SMART KPI: Business Definition and Usage

Patrick Ward Patrick Ward Follow May 13, 2021 · 3 mins read
SMART KPI: Business Definition and Usage

Business Definition of “SMART KPI”

The acronym “SMART KPI” stands for “Key Performance Indicators” which are “Specific, Measurable, Attainable, Relevant, and Time-Bound.” SMART KPIs are measurable metrics used to assess employee and company performance.

When companies talk about SMART KPIs, what they mean is that KPIs should be:

  • Specific
  • Measurable
  • Attainable
  • Relevant
  • Time-Bound

In some cases, the manager establishing a SMART KPI policy might describe them as “SMARTER KPIs,” meaning that in addition to being SMART, the KPIs are also Explainable (easy to understand for your peers) as well as Relative (measured in percentages, or other methods which avoid “vanity metrics” that look overly rosy if the business is growing (or overly negative if shrinking).

SMART KPIs are important because they encourage managers and employees to avoid vanity metrics that don’t impact the business, and discourage evaluating performance based on qualitative elements (corporate politics, etc) rather than quantitative ones (did the employee achieve a goal?).

An example of a SMART KPI for an individual employee would be increasing inbound media mentions by 15% Month over Month. This KPI is SMART because it is Specific (no mentions of “brand awareness”), it’s measureable (you can count the inbound links), it’s attainable (no pie-in-the-sky arbitrary revenue goals), it’s relevant (the sales team uses media mentions as social proof for leads), and it’s time-bound (month over month, not “eventually”).

SMART KPIs may be instituted at the division or corporate level for measuring the organization, or at the employee level for measuring individual performance during quarterly reviews between managers and direct reports.

What is an example of a SMART KPI?

A good example of a KPI is CPA (Cost Per Aquisition). For example, if customers are aquired through paid advertising, the company spends $100,000/mo on ads, and aquires 100 customers, the CPA is $1000. Ideally, a company would want to see this figure fall over time, as they become better at targeting their advertising efforts.

What are the most important KPIs?

The most important KPIs for individual employees will vary wildly, since their domain focus is very specific. You would expect the KPIs for a marketing manager to look very different from the KPIs for a Javascript developer.

However, for businesses and corporations, the most important KPIs are quite similar. Most business professionals will agree that the most important KPIs for a business are:

  • Revenue
  • Profit margin
  • Growth
  • Churn
  • Working Capital

However, the specific definition of each KPI will vary by business. For example, a lead generation business would measure revenue per visitor, while a SaaS business would measure revenue per customer.

What Does “KPI” Mean?

KPIs for individuals vary based on the role. For example, userbase growth rate would be an important KPI for a growth hacker. Conversion rate would be a critical KPI for a UX designer working on an ecommerce platform.

KPIs are a key principle for corporate management because they gamify the corporate experience. When you play a video game, you’re incentivized to perform meaningless actions by a number or graph that rises up and to the right on the screen. The same is true for contributors of a business initiative.

One of the biggest issues facing mid-to-large companies is lack of visibility into KPIs for employees. This results in contributors who feel “blind” and unmotivated, because their work isn’t being measured accurately. Even when the rewards are low, accurate measurement of progress is intrinsically motivating to most people. This is why KPIs, particularly SMART KPIs, are essential for corporate success.

Patrick Ward
Written by Patrick Ward Follow
Hi, I'm Patrick. I made this site to share my expertise on team augmentation, nearshore development, and remote work.