What is KPI? How to build an effective KPI system

What is KPI ? Implementing performance measurement helps managers measure, monitor and evaluate the performance of individuals and businesses. So how to build an effective KPI system? Below are detailed instructions that 1C Vietnam has compiled.

1. What is KPI?

Abbreviated from the English phrase Key Performance Indicator, KPI means an index to measure and evaluate work performance so that businesses can monitor and evaluate the progress of achieving specific goals or objects in a transparent and clear manner.

KPI indicators usually include profits, sales volume, revenue, etc. KPI analysis helps businesses have an overview of operational efficiency, thereby making necessary adjustments. In addition, KPI also helps employees understand the level of work completion, thereby motivating them to work and strive to achieve goals.

To evaluate the whole, businesses need to build a high-level KPI system, on the contrary, low-level KPIs will need to focus on evaluating processes in departments such as sales, marketing or customer service.

2. Why do businesses need KPIs?

KPIs typically focus on aspects of a goal that are critical to the current and future success of a business. Some of the key roles that KPIs play are:

• Help businesses measure business goals and operational objectives.
• Promote the sense of responsibility of all employees in the enterprise.
• Improve working spirit and create development environment for employees.
• Help businesses achieve their goals, visions and expectations.

3. The meaning of KPI for businesses and employees

Understanding what KPI is helps businesses know the general role of KPI in developing and achieving goals. So what is the true meaning of this index for businesses and employees? Let's find out with 1C Vietnam right below:

For businesses:

KPI not only helps businesses measure the effectiveness of business or marketing strategies, but is also a measure to evaluate employee performance. Specifically:

• Outline specific work tasks for employees to rely on KPIs.
• Evaluate employee performance and competency.
• Evaluate business strategy and re-implement strategy (if necessary).
• Create a development environment for employees.

For employees:

Having a solid understanding of what KPI is helps employees control KPI and complete work according to set indicators easily. On the contrary, if they do not clearly understand the function of KPI and how to complete it, the work will be delayed and not completed smoothly. Below are some specific roles of KPI for employees:

• KPIs help employees understand the level of work that needs to be completed.
• Measure the level of work completion against the original objectives.
• Provide a clear, specific work plan for each goal.
• Recognize when progress is off KPIs so you can make timely adjustments and improvements.

4. The most popular types of KPIs today

Based on the goals and objectives of the business, businesses can monitor and set KPIs in many different ways. Businesses just need to understand what KPIs are and choose the right KPIs. Choosing the right KPIs from the beginning is a stepping stone to help businesses complete their business activities. There are 5 common types of KPIs that businesses need to know:

• Business KPI

Business KPIs help businesses measure the results of long-term business goals by tracking business metrics, thereby navigating each process and finding areas of slow growth.

• Financial KPI

Financial KPIs are monitored by the board of directors and the financial department of the enterprise. Through this index, the enterprise can easily assess whether the operation is generating profit and revenue or not, thereby determining whether the enterprise's business is favorable or facing difficulties to adjust the strategy.

• Marketing KPI

This KPI helps the Marketing team track the success of marketing channels, using metrics to get an overview of how the team is performing in finding potential customers.

• Sales KPI

Sales KPI is an important indicator that helps businesses monitor the overall ability to achieve goals and objectives from sales data of the sales team, thereby monitoring the results and revenue growth of the business.

• Project management KPI

Project management KPIs are used by managers to track the percentage of goals achieved and progress toward them. They are also used by many businesses to determine whether a project is successful and meeting requirements.

5. How to build and deploy an effective KPI system in a business

Having a complete KPI system helps businesses quickly achieve business goals and effectively evaluate operational progress. Depending on each business goal, building a KPI system is also completely different. Below are 5 ways to build an effective KPI system that businesses should refer to:

5.1 Identify the person/department to build KPIs

Managers need to identify the person/department that builds KPIs, usually the department head, who has a good understanding of the tasks and requirements of other positions. However, if the department is too large, KPI building should be done by lower-level managers.

