As of today, analyzing the performance of business and employees are easily done via various KPI metrics and KRA indicators. In this article, we will discuss everything you need to know about KPIs and KRAs – definitions, examples, and KRA vs. KPI comparison.
How do KRA and KPI Link to the Business World?
In the third quarter of 2021, the United States witnessed the formation of over 356K new businesses. That’s 3869 firms getting registered daily. Sustaining your business in today’s trafficked and dynamic business environment is a nightmare. What’s even worse? If you don’t have the right metrics to measure the growth, your business could land among the 50% of startups that fail in the first 5 years. When it comes to measuring progress, KPIs and KRAs are two significant metrics that help business owners analyze the success ratio of their business. But, you might be thinking: What are KPIs and KRAs? KRA stands for Key Responsibility Areas. While KPIs refer to Key Performance Indicators. But these terms are more than just abbreviations. They are the wheels to drive your business (no matter how small or big) through every odds. Let’s understand both the key metrics, starting with KPIs.
Everything You Should Know About KPI
What is a KPI?
Key Performance Indicators (KPI) are a set of quantifiable measurements used to evaluate a company’s performance over a given period. You can have long-term KPIs that focus on your organization’s overall business objectives or short-term KPIs that focus on specific individuals or departments. KPIs assist in the strategic growth of every area of your business – HR, finance, marketing, and sales.
Types of KPIs
Key performance Indicators come in various forms to suit your business goals. While some are commonly used to calculate monthly progress, others effectively determine long-term success. But among the varieties, one thing remains common – measuring strategic goals. Let’s look at the types of KPIs that come into play.
#1. Strategic KPIs
Strategic key performance indicators are used to determine how the organization is doing at any given time. They play a major role in analyzing long-term business goals. Examples: Return on Investment (ROI), Annual Revenue, Market Share, etc.
#2. Operational KPIs
Operational KPIs measure the efficiency, quality, and consistency of day-to-day operations. They measure the performance of short-term objectives. Mostly, organizational processes and efficiencies. Examples: Monthly Sales, Average Monthly Transportation Costs, Sales by Region, Cost Per Acquisition (CPA)
#3. Lagging and Leading KPIs
Lagging KPIs track the performance of the tasks which have already happened. Executives use this to measure the achievements of a specific goal over a time period. Examples: Measuring website traffic, number of people attending an event, and revenue earned via a program or campaign. On the other hand, Leading KPIs help predict outcomes or a business’s future state. For example, businesses may use indicators such as job growth, interest in new markets, or unemployment levels to predict various outcomes for their organization.
Key Performance Indicators to Measure for Any Organization
Although various indicators can measure a company’s performance, we have listed five key performance indicators for any organization.
Revenue Growth: Tracking and monitoring your revenue growth is a vital aspect. It can help you predict your business sustainability and progress in the near future.Income Streams: Monitoring the performance of each income stream like revenue per client, revenue per sale, and other crucial revenue streams can help you figure out the accurate picture of growthProfitability Over Time: Your business is in a blind spot without this KPI. It lets you measure the revenue and expenses incurred over time and calculate the overall profit (and is it enough to survive?), thereby helping you in cost-cutting as required.Customer Satisfaction: It’s simple, your organization won’t survive without customers. Whether profit or non-profit, any organization must ensure it delivers to the customers.Working Capital refers to the funds required to carry out day-to-day business operations. Tracking this metric ensures that the organization is well funded and self-sufficient to survive.
How to Develop KPIs?
It can be overwhelming to measure everything with so much raw data on hand. However, it’s wise to measure only the key performance indicators to help you achieve your desired business goals. Here are a few important things to consider when developing KPIs.
#1. Define KPIs Usage
Talk to subordinates or executives directly or indirectly involved in the process. Ask them what they want to achieve in a given time span and how they will do it. This will help you define KPIs that are valuable and reliable.
#2. Coincide Them With Your Business Goals
If your KPIs don’t coincide with your optimal business goals, you might be heading in the wrong direction. Whether you use KPIs for specific operations or specific campaigns, they must tie back to your business goals. After all, every operation is dedicated to the company’s long-term vision. And so should your KPIs.
#3. Write SMART KPIs
SMART in business terms refers to Specific, Measureable, Attainable, Realistic, and Time-Bound. For example, “Grow sales by 20% by the end of this financial year and reduce Churn rates by 5% in 5 months.”
#4. Be Clear And Precise
Eventually, KPIs are built on raw data, and that’s why data literacy is important. Everyone in the organization should understand what KPIs are, how to work with data and make data-driven decisions that positively impact the overall business goals.
#5. Avoid KPI Stuffing
Having an abundance of raw data doesn’t mean you need to explore every known KPI. KPIs should be used for the most important goals. Avoid measuring unwanted KPIs to have clear plans and benchmarks for your business. Now that you know a great deal about KPIs, let’s understand KRA.
Everything You Should Know About KRA
What is KRA?
