Key performance indicators (KPIs) are metrics-based measures of business performance based on organisational data. They are typically used to help determine how well a company is progressing toward its strategic goals and how effectively it is performing against competitors. Because they are used to understand and measure performance, KPIs can help lead to team alignment, better communication, and improved decision-making.

What Are KPIs?

A KPI is a measurable, quantifiable value used to track performance against specific goals. In a business setting, these metrics give a clear overview of performance, provide targets for teams, and help leaders make informed decisions. KPIs can be used in all areas of a business, from customer success to finance, by people in various roles. Executives, performance analysts, team leaders, and project managers are most likely to use KPIs regularly.

KPIs must be quantifiable, strategic, and actionable. They are particularly helpful for analysing historical performance, forecasting, measuring progress, and creating accountability within a company. Examples of common KPIs include customer acquisition cost (CAC), profit margin, return on ad spend (ROAS), and revenue growth. For team leaders, KPIs can be used when conducting employee performance reviews and can be categorised by productivity, quality of work, satisfaction, and efficiency. Setting measurable targets will help set clear expectations, help business leaders identify opportunities for growth, and keep employees motivated at work.

How Are KPIs Related to Business Goals?

KPIs should directly support business goals by acting as measurable targets that guide employee focus and drive decision-making. When KPIs match your business size, industry, and context, they become targets to aim towards and serve to highlight areas for improvement. Without this alignment, KPIs wouldn’t help the business grow or achieve its objectives.

The SMART framework can help set clear KPIs that are aligned with business goals. Under the framework, all KPIs should be Specific, Measurable, Achievable, Relevant, and Time-bound. Major retailers, such as Woolworths, may have the business goal to improve customer satisfaction. A good KPI to measure this goal would be a Net Promoter Score (NPS) or customer survey scores to monitor and improve the shopping experience.

What Makes a Strong KPI?

A strong KPI should be closely aligned to the business objectives, whilst being easy to understand and communicate to others. Consider the following characteristics when deciding on KPIs:

  • Measurable: A strong KPI must be quantifiable, leaving no room for misinterpretation. You should be able to track and compare this metric over time.
  • Easy to understand: Team members should have visibility over the KPIs they are measured against and should be able to comprehend them. This helps team members become better aligned with the business goals.
  • Value: KPIs should be linked to real value for the company or department. They usually reflect the outcomes that matter most for the company. For example, if Afterpay wanted to increase its customer acquisition, one of its main KPIs could be to acquire 50,000 new active customers per quarter, which would equate to a concrete dollar value for the business.
  • Attainable: KPIs boost accountability and motivation—this is one of their main benefits. For this reason, KPIs should be achievable, and employees should feel a sense of accomplishment when they meet them.
  • Specific: KPIs should set clear expectations and define what is being measured.

Why Are KPIs Important in Business?

KPIs help businesses track progress, identify areas for improvement, and improve performance. They can also help to keep employees motivated and accountable as they work towards the specific business goal. It is important to understand why KPIs are important for every business, since they are often used to:

  • Measure company performance and improvement: This is, arguably, why KPIs matter. They provide insights into how a company is performing and if they’re on track to achieve the goals they set out to achieve. KPIs can also be useful in pinpointing areas of concern, which can then lead to operational improvements.

    Good visibility of business data is key to using KPIs to measure performance and make improvements. For instance, after Australian electronics company Extel Technologies adopted an ERP that aggregated key data, they were able to review their performance daily and create production workgroups to identify root causes of issues.

  • Goal alignment: KPIs are a great way of ensuring teams are working towards a common set of goals.
  • Facilitate communication: KPIs become a common language for communicating and tracking performance.

  • Provide data-driven insights and decision-making: KPIs help businesses avoid guesswork and make data-driven decisions. Leaders can identify trends, highlight problem areas, and change their approach by tracking KPIs.

    When Australian Mexican restaurant chain Guzman Y Gomez needed a comprehensive overview of their various locations around the world to support their decision-making processes, they adopted an ERP platform, which gave their leadership accurate and up-to-date financial data to make data-driven, strategic decisions.

  • Drive accountability and motivation: Setting clear, measurable expectations for teams and employees can boost feelings of motivation and ownership. KPIs can also be used to recognise performance and may inform promotion decisions.

Establishing Effective KPIs

Setting successful KPIs requires a strategic approach that balances alignment and the growth of the company. By following the framework below, companies can set clear and effective KPIs.

Start with goal alignment

KPIs should be closely aligned with overarching business goals. Rather than looking at metrics in isolation, companies should clarify priorities and then identify what needs to be measured.

Look at lagging and leading indicators

Lagging and leading indicators offer a balanced view of performance, looking backwards and also getting a sense of current trends. While lagging indicators (like customer satisfaction scores) reveal historical trends and outcomes, leading indicators (such as website conversion rates) help predict future performance and enable proactive decision making.

Measurability and specificity

The most valuable KPIs provide quantifiable data that teams can track over time. If the goals aren’t quantifiable, it may help to make them more specific. If Qantas wanted to improve its operational efficiency and reliability, it would track the percentage of maintenance tasks completed on schedule rather than tracking the number of maintenance checks scheduled.

Prioritise and focus

Businesses find it helpful to focus on a handful of KPIs to track at the beginning to avoid making teams feel overwhelmed or confused. To decide, choose the most important KPIs that align with your business goals.

Track and Measure KPIs for Business Performance With NetSuite

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As part of NetSuite ERP, the NetSuite SuiteAnalytics reporting and dashboard solution provides built-in, real-time reporting, searches, KPIs, and dashboards. With embedded analytics, companies can perform actionable analysis on KPIs to gain meaningful visibility of business performance across multiple departments and teams.

KPIs FAQs

How do I determine which KPIs to use?

To determine which KPIs are most important, evaluate the business goals and understand which metrics matter most in achieving these goals. KPIs should follow the SMART framework, and it is important that there are only a handful of key KPIs so employees stay focused. Looking at leading and lagging indicators can help to understand which metrics may be most important.

What are the 4 pillars of a KPI?

A strong KPI should accurately show progress, be easy to understand and interpret, be relevant and effective across different circumstances and conditions, and be scalable as the business grows.

What are the SMART criteria when setting a KPI?

The SMART criteria help leaders set KPIs that are effective and achievable. Each KPI must be:

  • Specific: They should be defined and aligned with a business goal.
  • Measurable: KPIs must be quantifiable, so progress can be tracked over time.
  • Achievable: Goals must be realistic and achievable to help keep employees motivated.
  • Relevant: KPIs should directly align with business goals.
  • Time-bound: They should be set with a clear deadline.

How specific should KPIs be?

KPIs must be measurable and should directly align with business goals. When setting KPIs, avoid vague goals like “increase revenue”; instead, a strong KPI would focus on monthly recurring revenue (MRR), setting a target of achieving $500,000 MRR by the end of H2. This clarity helps maintain focus, fosters accountability, and helps drive action across a business.