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The Practical Explainer — KPI
Simplifying the landscape of analytics — one concept at a time
KPI stands for Key Performance Indicator. It is the most popular acronym for a performance measure. There are plenty of others. A new one is likely being added to an up-and-coming software tool as we speak. Why so many? Because what KPI are supposed to be and what they become in practice are distinctly different. The resulting disillusionment leads to the ever popular rebranding… because, you know, this time they really mean it.
In theory:
KPI are a small selection of measurements that represent the likely future performance of your business.
In reality:
The label of KPI is thrown on to a nearly endless list of performance measures created by a business.
While that comparison still angers a few people, reality is even fuel for our comics. Dilbert uses the less techy term — key metrics, but the insight is real. Note: if you are struggling with how rapidly we are jumping from indicators, to measures, to metrics — you probably didn’t read our last article.
In practice:
KPI tend to be fairly complicated (read calculated) metrics. Examples often include things like CPA (cost per acquisition) or CAQ (cost to acquire). Along with other metrics like AOV (average order value) or SPA (sales per active), these measures are frequently ratios and their denominators are almost always qualified. Those facts lead to a lot of shenanigans, but you will need to read our other articles for more on that.
Then let’s break it down:
K — Key. This should be a qualifier on the value and number of measures that are considered to be KPI. As already noted, this is often ignored and subsequently so are the KPI themselves and the dashboards that track them. Synonyms include — important, critical, high level, and executive. All of which are fodder for the daily growth of equivalent acronyms.
P — Performance. This word alternates between an excuse and a reminder. Partial synonyms like profitability, success, and outcome emphasize what it really isn’t — a fully quantified outcome. Others — like growth, development, predictive capture the emphasis on change and movement. KPI are supposed to show how your business is developing, NOT where it has been.
I — Indicator. To emphasize that last point, we have indicator. At their best, which is quite rare, KPI should indicate where future performance is headed. The penchant of new acronyms is to substitute — measures and metrics. This is an indicator of just how difficult it is to find good indicators. It is also an indicator of the educational gap in many organizations.
Some final disassociations:
Another reason for the wealth of new acronyms in this space can be blamed on sales (most rebranding can be). But it comes from a very common client objection “We already have KPI.” The simplest answer is to just rename what your system or software produce.
In other words, organizations don’t set out to create 127 KPI (a number I selected from a recent consulting job). The issue is that “key” is relative to different people, different departments, and different times. No department wants to be held accountable for KPI they have no influence over.
To solve that (read complicate further), enthusiastic organizations create hierarchies of KPI and assign them levels. To be certain that no one misses how thin this solution is many organizations choose Level 0 (more often L0) as their starting point. I personally have seen L7s…
So just remember:
KPI are supposed to be a select group of metrics which provide the business insight into future growth and profitability.
In skilled hands, KPI are about tracking, measurement, and prediction. They are a strong indicator of organization, accountability, and data-driven insight. To the average employee (or even manager), they are often just another number of a spreadsheet.
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