If you run a business or hold a position of responsibility, you must have heard about “KPIs or Key Performance Indicators”. These are extremely important in the management of a company. Let’s consider together the usefulness and definition of performance indicators.
Table of contents
Definition of a performance indicator
A performance indicator is a very simple summary of selected information related to a company’s activity. This synthesis allows the decision-maker to have a quick overview of the state of his goals and take corrective decisions if necessary. As a result, the method of calculating a key indicator must make it possible to define very precise levers and the people who make it vary.
Case study: key indicator of air travel
The wrong key indicators
We might think that useful key indicators are those calculated directly from the financial results, such as, for example, turnover, average basket per customer, rate of return, etc.
But in fact, the best performance indicators are those which are totally detached.
Take the case of a troubled airline. Obviously, to improve the situation of this company, we can say (stupidly) that it is necessary to increase its turnover or its margins. We would then be tempted to take indicators like monthly turnover, gross margin, etc.
But with such an indicator, how to make it vary positively? By putting pressure on the commercial force? By negotiating more severely with its suppliers?
In fact, any company will seek to increase its turnover, margins, lower operating costs, and so on. Indicators directly related to these elements are ultimately neither relevant nor exploitable.
The late departure rate
Here is a much better key performance indicator in our case study: the late departure rate. It will be calculated as the ratio of flights departing late on all flights in the last 30 days. It is clear that this indicator is not calculated on the financial reports of the company, and yet it has a very important impact on them.
A late flight departure will result in:
- increase customer dissatisfaction, and therefore their loyalty
- increase fuel consumption as pilots will fly faster to catch up and have to run engines longer on the tarmac
- create costs related to the management of passengers missing their correspondence (hotels, etc.)
- increase the costs invoiced by the airport for the occupation of a parking area
It is clear that the late departure of an aircraft generates costs weighing on the margins and vice versa. Whereas a one-off company will generate more sales from loyal customers. The proper definition of the performance indicator is imperative.
A key indicator that is easy to calculate and improve
The late departure rate has the huge advantage of being very easily calculated. You just have to count two things : late and on-time departures…
Moreover, it is very easy to act on it. To avoid a take-off delay:
- the company can send two cleaning crews rather than one to speed up the cabin refurbishment
- fuel distribution between aircraft can be better managed to prioritize aircraft that may be behind schedule
- denying access to the aircraft to delayed passengers
- by optimizing boarding
The late departure rate alone can clearly isolate the factors that influence it, then to act on it and to increase the turnover of the company.
Why performance indicators?
When the company exceeds a certain level of activity, the manager and his directors cannot simply go with the flow. The subjective impressions of each one can be very far from reality because it becomes more and more difficult to have a view on everything.
Let’s take an example. Just imagine that you are the manager of a business with a sales department that sells video editing or videoconferencing software, a research and development department, an accounting department, and so on. Each one of these departments has at least 5 employees, that is, a company with at least 20 employees. How do you know if the novice salesperson to whom you have rarely spoken to is effective ? And yet it will be necessary to know it so as not to drag out « dead » charges.
How do you know if your sales team sells badly or if it’s your product that is not suited to the market when you can no longer follow each sales process ? For example, you can use the definition of the conversion rate performance indicator, which can be easily calculated using a CRM software.
We can clearly and quickly realize that having a good panel of performance indicators (between 5 to 10 maximum) is essential to oversee our company or department.
To set up your business, it may also be wise to select a small number of performance indicators to see if you are “sticking” to business plan forecasts.
Performance indicators as a source of motivation
Another advantage of performance indicators is that we can use them to set up incentives.
You know that it’s important to keep your employees motivated, and nothing is better than setting bonus targets.
So we immediately think of the very common objective like: the best commercial negotiator will be rewarded, and so on.
But that means putting the pressure always on the same team. And what about the others? How to set an objective for the administrative and financial team ? Technicians ? Customer support ?
Thanks to the good definition of performance indicators!
Examples of performance indicators
Before giving you some examples of performance indicators, you should be aware that they must be chosen according to your activity and your objectives. There is no list of key indicators to use systematically, and you can even create your own according to your needs. The following examples should only be used to give you inspiration to define yours:
- machine availability rate in a factory
- customer payment deadlines for the financial department
- renewal rate for subscription-based activities (as for Verisure alarms)
- story points treated by sprint for developers ( AGILE method)
- conversion rate for salespeople
- new customers in the last 30 days
- return products rate
- waiting time at checkouts for retailer
- average shopping basket
- bounce rate for websites
- average time spent on a website
- turnover for human resources, etc.
To see the most exhaustive list of examples of performance indicators on the web, click here !
What are your key performance indicators ? Feel free to share them in comments !