In the modern business world, Key Performance Indicators (KPIs) are essential tools for performance management. They enable companies to measure their goals, track progress, and make informed decisions.
This article explains how KPIs are derived from goals, provides a practical example, and discusses the importance of bottom-up goal setting.

What are KPIs and Why are They Important?
KPIs are measurable values that indicate a company's progress towards its goals. They provide clear, objective data that help businesses evaluate performance, identify bottlenecks, and recognize opportunities for improvement.
The process of deriving KPIs begins with setting goals, which are defined using the SMART method. A KPI measures whether the company is on track to achieve this goal.
Steps to Deriving KPIs
Define Goals: Set SMART goals
Identify Key Success Factors: Determine the factors that are crucial for achieving these goals
Establish KPIs: Define specific, measurable values that quantify the key success factors
For example, if a company aims to improve customer satisfaction:
Goal: Increase customer satisfaction by 10% by December 31, 2024.
Key Success Factors (excerpt):
Fast response times in customer service
Product quality
On-Time Delivery (OTD)
KPIs (excerpt):
Average response time in customer service
Number of complaints
OTD ratio
Bottom-Up KPI Definition
While top-down goal setting is initiated by management and passed down the hierarchy, KPI definition often begins bottom-up at the lower levels. This approach has several advantages:
Practical Relevance: KPIs are designed with practical considerations in mind, based on the daily experiences and knowledge of employees, making them more realistic and achievable.
Improved Communication: Aggregating KPIs at higher levels promotes a unified view of performance, enhances transparency, and facilitates communication between different departments and hierarchical levels.
Efficiency Gains: Aggregating KPIs helps avoid redundancies and use resources more efficiently, leading to improved performance management and increased competitiveness.
Desirable KPI Characteristics
For KPIs to be effective and useful, they should possess certain characteristics:
Simple: KPIs should be easy to understand and straightforward. Complex KPIs can lead to confusion and make tracking difficult.
Verifiable: KPIs must be objective and verifiable. There should be clear criteria by which performance can be measured.
Assigned: Every KPI should be assigned to a responsible person or team to ensure accountability for achieving the target.
Traceable: KPIs should be historically traceable, allowing trends and changes to be observed and analyzed over time.
Coordinated: KPIs must be aligned with overarching company goals and coordinated to ensure that all efforts are moving in the same direction.
In contrast, irrelevant metrics should be avoided. If a KPI prompts a "So what?" response, it's time to look for another. Additionally, the use of KPIs that are overly focused on the past should be minimized in favor of leading KPIs that are more impactful and future-oriented.
KPIs are essential for performance management in companies. They must originate from clearly defined goals and be measured precisely. Effective visualization of KPIs allows for easy tracking of progress and informed decision-making. Bottom-up goal setting ensures that goals are realistic and motivating, ultimately leading to higher performance and better business outcomes.
By combining SMART-defined goals with precise KPIs, companies can improve efficiency and secure long-term success.
Outlook: In our next article on performance management, we will delve deeper into KPI visualization.
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