SMART KPI: Business Definition and Usage

Patrick Ward Patrick Ward Follow Jul 19, 2024 · 4 mins read
SMART KPI: Business Definition and Usage

Business Definition of “SMART KPI”

The acronym “SMART KPI” refers to “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.” This means that in addition to being SMART, the KPIs are also Explainable (easily understood by your peers) as well as Relative (measured in a way that avoids “vanity metrics”).

SMART KPIs are important because they encourage managers and employees to avoid unclear metrics that don’t impact the business, and discourage evaluating performance based on qualitative elements (corporate politics, number of emails sent) rather than quantitative ones (did the employee produce measureable impact on the business?).

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 type of metrics are appropriate for SMART KPIs?

A good example of a metric to measure as a SMART KPI is CPA (Cost Per Aquisition). For example, if customers are aquired through paid advertising, and the company spends $100,000/mo on ads to acquire 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.

The Director in this case could set a KPI for their Marketing Manager to reduce their CPA by 10% within one quarter.

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, at the businesses or corporate level, the most important KPIs are quite similar. Virtually all businesses are concerned at the management level with a few key financial metrics such as revenue, gross margin, and COGs (Cost of Goods Sold).

Operational metrics at the business level may vary more widely however, since different business models are concerned with different inputs and outputs. For example, a digital media business would likely carefully monitor revenue per visitor, while a SaaS business would care more about revenue per customer. COGs matter for an e-commerce business, but are not a major cashflow concern for a software provider.

Overall, SMART KPIs are most important for measuring and avoiding performance issues before they become mission-critical failures. A lack of clear accountability is one of the key reasons that 90% of startups fail.

What are some examples of “Relevant” SMART KPIs?

The term “relevance” is easily the least clear of the SMART acronym. In essence, this refers to the connection between the KPI and the strategic objectives of the company.

Relevant KPIs tick these three boxes:

  1. Address Core Objectives: It should directly impact the critical success factors and objectives of the organization. For instance, if a company’s main goal is to expand its market reach, a relevant KPI might measure new market penetration or the growth rate in new geographic regions.
  2. Suit the Context: It must fit the role, function, or department it’s designed for. A relevant KPI for a marketing team could be the conversion rate of campaigns, which directly affects their goal of generating leads and sales.
  3. Drive Action: The KPI should inform decision-making and inspire actions that contribute to achieving broader goals. It should be clear how improving the KPI will benefit the organization and what specific actions can influence it.

To give a counter-example: imagine measuring inbound media mentions as a KPI for your marketing manager, when your business does not rely on media coverage to drive sign-ups. This KPI should be adjusted to measure something with a more direct input-output relationship to success for the marketing department.

Why do SMART KPIs matter?

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. Studies have shown that it can even help retain employees without raises — making them especially relevant during poor economic cycles.

This is why KPIs, particularly SMART KPIs, are essential for corporate success at every level.

Frequently Asked Questions

How do I write a good SMART KPI?

In my experience creating scorecards for my team over the past decade, the most effective SMART KPIs follow one simple rule: be achievable. You've probably heard the saying “Shoot for the moon. Even if you miss, you'll land among the stars.“ This approach is common, but often backfires when applied in a corporate setting. Employees need to be challenged, but not put in a position where they miss their targets quarter after quarter. Aside from worrying about their bonus and performance review, unrealistic targets will make them doubt your ability to manage other aspects of the business.

What does KPI stand for?

KPI stands for Key Performance Indicator. KPIs are metrics used to assess the health of a business by monitoring changes in the metric over time or by comparing the metric to similar companies.

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.
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