Key Responsibility Area or Key Result Area refers to a shortlist of measurable goals for employees in an organization. Each employee’s KRAs vary based on their job profile, experience, and expectations, such as:
KRA for a sales manager can be the total number of sales in a quarter KRA for an HR Manager can be attrition rate and employee satisfaction KRA for a Finance Admin can be cost-cutting and accounting
KRAs help employees better understand what’s expected from them and encourage them to work towards a destined goal.
Why Are Key Result Areas (KRAs) Important For Businesses?
80% of the consequences come from 20% of the causes, says the Pareto principle. Applying this principle in business, 80% of the value of your work comes from 20% of the work accomplished by you and your employees. Hence, you must understand and identify the results expected from each employee, i.e., 20% of your work. Once you have identified the key result areas, they hold the ability to drive your long-term success by aligning employees’ actions with your company’s strategic goals. Besides that, determining KRAs also contributes in many other ways to the organization.
Delegates work evenlyManages tasks and tracks performanceBoosts employees productivityPeriodic measurement of outcomesEnsures uniformity toward the company’s goals
Hurdles in Identifying, Understanding, and Using KRAs
Although developing good KRAs is no rocket science, common hurdles sometimes create problems.
Lack of Clarity: Creating KRAs that involve two parties – the employee and the employer. This sometimes creates confusion about the tasks and the results employees should focus on.Distractions: People often get distracted from doing daily tasks that seem important. But eventually, these tasks add very little value to the organization’s overall success.Delegation of Work: Superiors who create KRAs for juniors directly impose responsibilities rather than discussing them with the subordinate to get their input. This system of identifying KRAs often fails badly.
How to identify Key Responsibility Areas?
There’s no one-size for defining key responsibility areas. It varies with organizations, departments, and employees. And so, it’s important to identify KRAs and work accordingly. Here are a few parameters to keep in mind when identifying KRAs.
#1. Organizational Goals
Before assigning work and responsibilities, knowing a business and its vision is mandatory. Ensure that the candidates are well aware of what they will be working on and how their work will contribute to the organization’s long-term goals. It’s even better if you allow employees to take a stand and identify key responsibility areas for themselves (you can always add your suggested KPIs to their desired ones). As a result, employees would be more dedicated to their responsibilities. It will motivate them to hustle and work harder while repeatedly delivering their employee of the month performance.
#2. Educational Qualification
Another parameter to consider while identifying KRAs is the academic superiority of the employees or candidates. Not everyone has the same potential, and not everyone will deliver the same results. Hence, it’s important to evaluate candidates’ educational qualifications, former experience, skillset, and interests before assigning key responsibility areas. Once you have examined these things, decide what profile best suits them and outline their key responsibility areas. Bonus Tip: Recognizing employees’ strengths and adding them to their KRAs will boost their morale and motivate them to do better at your organization.
#3. Willingness to Accept KRAs
Despite considering the organizational goals and evaluating the educational qualification of candidates. Employees must understand and accept their KRAs willingly. Acceptance of key responsibilities by an employee will go a long way toward helping them perform better at your organization. However, you must understand that verbal communication lacks authenticity and legality in today’s environment. Therefore, ensure that every responsibility you discuss with an employee is entirely documented.
KRA vs. KPI: What’s the Difference?
KRA and KPI are two crucial metrics that help you to figure out whether your organization is moving in the right direction or not. Evidently, both the metrics are highly dependent on each other. So, let’s break down the key difference between KRAs and KPIs.
Basic Difference
KRAs focus on a set of expectations that are defined to employees. It provides details of all the assigned tasks to employees and what’s expected out of those tasks within a financial year. KPIs come into play to effectively gauge the development and performance of those KRAs towards organizational goals, Key performance indicators measure the performance of key result areas defined to individual employees or departments and determine whether the organization is progressing toward its goals. For example, An HR is asked to hire sales executives in a month. Now, let’s see the KRA and KPI dedicated to this task. Goal: To hire 10 sales executives in a month KRA: Recruitment and onboarding of top executives KPI: Number of executives hired. Hope you can now distinguish between KPIs and KRAs. We will descriptively discuss more such examples later in the article.
Roles
Key Result Areas play an important role in understanding how well the organization, its departments, or employees have achieved its overall objectives. It’s a framework that outlines the scope of the products or services offered by the organization. Whereas key performance indicators are quantifiable measures used by organizations to analyze the performance of their products or services. This, in return, helps the organization achieve long-term goals. KPIs are the most recommended business metrics to judge your organization’s success over time.
Examples of KRAs and KPIs for various job profiles
Sales Manager
Human Resource Manager
IT Managers
Wrapping Up
KRAs and KPIs go hand-in-hand as both are equally important for the success of your business. Welding your employees’ actions to the organization’s strategic goals can significantly increase your chances of achieving long-term goals. Using KRA and KPI in tandem will make your business a success. You may also be interested in how to create KPI dashboards.
