Indicators can be defined as data that reflect the variations, progress, risks, and consequences of the actions that are executed by management and in the areas of a company. They help to measure, control and improve the action plan during its implementation.
- Characteristics of a good indicator.
- Indicator functions.
- Advantages of the indicators.
- Indicators at the different managerial levels.
- Indicators of the different functional areas (marketing, finance, sales, and operations).
- Challenges in determining the indicators.
The implementation of indicators is integrated into the UNE 66175: 2003 standard “Guide for the implementation of indicator systems”. They constitute means, mechanisms, or means to evaluate the progress in the fulfillment of the strategic objectives. They reflect a unit of managerial measurement that favors the evaluation of a company's performance in the planning of its goals, objectives, and commitments to its growth.
They gather information to analyze the performance of any area of a company and verify the scope of the objectives, in terms of results. In addition, they can identify possible deviations in the achievement of objectives.
Characteristics of a good indicator.
- Reliable: measurements must give results that agree between different observers.
- Measurable: the indicators must be quantifiable using the available tools and methods.
- Valid: it means that the measurement of behavior, activity, process, and task, which constitute the expected product or result of the metrics and monitoring, must be exact.
- Precise: these indicators must be defined in operationally valid or accurate terms.
- Timely: it provides a measure at relevant and appropriate intervals in terms of program goals and activities.
- Programmatic importance: it is associated with the program of the achievement of the objectives of the program.
The functions fulfilled by the indicators are the following:
They constitute the basis for the evaluation and monitoring of a project, which is why they must be precise and relevant enough to be used at different stages that require it and not only at the end of the project. In addition, they accurately specify each objective at the product level.
Advantages of the indicators.
1. They close learning gaps.
Indicators help recognize and address learning gaps. If you are not meeting an objective or goal, it may indicate that your employees need more training.
Let's say you want to convert 20% more leads. You should communicate the sales goal to your sales team, to achieve it by the next quarter. However, after three months, sales weren't increased. Sales training helps your team understand the basis of prospecting, selling, and closing, so every call becomes an opportunity.
Knowing about a skills gap allows you to start training your employees accordingly. Establishing a measurable KPI with a tangible result helps assess employee performance and post-training improvements.
2. Empower employees to take action.
The overall goal might be to make more sales this year compared to last year. How will you achieve it and how will your team know what to do? Clear KPIs drive your employees to action and direct them along the way.
A tangible KPI for a sales representative might be: "Sending 30 sales emails every day" or "Following up with leads within 1 hour of first contact." The number of sales emails sent and the follow-up period are specific and trackable KPIs.
If you start to see results, then you are on the right track. If you don't see results, check the goal(s) again, the KPIs you're measuring on the way to that goal, and pivot as needed.
3. Measure the results.
Indicators allow for measuring results. A good KPI, by definition, must be measurable and trackable. Without a way to measure progress toward your goals, you can't make improvements or adjustments.
Indicators at the different management levels.
There are three levels of indicators at managerial levels to analyze in companies: strategic, tactical, and operational.
1. Strategic KPIs.
KPIs are key performance indicators. They are financial or non-financial measurements to quantify the level of achievement of objectives. Also called strategic, they are responsible for showing the performance of business management and seek to define future action plans, based on measurable and verifiable data.
Their main function is to measure actions, carry out a situational diagnosis and communicate the results to those responsible to constantly evaluate the progress of meeting the objectives. Examples of KPIs are the indicators of profitability, ROI (return on investment), and financing, which are the ones that every company is interested in to measure the state of their company.
2. Tactical KPIs.
When the next level of data measurement needs to be evaluated for the fulfillment of strategic objectives, tactical actions are determined to achieve medium-term objectives. These types of indicators are frequently used at the departmental level. Examples of tactical indicators are sales and marketing metrics.
3. Operational KPIs.
Operational indicators are short-term data measurements. They are closely related to the processes and operation of the company as a whole. They are usually assigned to work teams or employees to actively participate in the achievement of strategic objectives. In short, what is measured here are the processes of the work teams to check their productivity. Examples of operational indicators are worker performance measurements.
On the other hand, the indicators can also be classified into indicators of efficiency and effectiveness. The efficiency indicators measure the level of execution of the process, focusing on the modus operandi and the performance of the resources of the activities that are trying to be evaluated. In a nutshell, efficiency indicators seek to measure the productivity of processes.
The effectiveness indicators, on the other hand, are oriented to the specific activities that must be carried out, that is, the well-resolved aspects of the processes. In an efficiency indicator, it is essential to attend to the customer's requirements to establish comparisons between what is delivered in the process and what the customer expects.
Indicators in the different functional areas (marketing, finance, sales, and operations).
Indicators for the marketing area
1. Visitors to the website.
These visits are each of the users who enter a website, and their number is significantly less than the number of page views since a user can enter a site more than once but only once as a visitor.
2. Time spent on a website.
Permanence time is one of the most important KPIs to make planning decisions and that shows the interest generated by the content in the browsing time on a website, and its journey through the different modules.
