Your key performance indicators (KPIs) are measures that help you understand whether you are achieving one or more of your strategic goals. You may have already thoughtfully determined the KPIs you should be tracking, like revenue, expenses, number of customers, etc., but the reality is this: You need to set KPI targets to make them even the least bit meaningful.
Why? Think about it this way: You may see a long-term increase in revenue, but without a target, you won’t know whether whether you’re on track to meet your strategic goals. Follow the nine steps below to set targets that make it clear whether your performance is keeping pace with your overall goals.
How To Set KPI Targets: 9 Steps To Drive Results
Step 1. Review progress in achieving your strategic plan.
You should start this process with a set of goals and, ideally, a list of which KPIs you’ll track to help you reach those goals. (Not sure how to select the right KPIs? This article will help.)
Your organization may have many measures; some for specific divisions and departments, others for your operations. It’s a good idea to set targets for all measures associated with your organization, but in this article, we’ll be focusing on KPIs as they relate to your top-level strategic plan.
Step 2. Select your most important KPI as it relates to your strategy.
If you’re a for-profit organization, this is likely a financial measure centered on profitability or revenue, which is what we’ll focus on in for these KPI target examples. If you’re a nonprofit or municipal organization, your most critical KPI could be mission-centric (like “number of people served” or “delivery value for cost”).
Step 3: Mathematically determine the five-year target for that KPI.
Let’s say your most important financial KPI is to double profits in five years. You’ll need to then do the math and come up with that final number. As an oversimplified example, if you make $50 a year, your goal would be $100 in five years. (Let’s hope for your company’s financial security that your numbers are a tad higher than this.)
Step 4. Work backwards from your five-year target to get to your year-by-year target.
Working from our scenario above of growing our $50 profit to $100 over the course of five years, your company is likely going to fit into one the following growth scenarios:
- Scenario A: You want to grow profits consistently from years one to five. This means your target would be $60 in year one, $70 in year two, $80 in year three, and so on.
- Scenario B: You want to invest heavily toward your goal in years one and two, and expect growth to come in the later years. This means your target may be $55 in year one, $60 in year two, $70 in year three, and $85 in year four.
- Scenario C: You want to put the hard work in year one and expect slower growth in the latter years. This means your target may be $70 in year one, $85 in year two, $93 in year three, and $97 in year four.
The scenario you choose will determine how your targets will change over a five-year period, which will impact the method by which you execute your strategy. If you haven’t already made this plan, it’s time to meet with the leadership team and do so.
Step 5. Nail down the rest of your financial KPIs using the process above.
Now that you’ve determined your profit target, it’s time to hammer out the rest of your financial KPI targets. Fortunately, once you know your profitability target, you should be able to make assumptions for several other critical KPIs, like revenue and expense, that will make setting those targets easier. For example, you may need to triple your revenue target in order to double your profit. So if your revenue is currently $500, you may need to see it rise to $1,500 by year five. Whatever your specific case may be, be sure to finalize your financial perspective KPIs (or whatever your most important KPIs are, if you’re a mission-driven organization) before moving on!
Step 6. Set your KPI targets for the customer perspective.
Note: The same process outlined in steps 3-5 also applies to the customer perspective. Determine the five-year target for that KPI, work backwards to find your year-by-year targets, and so on. But the process for actually determining the customer, internal, and people targets is a bit different, which is what we’ve described in steps six and seven.
Now that you’ve set the targets for your most important perspective, you need to determine what is driving your customers’ behavior.
Let’s say your top customer KPI is to get an additional $400 in revenue from your current customer base. (If you are tracking the math, assume you are getting the other $1,100 from new customers.) To do this, do you need to raise your prices? Sell more to your current customers? Find new customers? Like the financial KPI targets you set, how you go about setting these customer targets is based entirely on your organization’s strategy. For example, your organization may decide that, in order to reach that KPI target, $100 should come from price increases, $300 should come from repeat customers, and $1,100 should come from new customers.
Step 7. Set your KPI targets for the internal & people perspectives.
KPIs in the internal perspective help you identify what you’re doing inside your organization to contribute to making customers happier and gain more profit. Therefore, as you begin to set KPI targets in the internal perspective, be sure you’re focusing on activities that will impact your customer KPIs. For example, product innovation KPIs may help with your price increases, subscription KPIs may help with your repeat purchase rates, and new target markets or marketing campaign KPIs may assist you in getting new customers. From there, you will be able to set the appropriate targets.
KPIs in the people perspective (also called “learning and growth”) help you answer what you’re doing to nurture your staff’s capabilities and skills. Your KPIs will likely relate to employee satisfaction results, your strategic skills gap, or employee turnover.
Step 8. Link all of your KPI targets.
As you may have noticed, setting KPI targets in the financial perspective is quite a bit simpler than the other perspectives. When you’re setting targets that relate to your customer and people perspectives, the targets will not add up mathematically as they do in the financial perspective. But the important thing is that all of your targets align with one another. You can’t expect to grow your customer base without a year-by-year plan while still expecting to meet your revenue growth. In other words, there’s no way to achieve your top-level financial goals without meeting a certain level of performance in all three of the other perspectives.
To avoid this, review each target to ensure they’re linked appropriately, and strategy-focused. Do this by asking, “What will this KPI target impact in this perspective, and in other perspectives?” If you can’t answer, you risk meeting a nebulous goal that doesn’t actually help you achieve any targets.
Step 9. Take time for a “Sanity Check”!
You’ve made it through the KPI target-setting process—well-done! Before you move on, ask yourself two questions:
- Do you have the money to invest in all the different areas across your strategy? A great deal of your budget will likely be spent in your internal and people perspectives, so before you get started with the KPIs in these perspectives, you’re going to want to check to see if you have sufficient funding for each of those KPI activities. If so, great! If not, you’ll probably need to adjust some of your targets.
- Do you have the capacity to execute on all your plans at the pace of your strategy? Once you’ve reviewed your KPIs and assigned targets, you likely have a tremendous number of activities to work through as an organization—but do you have the ability to execute on all of them at once? If you try to overdo it, you may (predictably) come up short and overwhelm your staff. If you find yourself in this situation, we recommend adjusting the pace of your strategy execution to include more realistic goals.
A quick word of advice:
If you follow the steps outlined above, you’ll be on your way to a well-executed strategic plan in no time! But be aware: You’ll need to communicate frequently with your leadership team throughout the KPI target-setting process to ensure strategic alignment and be sure everyone is on the same page. Be prepared to adjust your strategy from time to time if the leadership team feels that you’re pushing your organization too far (or not far enough). The last thing you want to do is wait until year four to assess whether you’re going to hit your year five target. And if you have any questions during this process, don’t be afraid to reach out—we’d be happy to help!