What are performance indicatorsIn simple terms, performance indicators (PIs) provide a way to measure the performance of companies, business units, projects, or individuals in relation to their goals and strategic objectives.In their broadest sense, PIs provide the most important performance information that enables organizations (or their stakeholders) to understand whether or not the organization is on the right track toward its stated objectives. In this way, well-designed indicators are vital navigation instruments, giving a clear view of current performance levels and whether the company is where it needs to be.Performance indicators, in short, are the navigation tools managers use to understand whether the business is on the planned path or not. The right set of indicators will highlight the key aspects of performance and highlight areas that may need attention.Indicators are also useful decision-making tools. Because they help reduce the complex nature of organizational performance to a small and manageable number of key indicators, they can, in turn, assist in decision-making and, ultimately, help improve performance. We will see later that choosing indicators is very important. Having too many indicators is not synonymous with efficiency. You can work with few, but with breadth and quality.How to choose a good performance indicatorA good indicator should work like a compass, helping you and your team understand whether you are following the right path toward your strategic objectives. To be effective, an indicator must:1. Be well defined and quantifiable.2. Be communicated throughout your organization and departments.3. Be crucial to achieving your goal.The problem is that there are thousands of indicators to choose from. If you choose the wrong one, you will be measuring something that does not align with your objectives. So how should you choose the right indicators for your organization?Let’s give some common tips used by managers:TIP 1: Indicate your product or service’s business goalsTo choose the right key performance indicators or KPIs, you must be clear about the business goals your product serves. If your product generates revenue directly, this could be a key indicator, for example. If you are not sure what the business objectives are, ask yourself how the product benefits the company and why the company invests in it. Then take the next step and define the goals.TIP 2: Make the objectives measurableKnowing your product’s business objectives is a prerequisite for selecting the right indicators, but it is not enough. To effectively apply the indicators, analyze the resulting data and take the right actions, the goals must be measurable. The challenge is to set measurable goals that are also realistic, particularly for new and young products. The next tips help you meet this challenge.TIP 3: Use rates and rangesWork with ratios and ranges to quantify your goals. Instead of stating that a new product must generate x revenue per year, you could say that the product should increase the company’s revenue by 5 to 10% in one year after launch, for example.TIP 4: Avoid vanity metricsStay away from vanity metrics: measures that make your product look good, but add no value. For example, you may be measuring visits to your online sales website and the number may even be quite high. However, if you do not measure the number of actual sales transactions completed on the site, there is no point in boasting about the number of visits. On the contrary, you run the risk of seeing your business collapse very soon.TIP 5: Don’t measure everything that can be measuredDo not evaluate everything that can be measured, and do not blindly rely on an analysis tool to collect the right data. Instead, use business goals to choose a small number of metrics that truly help you understand your product’s performance. Otherwise, you risk wasting time and effort analyzing data that creates little or no value.TIP 6: Use quantitative and qualitative indicatorsAs the name suggests, quantitative indicators, such as daily active users or revenue, measure the quantity of something rather than its quality. This has the benefit of collecting “hard” and statistically representative data. Qualitative indicators, such as user feedback, help you understand why something happened. For example: why users are not as satisfied with the product as expected. Combining both types gives you a balanced view of how your product is doing. It reduces the risk of losing the most important success factor: the people behind the numbers, the individuals who buy and use the product.TIP 7: Look beyond financial and customer indicatorsFinancial indicators – such as revenue and profit – and customer metrics, including engagement and satisfaction, are the two most common types of indicators found in the market. However, although these metrics are undoubtedly important, they are not enough. Let’s say your product is meeting its revenue and profit goals and customer engagement and satisfaction are high. This suggests that your product is doing well and that there is no reason for concern. But if, at the same time, internal team motivation is low or product quality is deteriorating, you should be concerned: these indicators suggest that achieving product success will be much more difficult in the future. Therefore, you should look beyond financial and customer indicators and complement them with relevant product, process, and people indicators.TIP 8: Leverage trendsCompare the data you report to other periods of time, user groups, or competitors, such as revenue growth over the last six weeks or cancellation rates quarter over quarter. This helps identify trends, for example, whether revenue is increasing, staying stable, or decreasing. Trends allow you to better understand what is happening and take the right action. If a decline is a one-off occurrence, for example, there is probably no reason to be overly concerned. But, ifit is a trend, then you should investigate how you can stop and reverse it – unless you are about to abandon your product.TIP 9: Establish a visible indicator frameworkAfter selecting the correct key performance indicators for your product, you should collect the relevant data and analyze it regularly. A visible indicator framework is a great tool for this job. Some managers commonly call this framework a “dashboard”Examples of performance indicatorsAs we mentioned earlier, there is an infinity of indicators that are currently adopted by the market. To make our study easier, we divided them into four categories: financial, customer, process, and people.Financial metrics• Profit: This indicator is obvious, but it is still important to point it out, since this is one of the most important performance indicators out there. Do not forget to analyze gross and net profit margin to better understand the success of your organization in generating a high return.