How to Define the Best Business Indicators (KPIs)

The best business indicators are the few key performance indicators (KPIs) that tie a process directly to a strategic objective, are measured with reliable data, have a named owner and a defined frequency, and trigger a decision when they move. A good indicator tells leaders whether a process is below its goal, close to it or beyond it, and what to do next.

Imagine the monthly management committee at a mid-sized retailer. The dashboard has forty-two indicators, color-coded, and each director explains why their own red numbers are not really a problem. The chief executive asks a simple question: are we closer to the strategic objective we agreed in January than we were in December? Nobody can answer with confidence, because the dashboard measures activity in every corner of the company but none of it is tied explicitly to the objective. The meeting ends after ninety minutes with no decision, and the same forty-two indicators will return next month. The company is not short of data. It is short of indicators that mean something.

Achieving success, being more efficient, listening actively to customers and staying ahead of competitors are objectives that every organization shares, and every business model runs towards them. The difficulty is reaching them without getting lost on the way. Are we doing well? What can we improve? Do we hold information, data and evidence that give an accurate picture of the organization? The answers lie in the key performance indicators. This article explains what they are, why measurement culture pays off, which families of indicators are most used, and how to define them step by step, with particular attention to the choices that separate a useful scorecard from a decorative one.

What is a key performance indicator?

An indicator, or KPI, is the information that allows us to measure the progress of a process. The classic image is a thermometer: it gives a reading that tells us whether the temperature is cold, warm or hot. For an organization, it tells whether its business processes are below a goal, close to the objective or exceeding expectations. A proper definition of indicators is essential for the evolution and maturity of processes, because it leads the company in an orderly and comprehensive way towards the goals it has agreed. For readers who want to review the underlying idea of a process before measuring it, ICX explains what a business process is.

The difference between an indicator and a key indicator is easiest to see with an example. Suppose a company wants to measure its purchase process on a website. It could propose counting the number of visits, which is an indicator. But the key indicator is how many of those visits result in effective purchases for the business, because that figure connects the process to revenue. The first number describes attention; the second describes outcome. A large part of the work of defining indicators consists of moving from the first kind of number to the second.

Several characteristics distinguish a well-designed indicator. It is aligned with the objectives of the organization. It measures the process adequately. It is specific about what is being measured, and it is clear and easy to understand. It is delegated to a responsible person. And it defines what is measured, how it is measured and how often. If any of these is missing, the indicator tends to drift into the background, since nobody owns it, nobody trusts it or nobody knows when to look at it.

Which indicators does your organization need?

Executives often ask for a list, and the honest answer is that it depends on the industry and on other variables. Beyond looking for a recipe and its ingredients, the relevant point is that indicators must follow the direction set by the compass of the company: its objectives. It is possible to propose many interesting indicators, but leaders must be very clear about the objectives they need to meet, whether the indicator will benefit customers and whether the process is mature enough to support it. A new process, still unstable, rarely deserves a sophisticated indicator.

That said, reference families are widely used and can serve as a starting point. They include financial indicators, such as margin and cash conversion; commercial indicators, such as pipeline coverage, win rate and average deal size; customer indicators, such as retention, satisfaction and complaints; quality indicators; efficiency indicators, such as cost per transaction or cycle time; project indicators; and competitiveness indicators. ICX has described one of these families in detail in its article on 11 sales productivity indicators you should know.

The sequence that leads to a good definition begins with the organization's objectives and moves to the measurement of the processes that deliver what customers expect. When the sequence is respected, every indicator can be traced back to the added value the customer receives. When it is inverted, as when the company starts from the data it happens to have, the result is the forty-two-indicator dashboard of the opening scene. The exercise of clarifying objectives is closely related to the question of the business model itself, which ICX discusses in its guide to how to create a business model canvas and in its article on the 10 signs that it is time to update your business model.

Why does a results-oriented organization outperform?