In addition, the human resources department and specialists can also build KPIs to ensure objectivity and scientificity. However, the results of KPI evaluation may not be true to reality and may not be in line with the tasks of each department or division. Therefore, functional departments need to evaluate, assess and make appropriate adjustments to ensure accurate results.

5.2 Identify key KPIs

KPIs will mainly be based on the functions and tasks of each department. The person who builds the KPI will set a general index according to the characteristics of the department and will be the basis for creating KPIs for each position title. In other words, building KPIs will be based on the job description of each individual employee, ensuring the criteria related to SMART and all require a source of information that the business is applying.

After agreeing on KPIs with the goals of each department, the business needs to apply SMART criteria to evaluate work performance indicators. In which:

• Specific: Specific goal

KPI indicators must be clearly separated, including information such as: Indicator name, formula, information source, unit, planned number, weight and actual number. In addition, the indicator name must be concise and reflect the true nature of the indicators, such as: Revenue, export revenue.

• Measurable: Measurable goals

KPIs must be measurable, businesses can apply available management software such as: ERP, Production Management, CRM... If the index does not have a measurement method, businesses need to add information about customer satisfaction rate, which the business has never measured in the past to proceed with the addition.

• Attainable: Attainable goal

Businesses should still set more challenging goals than usual, but KPIs need to be within the business's ability to achieve.

• Relevant: Realistic goals

Managers need to take into account factors that affect the ability to achieve goals, for example: The Covid-19 pandemic can affect the ability to complete the goals of many businesses, at this time managers need to consider when setting up KPI planning indexes.

• Time Bound: Time bound goals

KPIs need to have a specific time frame of monthly, quarterly, yearly or a specific time frame in a year. On the other hand, the performance indicators selected as KPIs will be different based on each business model, employee activities and the general KPIs of the department/division.

5.3 Evaluate the completion of the set KPI

KPI completion score evaluation will take place after the manager has determined KPIs for the department and each job position. Because KPIs are determined based on measurement criteria, the business will have specific evaluation methods for each KPI. Most KPIs will be classified into 3 main groups as follows:

• Group A: It takes a long time to implement and decide on a common goal.
• Group B: Takes less time to implement, has a big impact on the overall goal or takes more time to implement and has a small impact on the overall goal.
• Group C: Short implementation time, negligible impact on overall goals.

In general, each of these KPI groups will have a weight based on their level of importance, for example: A: 50%; B: 30% and C: 20%.

5.4 Linking KPIs to the compensation system

For each level of target index completion, managers need to link KPIs to a certain salary or total compensation system. This can be pre-determined by the company's leadership, department, KPI system builder or agreed upon by employees.

5.5 Summary and adjustment to optimize KPI

Finally, the person who builds the KPIs needs to determine the link between the assessment results and the specific level of treatment based on each department, division, position, field of operation, etc. Through that, managers will build KPIs in specific steps and can seek advice from experienced experts so that the indicators are effective and suitable for the management goals of the business.

Most performance appraisals will take place at the end of each appraisal period. The appraisal needs to be objective and comprehensive, by incorporating the opinions of the company's personnel such as: Management, colleagues, employees themselves and customers.

6. Common mistakes when building a KPI system

In many businesses, KPIs are still not used effectively, lack expertise and do not reflect anything. Therefore, KPIs need to be a measure that connects activities with the success factors of the business, thereby building the connection of internal efforts in predetermined directions. Below are 8 mistakes when building a KPI system that businesses often encounter:

• Every KPI measure helps improve performance

Any metric can cause negative actions that lead to poor performance. Therefore, to make metrics work effectively, businesses need to predict the behaviors that may occur when implementing KPIs and reduce the potential negative impact of these behaviors by:

- Discuss with relevant staff what work will be done if the measurement is to be done.

- Test before implementing KPI.

- Abandon if the downside of KPIs causes many negative effects.

• All KPIs can be successful at any time, organization

In reality, not all metrics work for all organizations at all times. Metrics need a positive measurement context to reach their full potential.

• All target measures are KPIs

A target measure is a measure of the performance of an activity, while a KPI is a target measure that is important to achieving the strategic goals of the business. However, not all target measures are KPIs.

