Defining KPIs and Objectives

In 1981, George T. Doran defined S.M.A.R.T. as a way to write goals and objectives. Doran discussed the importance of objectives and the difficulty in setting them, noting that, ideally speaking, each corporate, department, and section objective should be specific, measurable, achievable, realistic and time-specific. The S.M.A.R.T. mnemonic applies when establishing KPIs too. It’s important to ensure that your KPI objectives are specific—are they stated in a way that is precise about what you are hoping to achieve? Are they measurable—can you quantify each objective? Are they achievable—are your objectives reasonable in terms of what you can actually accomplish? Are they realistic—do you have the needed resources to achieve your objectives (if not, then they’re likely unrealistic)? And last, are they time-specific—what time frame has been set for completing your objectives?

But just because something is measurable, doesn’t make it key to the organization's success. There must be a way to define and accurately measure a key performance indicator for it to have value. For an online retailer, “Grow domestic adult sales, age 25-35, by 12%” is a useless KPI if there isn’t a way to distinguish sales by age and geography. Similarly, “To be the most popular manufacturer of kids toys” won’t work either because there’s no easy way of measuring “most popular” as it compares to other toy manufacturers.

After the key performance indicator has been defined, it’s necessary to set targets for each KPI. If the KPI is “increased sales,” the targets could include the dollar value of sales, units sold, or both. You’ll also need to determine how “dollar value of sales” will be defined. Will it be at list price (MSRP) or take discounts into consideration? Will it consider returned merchandise, coupons or promotional discounts? For universities, an important KPI is academic progress and graduation rate. But how will you consider (measure) students that transfer to another institution? Questions like these must be addressed when defining KPIs.

It is also important to limit the number of KPIs to a small, manageable group. This helps to keep everyone's attention focused on achieving the same KPIs. This doesn’t mean that the organization should only have three or four KPIs. Although it might, each department or business unit will also have its own supporting set of KPIs that support the overall goals of the organization.

Once you have defined good key performance indicators, you can use them not only as a performance management tool, but also to motivate performance. KPIs should communicate a clear picture of what is important to the organization, and for employees, what they need to do to achieve strategic goals and corporate objectives. This can be used manage performance, making sure that everything the people in your organization do is focused on meeting or exceeding those key performance indicators. Organizations also use the KPIs as motivation—showing what the target is for each KPI and the progress toward that target. By doing so, people will be motivated to reach those KPI targets.

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