It was Peter Drucker who said, “If you can measure it, you can manage it”. KPIs fall into that category.
KPIs - Do The Work Early!
The specific metrics that drive any business will differ from startup to startup, and very few first-time founders are likely to understand them from the get-go.
But they must do the work to identify those inputs so they can calculate some basic KPIs that every founder should know.
What Are Key Performance Indicators (KPIs)?
Key performance indicators (KPIs) refer to a set of quantifiable measurements used to gauge a company’s overall long-term performance. KPIs specifically help determine a company’s strategic, financial, and operational achievements, especially compared to those of other businesses within the same sector (Source: Investopedia).
Understanding KPIs
Also referred to as key success indicators (KSIs), KPIs vary between companies and between industries, depending on performance criteria. For example, a software company striving to attain the fastest growth in its industry may consider year-over-year (YOY) revenue growth as its chief performance indicator. Contrarily, a retail chain might place more value on same-store sales, as the best KPI metric in which to gauge its growth.
At the heart of KPIs lies data collection, storage, cleaning, and synthesizing. The information may be financial or non-financial and may relate to any department across the company. The goal of KPIs is to communicate results succinctly to allow management to make more informed strategic decisions.
Categories of KPIs
What Type Of Activity Is Measured?
There is no “one size fits all” approach. It will depend on the industry that each company operates in, as well as the stage they are at (e.g., pre-revenue – pre-IPO – public).
Therefore, the list below is not exhaustive, and should not be used as a blueprint.
Financial
- Liquidity
- Profitability
- Solvency
- Turnover
- Revenue per employee
- Burn rate (cash spent per month)
- Runway
Customer
- Number of new ticket requests
- Number of resolved tickets
- Average resolution time
- Average response time
- Top customer service agent
- Type of request
- Customer satisfaction rating
Process Performance
- Production efficiency
- Total cycle time
- Throughput
- Error rate
- Quality rate
Marketing
- Website traffic
- Social media traffic
- Conversion rate on call-to-action content
- Blog articles published per month
- Clickthrough rates
IT
- Total system downtime
- Number of tickets/resolutions
- Number of developed features
- Count of critical bugs
- Backup frequency
Sales
- Customer acquisition cost (CAC)
- Customer lifetime value (CLV)
- Average dollar value per new client
- Number of engaged leads
- Customer churn rate
Staffing
- Absenteeism rate
- Number of overtime hours worked
- Employee satisfaction
- Employee turnover rate
- Number of applicants
Developing KPI Reports
Step 1: Discuss goals and intentions with business partners. KPIs are only as useful as the users make them. Before pulling together any KPI reports, understand what you or your business partner are attempting to achieve.
Step 2: Draft SMART KPI requirements. KPIs should have restrictions and be tied to specific, measurable, attainable, realistic, and time-bound metrics. Vague, difficult to ascertain, or unrealistic KPIs serve little-to-no value; instead, focus on what information you have that is available and meeting the SMART acronym requirements.
Step 3: Be adaptable. As you pull together KPI reports, be prepared for new business problems to appear and for further attention to be given to other areas. As business and customer needs change, KPIs should also adapt with certain numbers, metrics, and goals changing in line with operational evolutions.
Step 4: Avoid overwhelming users. It may be tempting to overload report users with as many KPIs as you can fit on a report. At a certain point, KPIs start to become difficult to comprehend, and it may become more difficult to determine which metrics are actually more important to focus on.
Advantages of KPIs
A company may wish to analyze KPIs for several reasons. KPIs help inform management of specific problems; it’s data-driven approach provides quantifiable information useful in strategic planning and ensuring operational excellence.
KPIs help hold employees accountable. Instead of relying on feelings or emotions, KPIs are statistically supported and can not discriminate across employees. When used appropriately, KPIs may help encourage employees as salespeople may realize their numbers are being closely monitored.
KPIs are also the bridge that connects actual business operations and goals. A company may set targets but without the ability to track progress towards those goals, there is little to no purpose in those plans. Instead, KPIs allows for companies to set objectives, then monitor progress towards those objectives.
Limitations of KPIs
There are some downsides to consider when working with KPIs. There may be a long time frame required for KPIs to provide meaningful data. For example, a company may need to collect annual data from employees for years to better understand trends in satisfaction rates over long periods of time.
KPIs require constant monitoring and close follow-up to be useful. A KPI report that is prepared but never analyzed serves no purpose. In addition, KPIs that are not continuously monitored for accuracy and reasonableness do not encourage beneficial decision-making.
KPIs open up the possibility for managers to “game” KPIs. Instead of focusing on actually improving processes or results, managers may feel incentivized to focus only on improving KPIs tied to performance bonuses. In addition, quality may decrease if managers are hyper-focused on productivity KPIs, and employees may feel pushed too hard to meet specific KPI measurements that may simply not be reasonable.
Informs management of how a company is performing in countless ways
Helps hold employees accountable for their actions (or lack of)
May motivate employees who feel positively challenged to meet targets
Allows a company to set goals and measure progress toward those objectives
Results in potential time commitment to consistently gather data over long periods of time
Require ongoing monitoring for accuracy and reasonableness in data
This may encourage managers to focus on only KPIs instead of a broader strategy
May discourage employees if KPI targets are unreasonable
Key Takeaways
KPIs offer an effective way to measure and track a company’s performance on a variety of different metrics. By understanding exactly what KPIs are and how to implement them properly, managers are better able to optimize the business for long-term success.
About The Author:
James Spurway is an Angel Investor, Mentor, Advisor, Speaker, former Commercial Pilot, and Author who specialises in raising debt and equity capital. He strives to model diversity, equity, and inclusion in the founders he agrees to invest and work with. He has paused his angel investing activity to focus on raising his first US$ 50M venture capital fund, which will invest in startups that can accelerate the achievement of net zero emissions. James spent the past 33 years living in Hong Kong, Vietnam, Germany, Switzerland, Monaco, the USA, Thailand, the Philippines, Singapore, and Australia, his country of birth. In that time, he started 10 businesses, exited from seven, shut down two, and kept one. He has invested in a total of 50 startups since 2001 and had six successful exits.