Operational efficiency is the cornerstone of a successful business, but it’s not inherently measurable. Utilizing key performance indicators (KPIs) is essential to transform abstract business goals into actionable targets. By driving continuous improvement and organization-wide alignment through KPIs, you can enhance overall operational efficiency.

KPIs vs Metrics

To effectively implement KPIs, one must know the difference between general metrics and key performance indicators. Metrics are quantitative measurements used to track and assess the status of a specific business process. Things such as website traffic, the number of customer support tickets, and total sales volume tell you what is happening, but they don’t intrinsically tell you how well you are performing. KPIs are specific, critical metrics that are tied to strategic business goals. They allow you to measure performance related to specific objectives. This provides measurable insight into whether your company is on track.

Aligning with Business Strategy

Effective KPIs are not chosen in isolation; they must be tightly linked to the organization’s strategic goals. Determining company-wide KPIs ensures that every employee in every department is focused on activities that contribute to your business’s success. To align your key performance indicators with your overarching business strategy, revisit your company’s long-term objectives. Determine what your main area of focus is; this can be something such as customer satisfaction or market growth. Then, create links between your strategic goal and a key performance indicator. For example, a relevant KPI for “increased customer satisfaction” could be positive customer satisfaction surveys. 

Define Your Goals

Like all goals, your KPIs must be measurable and trackable. In general, utilizing the SMART acronym builds an effective framework for setting targets. The SMART acronym stands for:

• Specific: what specifically do you need to accomplish?

• Measurable: how are you measuring progress towards your goal?

• Achievable: is your goal realistic?

• Relevant: how does your goal relate to the business at large?

• Timely: when do you want to achieve this goal?

Identify and Select the Right KPIs

The KPI selection process should be rigorous. Too many key performance indicators can dilute focus and overwhelm teams, so you should focus on the metrics that matter the most. Leading and lagging indicators are two of these metrics. Leading indicators measure activities that predict future performance, such as the size of your sales pipeline. Their projections allow for proactive course correction. Lagging indicators measure outcomes that have occurred, such as quarterly revenue. They reflect past performance, which can give insight into the business’s typical capabilities.

Establish a Baseline and Set Targets

Before targets can be set, you need to understand the current state of your business. Collect relevant historical data to determine the current level of performance for the selected key performance indicators. This creates your baseline starting point. Then, set targets based on your starting point, industry benchmarks, and strategic goals. Set clear, ambitious targets for improvement whilst keeping SMART goals in mind.

Monitor, Analyze, and Act

The value of key performance indicators is realized through continuous monitoring and informed action. Implement a regular schedule for collecting and reporting KPI data. Utilize dashboards and visualization tools to monitor data and make it accessible and easy to interpret across all relevant teams. Analyze the given data to determine why a KPI is meeting, exceeding, or falling short of its target. Look deeply into trends to find the root cause. Based on the analysis, corrective action should be taken. This can mean adjusting processes, reallocating resources, revising strategies, etc.

Determining your key performance indicators and effectively implementing them is integral to your mergers and acquisitions journey. Contact Stony Hill Advisors to speak to an experienced M&A professional today.