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key performance indicators (KPIs)Key performance indicators (KPIs) are business metrics used by corporateexecutives and other managers to track and analyze factors deemed crucial tothe success of an organization. Effective KPIs focus on the business processesand functions that senior management sees as most important for measuringprogress toward meeting strategic goals and performance targets.KPIs differ from organization to organization based on business priorities.For example, one of the key performance indicators for a public company willlikely be its stock price, while a KPI for a privately held startup may be thenumber of new customers added each quarter. Even direct competitors in anindustry are likely to monitor different sets of KPIs tailored to theirindividual business strategies and management philosophies.The KPIs followed most closely by different people in the same organizationcan also vary depending on their roles. For example, a CEO might considerprofitability to be the most important performance measurement for a company,while the vice president of sales could view the ratio of sales wins vs.losses as the highest priority KPI.Furthermore, different business units and departments are typically measuredagainst their own KPIs, resulting in a mix of performance indicatorsthroughout an organization — some at the corporate level and others gearedtoward specific operations.### Importance of KPIsKey performance indicators shine a light on how well a business is doing.Without KPIs, it would be difficult for a company’s leaders to evaluate thatin a meaningful way, and to then make operational changes to addressperformance problems. Keeping employees focused on business initiatives andtasks that are central to organizational success could also be challengingwithout designated KPIs to reinforce the importance and value of thoseactivities.In addition to highlighting business successes or issues based on measurementsof current and historical performance, KPIs can point to future outcomes,giving executives early warnings on possible business problems or advanceguidance on opportunities to maximize return on investment. Armed with suchinformation, they can manage business operations more proactively, with thepotential to gain competitive advantages over less data-driven rivals.### Types of KPIsKPIs that measure the results of business activities, such as quarterly profitand revenue growth, are referred to as lagging indicators because they trackthings that have already occurred. By comparison, KPIs that herald upcomingbusiness developments — say, sales bookings that will generate revenue infuture quarters — are known as leading indicators.There’s also a difference between quantitative indicators that have anumerical basis and qualitative indicators that are more abstract and open tointerpretation, such as assessing user experience with a product or on awebsite. In the case of qualitative indicators, identifying useful KPIs can bechallenging; the selection of appropriate ones depends on an organization’sability to actually measure them in some way. For example, the percentage ofabandoned transactions in online shopping carts might be one indicator ofcustomer experience on a retail website.From a functional standpoint, key performance indicators encompass a widevariety of financial, marketing, sales, customer service, manufacturing andsupply chain metrics. KPIs can also be used to track performance metricsrelated to internal processes, such as HR and IT operations.### How to measure KPIsOnce key performance indicators have been identified, they should be clearlycommunicated to employees so all levels of the organization understand whichbusiness metrics matter the most and what constitutes successful performanceagainst them. This could include the entire workforce on broad corporate KPIsor smaller groups of workers on ones that apply to particular departments.In most companies, KPIs are automatically tracked via business analytics andreporting tools that collect relevant data from operational systems and createreports on the measured performance levels. Increasingly, KPI results arepresented to executives on business intelligence dashboards or performancescorecards that often include charts and other data visualizations, with theability to drill down into the performance data for further analysis. MultipleKPIs also underlie balanced scorecard frameworks that pull together sets ofmetrics in an effort to provide a broader view of business performance beyondoperating income and other common financial measurements.One of the challenges in setting key performance indicators is deciding howmany to track to determine organizational success. Having too many KPIs maydilute the attention paid to the truly important ones. As a result, it may bemore effective to limit the scope to small sets of indicators.Managers must continually evaluate KPIs to ensure they’re still relevant andaligned with priorities in business operations. If individual KPIs no longerserve a useful purpose, they need to either be refined or replaced altogether.### Examples of key performance indicatorsBeyond revenue, expenses and profit, commonly used financial KPIs includegross and net profit margin, which measure how much money a company makes onsales of products; inventory turnover, which tracks how quickly products heldin inventory are sold; cost of goods sold, a measure of the materials andlabor costs incurred in making products; accounts receivable turnover, a ratiothat quantifies how quickly payments on credit sales are collected fromcustomers; and days sales outstanding, a related metric which gauges thenumber of days’ worth of receivables that have yet to be collected.Marketing and sales KPIs include lead conversion rate, which measures thepercentage of sales leads that are successfully turned into customers;customer acquisition cost, which calculates the average cost of acquiring newcustomers in marketing and sales expenses; return on marketing investment, forquantifying the financial payback of marketing campaigns and programs;customer lifetime value, a prediction of the total profit a company is likelyto make from sales to individual customers; and customer churn rate, ameasurement of how many customers stop buying a company’s products.Key performance indicators in customer service call centers include first-callresolution rate, which tracks the percentage of incoming inquiries fromcustomers that are addressed without the need for additional calls; cost percall, for quantifying the average cost of handling calls; call volume, whichmeasures the total number of calls handled during a particular period; holdtime, a measure of the average time customers spend on hold during calls; andcall abandonment, the rate at which customers hang up while waiting on hold.KPIs for manufacturing and supply chain operations include the percentage ofdefective products made by a company; manufacturing cycle time, which measureshow long it takes to make products; carrying cost, which puts a value on whatit costs to keep products in inventory; percentage of out-of-stock items, fortracking the number of products that aren’t available in inventory whencustomers order them; back-order rate, a related metric quantifying the numberof orders that can’t be filled when they’re placed; and return rate, whichassesses the percentage of items that are returned.HR departments track key performance indicators such as employee satisfactionlevels and turnover rates, while the KPIs that IT managers look at includesystem uptime, compliance with service-level agreements, on-time projectcompletion rates and average resolution time on help desk tickets.Industry-specific KPIs have also been created in retail, healthcare, financialservices and other markets. For example, a retailer might track things such asthe average purchase value of sales transactions and sales per square foot ofbrick-and-mortar retail space, while a healthcare organization might measureemergency room wait times, the average length of stay in a hospital andpatient readmission rates, among other metrics.