A strategic KPI system is the limited set of metrics a management team steers by, derived from the company's business model and its strategy, not from what the organisation already happens to measure. Structuring it along five dimensions, culture, business model, growth, function and finance, keeps both the strategic and the operational level in view. Building one runs in four steps, and most of the work sits in the narrowing down.
KPIs indicate how the organisation is performing, reveal opportunities, and signal the need for a change of direction. Without that derivation, a KPI set grows to include everything that is measurable and stops directing management attention.
Two inputs decide which metrics matter: business model and strategy
Two inputs identify the strategically relevant metrics: the business model, and the growth or corporate strategy.
Four questions define the business model
Who are the customers? What is the company's value proposition? What does the value chain look like, and what is the monetisation mechanism? Answering these four essential questions about a company's business model provides indications of the central metrics.
The strategy tells you which business dimensions to watch
The business model describes the current state; the strategy describes the target state and the path to it. In light of the strategy, some dimensions of the business model carry more weight than others, and in some cases the model itself has to be supplemented or changed. Those changes belong in the KPI set.
For strong growth strategies, particularly in a technology context, mapping a flywheel adds a further lens. Which processes and metrics reinforce each other? Those reinforcing components belong in the strategic KPI set.
5 dimensions of a strategic KPI system
Five dimensions structure the set so that it reflects both the strategic and the operational level.
1. Culture KPI
This KPI often makes the corporate vision or the central value proposition measurable. It captures the essence of the company that every employee should know. Netflix has defined its value proposition as "See what's next. Watch anywhere. Cancel anytime." The number of available series or films, or the availability of content across different devices, can serve as central cultural KPIs here.
2. Business model metrics
The KPIs derived from the four dimensions of the business model sit here. Metrics that do not change, or change only slightly, do not need to be in the set.
3. Growth metrics
These KPIs relate to the scaling factors and further factors that measure progress toward strategic goals. They do not necessarily have to be the same as those derived from the business model.
4. Functional KPIs
The various functions within the company such as marketing, operations, product, and others need their own KPI sets to make progress visible. These KPIs are defined on the basis of the company's key figures.
5. Financial metrics
Revenue, margin, and profitability are among the most important KPIs indicating the financial situation of a company.
The goal is not to capture every factor that bears on corporate success. The set should hold the factors that require management attention, and nothing else. Key factors, hence Key Performance Indicators.
Four steps from strategy to a working KPI report
We develop a KPI system in four steps that have held up across client work.
1. Business model and strategy
The first step is to restate the company's own business model and to build on the existing strategy work. Which metrics are important, and which are already being measured? We then review together what the strategic goals are and which business dimensions contribute to them. Should the business model change in the future? If so, that has to be reflected in the KPI model. From this first step, hypotheses for relevant metrics are derived.
2. Status quo review
As a second step, we conduct a series of interviews with key players in the organisation. This includes the management team, but also other influencers who perform important functions. What principles do they manage by? Which metrics do they look at? How do they think about scaling? The goal is to gain a consistent picture of the organisation and to create transparency: what is currently being measured, and what should be measured?
It is also worth thinking about what the core activities of the different departments are: is the marketing team primarily responsible for lead generation, or should it be driving brand awareness? Depending on the answer, a different set of metrics will be needed.
Based on the findings and on the review of strategy and business model, a series of workshops takes place. In these, we work together with the company to progressively narrow down which KPIs are truly important, until the absolute core metrics have been identified.
3. Development of the integrated KPI system
Based on the business model, strategy, and status quo review, the KPI system is developed along the five core dimensions.
4. KPI reporting and processes
Once the KPI system has been defined, it must be implemented in reporting. Together with BI and potentially a reporting team, the relevant dashboards are built and reporting routines are established.
The KPI questions we get asked most
What is a strategic KPI system?
A short list of metrics the management team actually decides on, rather than the full set a company is able to report. It is derived from two inputs: the four dimensions of the business model, and the strategy with its target state. What separates it from a dashboard is what it leaves out. Only factors that require management attention belong in the set.
What are the five dimensions of a KPI system?
Culture KPIs make the vision or value proposition measurable. Business model metrics come from the customers, the value proposition, the value chain and the monetisation mechanism. Growth metrics track the scaling factors behind the strategic goals. Functional KPIs give marketing, operations, product and other functions their own visible progress. Financial metrics cover revenue, margin and profitability.
How do you build a KPI framework?
In four steps. First, restate the business model and the existing strategy, then derive hypotheses for relevant metrics. Second, interview the management team and other key players on what they steer by today. Third, build the integrated system along the five dimensions. Fourth, implement it in reporting with BI and establish the routines around it.
How many KPIs should a company have?
There is no fixed number. The working test is management attention: a metric belongs in the set if a change in it would prompt a decision. Metrics that do not move, or move only slightly, can stay out. The workshops in step two exist to cut the candidate list down to the core.
How do KPIs relate to OKRs?
KPIs measure the ongoing health of the business. OKRs set what a team will change in the next cycle. A KPI that is drifting is a common starting point for an objective, and OKR cycles often use existing KPIs as reference points. In our OKR Impact Report 2022, 98% of companies reported better transparency around goals and performance after introducing OKRs.
