The importance of key performance indicators in business
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The key performance indicators, known as KPIs (for its English translation Key Performance Indicators), are daily used to measure and evaluate the performance of a company.
Key Performance Indicators
KPIs are management tools that help in running a business. They allow for measuring and evaluating the performance of an organization to manage it effectively and achieve various pre-set objectives or suggest areas for improvement. There are several types of KPIs that address specific goals and measure different parameters.
Types of Indicators?
Managers must choose which KPIs they want to use to monitor their activity. The balanced scorecard (BSC), also known as the Tableau de Bord Prospectif (TBP), is often used to steer and especially facilitate the decision-making process. The BSC is a method that measures a company's activities according to multiple parameters, which we will discuss in a future article.
Generally, four main types of key performance indicators are most commonly used:
Cost Indicators: they help ensure that your project does not exceed the allocated budget.
Productivity Performance Indicators: they establish a link between the quantity of services or products delivered and the company's resources,
Strategic Performance Indicators: they highlight whether a company is close to achieving its strategic objectives in relation to the Key Success Factors (KSF),
Quality Performance Indicators: they illustrate the perception of quality from the customer’s viewpoint,
Capacity Performance Indicators: they allow for calculating the quantity of services or products that can be delivered with specific resources over a certain period.
It is essential to use relevant indicators that align with your strategies and objectives. Too often, decision-makers settle for using cost and productivity indicators, which are important, but it may be necessary to complement them by considering other criteria. Here are other examples of key performance indicators that can easily apply to different types of businesses:
Profitability Indicators: they help determine the percentage of investment turned into profit,
Competitiveness Indicators: they measure the relationship between your company’s performance and that of the competition,
Effectiveness Performance Indicators: they indicate whether the company is achieving its objectives,
Profitability Performance Indicators: they calculate as a percentage the ratio between profit and total sales.
Many others exist, like those of value, yield, efficiency... But also more specific ones like time to market, turnover, average basket size, or market share.
Key performance indicators are numerous and allow for considering all possible parameters of a business. They are indicative of the health of your activity and help adapt your strategies. To make their use optimal, they must be used regularly and diligently. Without accumulating them, risking scattering focus, and losing sight of the main objectives.
Choosing Your KPIs
The choice of indicators is essential in a company’s strategy; they must be relevant based on the business sector or other criteria, such as for a multi-site or multi-franchise group, for example. Indeed, for multi-site groups or multi-site franchises, KPIs are an excellent way to compare the performance of establishments from the same sector or relatively comparable. For example: two three-star category hotels or three restaurants of the same brand or producing the same type of meal. In this example, another criterion is important: time. Indeed, it is crucial to track indicators over time. Therefore, data must be stored and easily accessible to compare with other establishments in the group and thus identify good or bad practices. This highlights the need for reporting; its relevance here is to amalgamate the various financial and commercial data to conduct analyses by KPI. If the data are siloed or difficult to access, analysis becomes complex if not nearly impossible, and the decision-maker won’t be able to make informed decisions. Indeed, reporting is a good means to aid managers in their decision-making. For example, if within a hotel group, there is an average ratio of welcoming products per sold room of €1.50, and a manager observes that five establishments exceed this average with an average cost of €1.70, they can quickly be alerted, and a discussion regarding this price deviation can occur, allowing for corrective measures to be taken. Such an action in an establishment with 150 rooms can save a group up to €8,000 per year. This example illustrates the need to implement KPIs and use them wisely within an effective reporting system; in this article, we deliver our tips to begin a reporting, for which it is preferable to use dedicated software, like Qotid.
Moreover, key performance indicators can facilitate communication within a team. Indeed, by sharing them with staff, indicators highlight common objectives, thus fostering a culture of transparency, which tends to encourage teamwork.
There are numerous advantages associated with the use of KPIs; they are essential and allow managers to assess their company's performance, anticipate their needs, and make adjustments if necessary.