• Cost: Evaluate cost effectiveness and find the best ways to reduce and manage costs.• Actual revenue vs. target: This is a comparison between your actual revenue and your projected (target) revenue. Creating charts and analyzing the discrepancies between these two numbers will help you identify your business performance.• Cost of goods sold: By calculating all the production costs of the item your company is selling, you can get a better idea of how your profit margin is constituted. This information is essential to determine how to outperform your competition.• Day Sales Outstanding (DSO) or number of days for the company to receive a sale: DSO measures how many days it takes the company to receive the money from a sale. This is one of the most used measures by credit analysts to measure a company's success. It is an important financial indicator in that it shows the average time it takes for a company to turn its receivables into cash. The lower the DSO, the better the indicator.It is common for a company, when it is in trouble, to increase its DSO.• Sales by region: By analyzing which regions are meeting sales goals, you can provide better feedback to lower-performing locations.• Actual expenses vs. budget: Compare actual spending with the projected budget. Understanding where you deviated from your plan can help you create a more effective departmental budget in the future.Customer metrics• Customer acquisition cost (CAC): Divide your total acquisition costs by the number of new customers in the period of time you are examining. Very good! You have found your CAC. This is considered one of the most important e-commerce metrics because it can help you assess the cost-effectiveness of your marketing campaigns.• Customer satisfaction and retention (CSR): This seems simple: make the customer happy and they will continue to be your customer. Many companies argue, however, that this is more about shareholder value than about the customers themselves. You can use several performance indicators to measure CSR, including customer satisfaction scores and the percentage of customers who make repeat purchases.• Net Promoter Score (NPS): Finding your NPS is one of the best ways to indicate the company’s long-term growth. To determine your NPS score, send quarterly surveys to your customers to see how likely they are to recommend your organization to someone they know. Establish a baseline with your first survey and implement measures that help these numbers grow from one quarter to the next.• Number of customers: similar to profit, this performance indicator is quite simple. By determining the number of customers you gained and lost, it is possible to better understand whether or not you are meeting your customers' needs.Process metrics• Customer support tickets: Analyzing the number of new tickets, the number of resolved tickets, and the resolution time will help you build the best customer service department in your industry. This indicator is widely used in maintenance and IT.• Percentage of product defects: Take the number of defective units and divide it by the total number of units produced in the period of time you are examining. This will give you the percentage of defective products. Clearly, the lower you can get this number, the better. This indicator is nothing more than a compliance indicator.• Process efficiency measure: Efficiency can be measured differently in every industry. Let’s use the manufacturing industry as an example. You can assess your organization’s efficiency by analyzing how many units it produced each hour and the percentage of time your factory was operating. We will see later how to build efficiency indicators.People metrics• Employee turnover rate (ETR): To determine your ETR, take the number of employees who left the company and divide it by the average number of employees. If you have a high ETR, spend some time examining your workplace culture, employment packages, and your work environment.• Percentage of response to open positions: When you have a high percentage of qualified candidates applying for open positions, you know you are doing a good job maximizing exposure to the right job candidates. This will also lead to an increase in the number of interviewees.• Employee satisfaction: Happy employees will work harder – it’s as simple as that. Measuring your employees’ satisfaction through surveys and other metrics is vital to your departmental and organizational health.More quality metrics• Productivity: total produced divided by resources used\[ \frac{\text{total produced}}{\text{resources used}} \]• Efficiency: planned resources divided by resources used\[ \frac{\text{planned resources}}{\text{resources used}} \]• Effectiveness: Total conforming outputs divided by Total outputs\[ \frac{\text{conforming outputs}}{\text{Total outputs}} \]• Quality: Quality index obtained divided by established quality index\[ \frac{\text{Quality obtained}}{\text{Established quality}} \]• Availability: Time producing divided by Time availableExercises1) A company worked 30 consecutive days, but in only one 8-hour shift (480 minutes). On average, 55 minutes per shift are lost for meals. In addition, in that month, the production line was down for 10 hours because there was no demand to be produced. Between stoppages due to maintenance, setup, and replenishment, a total of 40 hours was lost in the month.A total of 11,500 units of Item A were produced, 10,000 of which were “good the first time.” The rest were considered bad. Calculate the maximum possible number of indices with this data.
Sign in and join the conversation
— Comments 0
, Reactions 1
Be the first to comment