A key performance indicator (KPI) is a measure that helps you understand whether you are achieving one of your strategic goals. Sometimes a target can be bigger (like if you’re trying to grow revenue) and sometimes it can be smaller (like if you’re trying to reduce defects).
Inevitably, you need KPI targets to communicate the level of performance you’re trying to achieve. To that end, we’ve detailed a four-step process on how to set KPI targets. (And don’t skip the last step—it’s a tricky, but important concept!)
How To Set KPI Targets
1. Set your long-term or “stretch” target.
You’ll want to start by defining your long-term target first. This target—which is set for 3-5 years out—typically corresponds with your strategic plan and is a known goal throughout your company. For example, an organization’s target may be to double its revenue in three years or double the number of customers it has in five years.
These long-term targets can be:
- Derived from your overall mission.
- Related to your benchmarking.
- Based on your own historical performance.
2. Determine your leading and lagging indicators.
Lagging indicators allow you to see if you’ve accomplished your goals or not. In a for-profit organization, they’re typically customer and financial targets that need to be set first. If you’re a nonprofit or in government, these should be the targets that are closest to defining your mission. Lagging indicators don’t help you predict what is going to happen, but are very useful for informing you of what did happen.
Leading indicators help you understand what you need to do in order to meet your goals. Once you understand the variables (or processes) you need to go through to make sure your target is met, you’ll be able to start checking off the list.
See Also: How & Why To Set Leading Indicators
3. Make sure you’re leading and lagging indicators are linked together.
You need to make sure that your customer, financial, process, and people targets all operate together as a complete step. If not, you’ll either be looking too far ahead or be focused too much on what happened in the past.
Pro Tip: Keep in mind that steps 1-3 are all in place to ensure that you have a comprehensive set of targets that make logical sense for that period 3-5 years in the future.
4. Define how you back into your annual and quarterly targets based on this long-term target.
Now that you have a nice comprehensive set of targets for your strategic plan (or a vision for 3-5 years in your future), you need to break those down into annual and quarterly targets. These shorter targets should be based on how you think you can achieve each of these goals.
There are three ways of thinking about achieving these targets:
- Linear improvement: If you think achieving your target will be based on consistent year-after-year improvement, then it is very easy to define your annual goal. A linear target may be one that you believe will move by 20% every year for five years.
- Low-hanging fruit: Some targets will be based on fixing something that is broken or damaged, like a defect in your manufacturing process. If you purchase new machinery, you may improve your defect rate by 50% in year one—but that improvement may slow to 5% in years three, four, and five. This approach shows an immediate improvement that slows over time.
- Long-term investment: In other targets, you’ll need to invest in a process that will pay dividends over a longer period of time. If your company invests in marketing, you likely won’t expect to see huge results in year one or two, but expect to see tremendous results in years three, four, and five. This approach shows slow-going improvement that accelerates toward the end of a long-term target.
Pro Tip: These are not approaches for setting stretch targets; they’re approaches for breaking down those targets into realistic short term goals. Based on these unique assumptions, the approach for achieving your long-term goals can look very different over the years. If you looked at five targets, change in year one could be slow-going, consistent, or extremely rapid. Therefore, you need to be mindful about how you set these targets based on your assumptions of how you’re going to achieve your long-term goal.
If there’s anything you should remember about how to set KPI targets, it’s this: You need to start with your long-term target first to realize whether your short-term target is realistic or not. If you’re trying to double revenues in three years, but in year one, you’re trying to grow revenue by 10%, your goal likely won’t be met.
And don’t forget that your targets need to work as a comprehensive group. If you’re going to pave twice as many roads in three years, but you never build up the capacity to do that, it won’t be possible.
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