Key Performance Indicators are measurable values we fix to evaluate the success of a project or an objective.
Agile organizations like KPIs because they are good tools to:
- define objectives,
- monitor progress towards those objectives,
- accelerate decision-making based on that progress.
They allow organizations to test & learn from their actions at a rapid pace.
It is possible to use them:
- on occasion, to measure the success of a precise and short objective, or
- continuously, in support of the organization's overall business goals.
Leading and Lagging KPIs
There are two types of KPIs.
A lagging indicator measures the outcomes and results of an action, it is lagging behind. It tells you about the past. For example, your monthly revenue is a lagging indicator, it is a result of multiple actions in the past.
A leading indicator is focused on the future, it leads the way. It tells you about something that may happen in the future. For example, monthly active users or customer satisfaction may be better indicators of future profit than this month's revenue. Indeed, if your current customers are not satisfied at all, a record month in terms of revenue is not sufficient to anticipate a bright future for your organization.
Organizations usually have a tendency to monitor lagging indicators like revenue and profit but, when choosing KPIs, it's important to also include leading indicators.
Indeed, it's helpful to identify lagging indicators that show what you've done well or not so well in the past. For example, did you reach your revenue goal for example?
But when a lagging indicator is disappointing, it's already too late to fix for that period.
So you also want to monitor leading indicators to ensure that the future is bright. For example, does your Net Promoter Score suggest that revenue will go up in the coming months?
If not, it's the sign that you've got work to do to make your customers happy. Focusing on that will, in turn, improve lagging indicators like revenue.
Choosing the Right KPIs
Fixing objectives and metrics to analyze their success or failure is within everyone's reach. But, It is more difficult to find which KPIs will allow the organization to grow fast.
The right KPI encourages the achievement a strategic objective thanks to quantitative indicators that show what still has to be done.
An unfulfilled lagging KPI is a signal for the team to rethink their strategy and try something different to reach their key business objectives.
A good KPI allows the team or organization to react as soon as a too-long delay or a bad result are noticed.
KPIs that are always reached but can't help the organization grow because they don't challenge it and motivate workers to go beyond their boundaries are useless.
KPIs versus OKRs, What's the Difference?
It's important not to confuse KPIs with OKRs because both set of objectives and indicators fulfil a different purpose.
OKRs are focused on organizing and fixing inspirational and aspirational objectives for a group of people, an organization or a team for example.
On the other hand, KPIs are focused on pure performance metrics. These metrics should be connected to an objective (otherwise, you'll simply be tracking a number for tracking's sake) but, contrary to OKRs, there's nothing in the KPI methodology that encourages you to do that and it's easy to forget why you're tracking a KPI in the first place.