3. Bounce rate.
This indicator measures the percentage of visitors that enter the site or page and then, immediately leave it without interacting with any element. They count, between the entrances and exits to the site, the users who pretend to read an article and leave, either because they were not attracted by the presentation of the content or the design made their reading difficult.
This metric allows us to identify the degree of dissatisfaction of users who enter a site and to be able to generate corrective actions to reduce these negative rates that are hindering marketing planning.
4. Channels that increase organic traffic.
It establishes how the marketing strategies in the different channels are working at the time of increasing traffic, and how they contribute to the total value. For example, being able to visualize the organic positioning of all keywords or SEO phrases that appear in blog articles and social networks.
5. Followers and subscribers.
Followers are one of the most important indicators that allow us to know the scope of a profile. It is like the first level of activity in which at least a certain number of users know about the site and follow it. They may not subscribe yet, but they've already shown interest.
A second level is when a user becomes a subscriber and begins to receive specific content from the site in the email box, paying in exchange for having access to that material of interest.
Indicators for the finance area.
Liquidity is the amount of cash and assets readily convertible to cash that a company has to manage its short-term debt obligations. Before a company can prosper in the long term, it must first be able to survive in the short term.
The two most common metrics used to measure liquidity are the current ratio and the quick ratio. Of these two, the quick ratio, also known as the litmus test, is the conservative measure. This is because it excludes inventory from assets and also excludes the current portion of long-term debt from liabilities.
Related to liquidity is solvency, which refers to a company's ability to meet its debts on an ongoing basis, not just short-term. Solvency ratios calculate a company's long-term debt relative to its assets and equity.
The debt-to-equity ratio is generally a strong indicator of long-term sustainability because it provides a measure of debt versus equity. Therefore, it is a metric of interest and confidence of a company's investors.
3. Operational efficiency.
A company's operational efficiency is key to its financial success. Operating margin is one of the best indicators of efficiency. This metric considers a company's basic operating profit margin after deducting the variable costs of producing and marketing the company's products or services. Fundamentally, it indicates how well the company's management can control costs.
Good management is critical to the long-term sustainability of a business, as it can overcome a series of temporary problems, while poor management can lead to the collapse of even the most promising business.
Indicators for the sales area.
1. Sales volume growth per month.
It measures and calculates how much sales have increased each month, taking into account significant differences by period.
2. New customers per month.
Just as the volume of sales can be measured, it is necessary to increase the number of customers to obtain more possibilities for closing sales. New customers can be attracted through marketing content, but also by obtaining referred leads that provide loyal customers.
3. Number of new potential customers.
They are all those that can be generated by marketing and sales actions: marketing through the production of valuable content and sales, through prospecting. The number of potential customers before they become loyal customers is measured because they have not yet made the purchase decision.
4. Average lifetime value of customers.
It refers to the value that customers have for a brand or company due to the purchase they made in the past. It represents the net benefit associated with a customer throughout the life cycle.
5. Average customer lifetime.
This indicator allows for calculating the time that customers buy the products or services of a company and if they are loyal to its brand. In this way, it is possible to find out what average lifespan the customers of a certain company normally have. The higher the value, it means that these customers stay longer buying your products. Therefore, it is also an indicator that they are satisfied with the shopping experience.
Indicators for the area of operations.
1. Logistics management:
- Purchasing and supplier management: number of suppliers, delivery compliance, purchasing expenses;
- Inventory management: management and maintenance;
- Stocking: order picking accuracy rate, number of inventory items;
- Transportation: number of orders dispatched per day, number of vehicle frequencies, number of on-time and late deliveries;
- Customer service: lost customer rate, damaged products, product return rate.
- Monitoring and control of the production process;
- Production and task uptime;
- Failure ratio;
- Team effectiveness.
Challenges in determining indicators.There is a very widespread phrase by Peter Drucker, Doctor Honoris Causa of several universities in the United States, Belgium, Spain, Japan, Switzerland, and the United Kingdom, in the world of business and finance: "What cannot be measured, cannot be controlled, what cannot be controlled, cannot be managed, and what cannot be managed, cannot be improved." This phrase shows that all good management of a company requires the implementation of indicators to obtain control and monitoring of departmental processes.
Being able to know in numbers the status of a company's processes, activities and tasks allow greater visibility of its operation, identifying weaknesses and strengths on which to draw action and improvement plans to ensure business growth.
Regarding what aspects determine the choice of indicators, each company must consider the indicators that best suit their needs, since it will also depend on what is important for them to measure. Aspects such as the category or market within which a company is registered, its administrative maturity, corporate communication, and the maintenance costs of the indicator, among the most relevant issues, will influence their decisions.
Consequently, one of the greatest challenges that companies usually face when choosing indicators to measure activity is that the results produced by the indicators promote decision-making and, based on this, help to comprehensively improve processes. To this end, the indicators must be easy to read and interpret and must not represent an extra cost for the company that reduces its profitability.