Part of the discipline that leaders must keep on their radar is a culture of measurement that helps the organization improve, innovate and stay ahead of competitors. Executives should not be reluctant about measurement or about the results it produces. If a company does not measure, it does not know whether it is doing well or whether it should improve, where it can change and how to manage resources efficiently. Measurement is not a form of surveillance; it is the basis for deciding where to place effort.

Research supports this view, with an important caution. Christopher Ittner and David Larcker, professors at Wharton, found in Coming Up Short on Nonfinancial Performance Measurement that many companies set the wrong targets because they focus too heavily on short-term financial results, use metrics that lack statistical validity and reliability, and therefore cannot show that improvements in nonfinancial measures affect financial results. The consequence can be misdirected investments and rewards for ineffective managers. Their recommendation is to build a model that proposes a causal link between the chosen drivers and outcomes, inventory the data the company already holds, validate the assumed relationships with sound methods and keep testing them as conditions change.

More recent work points in the same direction. A global MIT Sloan Management Review study, Leading With Next-Generation Key Performance Indicators, which surveyed more than 3,200 senior executives and interviewed 18 executives and thought leaders, concludes that leaders struggle to balance tactical and strategic KPIs, operational and financial ones, and those that capture the present versus those that anticipate the future. The authors also find that most companies treat KPIs as a matter of compliance rather than commitment. Michael Schrage, in an analysis published by the MIT Initiative on the Digital Economy, goes further, arguing that KPIs and strategy are inseparable, while acknowledging the risk of people becoming mindless servants of their dashboards. The challenge, in his view, is to design metrics that inspire, motivate and educate.

The practical benefits of a well-run indicator system are concrete. It supports continuous improvement of processes and prepares the ground for their automation. It focuses effort on what matters, aligns the areas with the company's direction and gives leaders a global view of processes that no single department possesses. A bank that tracks time to resolve a customer complaint, for instance, quickly discovers which of its processes cross several departments and where the handoffs lose time. A manufacturer that tracks the share of orders delivered complete and on time sees a customer-facing outcome that draws together purchasing, production and logistics.

How do you define key indicators step by step?

Once the objectives are clear and have been communicated across the organization, the definition of indicators for the processes can proceed in a sequence of decisions. The first is to establish and understand the processes: define the steps that will be measured, in order to obtain an x-ray of how they currently work. Without this map, the company tends to measure whatever is easy to count instead of what is important. ICX's process mapping and analysis work is built for this stage.

The second decision is what to measure and by which method. With processes known, the team detects what causes pain, what is critical and where the risks are greatest, and it builds a formula that produces a value to show whether the process is inside or outside its limits. The third is to set the limits of the indicator, with a floor and a ceiling. If no previous data exists, expert judgment is a valid starting point, but accompaniment and adjustment are essential to approach the level the company wants to reach. The fourth is to select reliable data sources. The data must come from trusted systems because the purpose is not to obtain a percentage or a number but to take actions based on the results.

The fifth decision is to choose the indicators that produce the most harmonious result for the organization's direction. There may be attractive KPIs that fall outside the scope; it is better to set them aside and consider using them later. The sixth is to question the results. Like processes, critical indicators evolve, and there comes a time when their results no longer generate any alert or value, or when the boundaries need to move up or down. The seventh is to establish the owner of each indicator and its audience: who is responsible, and who in the organization needs to know the measurements.

The eighth is to define the frequency. Those responsible for each KPI must decide whether to measure monthly, quarterly, by semester or otherwise, depending on the nature of the process and its behavior; the more critical the process, the higher the frequency. The ninth is to define a review schedule that is part of the work calendar, in which indicators are rethought and improved. The author's advice here is practical: do not wait for the scheduled date if an indicator is clearly not producing results. Change it and adjust it. Forecasting is a special case of this discipline, and the article on HubSpot forecast software as the crucial indicator for management shows how it works in the commercial area.

