talk I do a lot where I share a picture of a street that I walked down in the Canary Islands, a nice holiday island off the coast of Africa for anyone who's not been there. And I walked down the street, they had this wavy sidewalk. And if you look closely, there were these stumps of about 20 or 30 mature trees. And what has happened was, the local authorities had relaid the road surface and the sidewalk, and they've done it and waved the sidewalk around the tree trees that were there. And then, almost immediately after they did that, they went down and chopped down all the trees on the street. And the reason I start with that as an example is I see this with KPIs. Individuals making the best decisions that they can, thinking hard, you're doing the right thing. But it's not a joined up enterprise.

So you end up with all these weird disconnects and arguments and alternative measures, [and] measurement regimes. And the bigger the organization is, the worse it gets. So I think this fragmentation, and also the uncertainty that comes with not having a method, paralyzes people, paralyzes teams, paralyzes individuals, paralyzes organizations. Because deep down, they're not really sure they're measuring the right thing, and they sure as heck aren't aligned as well.

👉 Read the full transcript or watch the interview with Bernie here.

How to employ KPIs to drive strategy execution

Any strong business operating system will use KPIs in its operating rhythms. The best business operating systems create a cadence of checking in on progress on a weekly, monthly and quarterly basis, with some also having an intermediate 6-week check in.

These meetings serve as “check-ins” that are used to

Keep leadership and management informed
Assess the effectiveness of the KPI in driving business behaviors
Identify lessons learned using an approach such as a start/stop/continue
Spot challenges and obstacles to achieving targets so they can be solved

Individual contributors can use KPIs to drive execution as follows:

Create a rhythm of checking in on your current KPI number, and your target each day.
Craft and schedule action plans and simple checklists (processes). each day that are designed to move the KPI value toward it’s target
Take 90 seconds to record progress and challenges daily.
Review patterns and refine your approaches on a weekly basis, recording your learning.

It is critical to success that each KPI be owned by one directly responsible individual. Many business operating systems agree that the best way to do this is to codify this ownership according to the “seat” (aka the role) in your accountability and ownership charts.

The rhythms of execution above are easily empowered using some form of scoreboard or scorecard showing the numbers you are tracking. The scorecard provides instant access to the numbers that represent success for your team or business, as well as who owns each number, how it’s measured, and how it’s tracking over time.

Here’s how that looks inside the ResultMaps app:

In ResultMaps, KPIs can be aligned to key result targets for OKRs or Rocks, depending on your preferred goal setting system.

When fit into effective operating rhythms like a team weekly sync meeting, it becomes easy to keep the numbers that matter at the center of everyone’s focus.