For example: A metric might be “customer satisfaction rate when using the product”. This is an important performance measure, but it is not a KPI if it is not a strategic objective. A KPI related to a strategic objective would be “increase customer satisfaction rate by 20% in the next year”.

• Businesses will improve performance by linking KPIs to compensation

The idea that employees are motivated by money and that businesses need to provide financial incentives to achieve high performance is a misconception. In fact, recognition and self-expression are important motivators. When tied to compensation, KPIs create political metrics rather than objective metrics that matter. Capital is then manipulated to get a bigger bonus.

• Can set performance targets at the end of the year

Many businesses still choose to release KPIs at the end of the year, but this can stifle creativity and ineffective performance. In some cases, managers spend months arguing about what the actual performance at the end of the year is, knowing full well that it will be wrong.

• Simple performance measurement and clear visibility of relevant metrics

Many managers are trained in finance, human resource management and information systems. However, they ignore performance measurement or have only a cursory training. Therefore, KPI measurement needs to be seriously invested in every business, to improve performance from average to good and finally to excellent.

• KPIs are not linked to strategic goals

KPIs are important indicators that must be built and monitored based on the strategic goals of departments and businesses. If KPIs do not match specific goals, businesses will waste resources and resources, especially not bring expected results.

• Focus only on outcome KPIs

KPI is an indicator that evaluates the final result but does not show the cause to achieve that result. Therefore, this indicator will become vague and difficult to achieve if additional KPI indicators that show the cause are not built.

Therefore, KPI indicators need to have a close causal relationship, balancing the two types of KPI result indicators and causes to ensure the expected output results.

7. Distinguish between KPI and OKR

KPI and OKR are popular goal management and performance measurement tools in most businesses. In general, these two indicators seem similar in terms of how they are used to measure and manage performance, but their approaches and purposes are different. 1C Vietnam will point out this difference in the table below:

8. Apply tools to effectively manage KPIs

In addition to the notes on building KPIs, businesses need to apply tools and software in parallel to organize, monitor and manage KPIs effectively. At the same time, it helps businesses make better decisions and achieve business goals. Below are some popular tools:

• KPI management software: Designed to track and manage KPIs for businesses. Allows managers to set targets, track progress and view performance reports automatically. For example: BSC Designer, KPI Fire, ClearPoint Strategy…
• Enterprise Performance Management (EPM): Is a series of tools that provide many features such as setting KPIs, tracking progress, analyzing performance and generating detailed reports. For example: Oracle Enterprise Performance Management (EPM) Cloud, SAP Business Planning and Consolidation, IBM Planning Analytics...
• Digital dashboard: Helps display KPI information in real time and track performance easily. For example: Microsoft Power BI, Google Data Studio...
• Project Management System: Provides features to track and manage KPIs in each project. For example: Trello, Asana, Jira, ...
• Customer data management system (CRM): Integrates KPI tracking features, allowing managers to monitor business performance and progress towards achieving sales goals. For example: Salesforce, HubSpot CRM, Zoho CRM, ...
• Human resource management system: Businesses can use human resource management software to track progress and evaluate human resource-related indicators. For example: BambooHR, Zenefits…

In particular, 1C:ERP is one of the comprehensive business management solutions that supports businesses in managing KPIs that is highly appreciated today. With the ability to collect data from many different sources, the 1C:ERP solution provides a powerful data platform that helps optimize operating costs, plan and estimate operational efficiency to achieve business goals.

1C:ERP is developed on a modern low-code platform, with open logic that helps businesses master technology, quickly customize, and be compatible with multiple platforms. With the 1C:ERP solution, administrators can easily control operational targets (KPIs), estimate operational efficiency, and performance of departments and employees to achieve expected KPIs.

Above is an explanation of the term KPI and some useful information related to how to build a KPI system in a business. In the current volatile business context, managers need to make wise decisions to improve performance and develop strongly. For more specific advice on the 1C:ERP solution to support KPI performance target control, please contact 1C Vietnam via hotline: 0247.108.8887!