What does this mean for the C-level?

For the chief executive, the central message is that an indicator is a decision tool, not a reporting obligation. Each KPI on the executive dashboard should have an answer to a single question: what will we do differently if this number moves? If the answer is nothing, the indicator belongs in an operational report, not on the leadership scorecard. Reducing the executive view to a handful of indicators that are tied to the strategic objectives makes meetings shorter and decisions faster.

For those responsible for growth, indicators clarify how well the company attracts, converts and retains customers, and they separate vanity metrics from those that predict revenue. For the leaders of customer service and operations, they reveal cost to serve and the points at which the experience breaks. For the chief financial officer, the key is the link between nonfinancial drivers and financial outcomes, which is precisely where Ittner and Larcker found most companies fell short. A scorecard that cannot show how a service improvement translates into retention and margin will lose its budget at the first difficult quarter.

How to start on Monday morning

A seasoned consultant would start by subtracting. Print the current management dashboard and, together with the team, mark each indicator with the objective it serves, the person who owns it and the decision it informs. Anything without all three is a candidate to be removed from the leadership view. The exercise is uncomfortable, because every indicator has a defender, but it usually reduces the list by half in a single session and makes the remaining indicators far more visible.

Next, choose one strategic objective and build its indicator properly. Map the process that delivers it, define the measure and its formula, agree on the floor and ceiling, identify the data source and test it for reliability, name the owner and set the frequency and review date. Run it for a quarter, review it with the people who use it and adjust. Once the team has seen one indicator work as intended, extending the approach to the others becomes much easier than any top-down mandate.

How ICX helps

ICX Consulting helps management teams define indicators that connect strategy, processes and results. Its KPI and OKR development and alignment service translates objectives into measures with owners, limits and review cycles, and its process improvement practice uses those measures to find and remove waste. The diagnosis is organized with ICX Compass, which sets priorities and sequence, and the results can be consolidated into dashboards supported by technology such as HubSpot, always after the indicators themselves are defined. For a customized view of how to apply these steps to your processes, learn more about ICX.

To begin with a concrete resource, the ICX toolkit to define activities and processes helps you document the steps you intend to measure. Would you like to know whether your current indicators are guiding decisions or only describing the past? Request a diagnostic with an ICX consultant.

Frequently asked questions

How many KPIs should a company track?

There is no universal number, but leadership dashboards work best with a small set tied directly to strategic objectives, while operational teams track more detailed indicators for their own processes. The test is whether each indicator has an owner, a decision it informs and a reliable source. Those that fail should be moved out of the executive view.

What is the difference between a metric and a KPI?

A metric is any measurement, such as the number of website visits. A KPI is a metric that is tied to a strategic objective and indicates progress in a critical process, such as the share of visits that become purchases. All KPIs are metrics, but only a small portion of metrics deserve to be KPIs.

How often should indicators be reviewed?

Measurement frequency depends on how critical the process is, and may be weekly, monthly or quarterly. The review of the indicators themselves should have its own schedule, at least annually, to confirm that limits, definitions and data sources still make sense. Indicators that stop producing alerts or insight should be changed without waiting for the date.

Can a company start measuring without historical data?

Yes. When no previous data exists, expert judgment can set the first floor and ceiling for an indicator, provided the team accompanies the results and adjusts the limits as real data accumulates. What cannot be postponed is the reliability of the source, since decisions will rest on it.

Indicators earn their place when they change what leaders do on Monday morning, and not when they simply decorate a report. If your management team wants to reduce noise and focus on the measures that move the business, talk to an ICX consultant and design the scorecard around your strategy.

Figure 2: Aspects that trigger added value to the clients.

>> How to define the best business indicators? <<

>> How to create a business model canvas: the ultimate guide <<

>> 10 Signs that it is time to update your business model <<

>> 11 sales productivity indicators you should know <<

>> HubSpot forecast software: The crucial indicator for management <<