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Every tech executive and IT manager is constantly trying to figure out the best approach to make work more effective. Keeping track of key performance indicators (KPIs) is crucial to the success of any business, but can they turn out to be useful in running an IT software company, and are there alternative measurements?
What is a Key Performance Indicator
According to PricewaterhouseCoopers’ Guide to Key Performance Indicators, key performance indicators are factors by which the development, performance or position of a company can be measured effectively. In an even more simplified way: KPIs are a way to measure a company’s operational achievements compared to other businesses in the same sector and can be used to cover not only your overall business but your processes, employees and customers.
How can a company benefit from introducing KPIs?
Every company likes to know how they are progressing in a way that is easy to understand – for management and employees. While it might seem easy to measure employee investment by introducing ‘targets’ or other quotas, KPIs alleviate these problems. KPIs introduce objectivity in measurements and cause everyone involved to engage on a deeper level.
How to choose the correct KPIs for business?
There’s no strictly defined set of KPIs you should introduce to your workplace, as they vary between industries, performance criteria and focus. KPIs come in different types, for example:
- Financial metrics that concentrate on revenue and profit margins,
- Process performance measurements that focus on operational performance,
- Customer metrics that deal with client efficiency, like customer lifetime value and customer acquisition cost.
KPIs should focus on the metrics necessary for a specific business. Only a tailor-made approach enables the selection of the most well-suited ones, while omitting the introduction of unnecessary goals for the team. It might sound simple, but it’s not: you will choose certain KPIs for your software and different ones for your developers working on it.
How can you recognize a good KPI? For one thing, there should be a clear goal and capability to track efficiency, quality, timeliness and performance. Furthermore, the capacity to measure performance over time and the ability to provide valuable data are essential, according to data gathered by Hubspot.
Why is it better to introduce KPIs in small steps?
Another critical element to remember when introducing KPIs is simple: not all at once. Since there is no defined set of KPIs, you should only choose the essential ones. Avoid implementing KPIs that don’t align with the data needed to be collected – start with the three most important metrics and then slowly add new ones till there are seven or eight of them.
A maximum of seven or eight KPIs should be the goal. Otherwise, it’s easy to get overwhelmed with data without seeing the overall picture. It’s especially true, considering that collecting data, and operationalizing it, takes time. As DZone, a publication focused on programming, web development, and DevOps news, says:
Use metrics for good, not for evil
Useful Key Performance Indicators for IT professionals
Return on Investment (ROI)
Probably the KPI that doesn’t need an introduction. Many managers will choose this universal KPI as the first one to observe. ROI is measured by dividing benefits by the cost of investment. Thanks to this particular KPI, you can identify cost breakdown or compare expenses to the revenue.
Cycle Time, Release Burndown and Velocity
Three very software development-focused metrics. Cycle Time concentrates on the time the team spends working on a task. Release Burndown assists you in determining if the team will deliver the software by the deadline (release consists of sprints, usually more than one). Finally, Velocity focuses on the work the team can accomplish in a given time.
Lagging and leading performance indicators
A lagging indicator lets you measure something that has already happened. In IT, it could be, for example, time spent handling issues or server downtime and uptime. Conversely, a leading indicator is a measurable variable that predicts a movement before it occurs, like anticipating a shift in the economy. They are not always accurate and need to find a balance between precision, accuracy and time needed for signalizing changes.
Projects delivered on budget
Staying within a budget is always desirable and exceeding one is an indication of potential issues. By tracking the percentage of projects that stay on schedule, you can compare the initial budget against actual spending to figure out anomalies like overspending.
Server downtime and uptime
An example of an easy-to-understand KPI that has the potential to indicate broader issues. It’s typical to have some server downtime, as maintenance, updates and reboots take time. A problem occurs when the downtime is unexpected or prolonged.
Unsolved tickets per employee
Unresolved tickets mean there is an issue that is challenging to solve. Who is having problems? How often are they happening? This measure can also stimulate employees’ performance and healthy competition. Overall, tickets are KPI-friendly, as it’s easy for companies to evaluate them and derive value from them. You can present them as figures, percentages, or ratios. You can compare/analyze reopened tickets, total vs. open tickets, handle time, and much more.
Team attrition rate
Though often overlooked because ‘rotation is normal’, acquiring talents is one of the IT industry’s biggest challenges. So, discovering any faults on a company’s side and developing a strategy to keep talented employees will significantly reduce recruitment costs and benefit the rest of the team.
Can you treat employees’ trust as a KPI?
The great thing about KPIs is that they empower developers. Nothing boosts their self-confidence better than easy-to-digest numbers that confirm their skills. Unhappy and unconfident employees are a force to be reckoned with, but when everything is going well, trust in a leader increases. The question here is: can you improve trust?
According to analysis from Deloitte, most companies struggle to understand how to define, manage and measure trust. Trust is an abstract concept that some don’t prioritize building with stakeholders and staff. Deloitte argues that trust should be built from the inside out, placing employees in the center of attention. Companies with a proactive attitude toward building trust have a healthier work environment, as organizations with a high level of engagement report 22% higher productivity, according to an analysis conducted by the Gallup Organization.
Trust is the foundation of relationships between a company and its employees, developed through actions that demonstrate competence and the right intent. The effect is visible in capability, reliability, transparency and genuine care for the experience of others.
Using Objectives and Key Results instead of KPIs
Objectives and key results (OKRs) are goal-setting frameworks that act as an alternative to Key Performance Indicators or work together with them. OKR consists of two essential elements: The objective (a qualitative reminder of what you set out to achieve) and the key results (measurable outcomes needed to accomplish the objective). “OKRs allow anyone in the organization to see what other people are working on. Individuals can see the importance of their contributions to their team. Leaders can see how their objectives are being implemented by teams throughout their organization and initiate discussions to keep the work on track.” – as described by Jennifer Perret, Principal Group Program Manager at Microsoft. The Redmond-based software giant has been using OKRs with great success for many years.
North Star – one KPI to rule them all
As Ward van Gasteren puts it, “The North Star Metric (NSM) is a metric that a company uses as a focus for their growth.” It should be the single most paramount metric for the whole company. Well-known consumer-based tech companies use such an approach. For Slack, the NSM is daily active users, Uber focuses on rides per week, Airbnb on booked nights, Hubspot on weekly active teams and Spotify on time spent listening. The North Star Metric is easy to set, described in one sentence, and creates a clear vision for the whole company.
The challenges you face when applying metrics to a software team
Introducing metrics might lead a team to overly focus on them and work solely to meet them. For example, if you decide to measure the number of commits, they might split the code into smaller fragments to increase that digit. Measuring bugs can lead to spending a third as much time on testing – such an approach tends to be ineffective, especially if a team tries to build a reasonably working Proof of Concept as quickly as possible. One solution as an IT manager is to keep some KPIs to yourself, apply them to confirm whether the team is performing at a suitable pace and verify how your decisions impact them.
The second downside connected to the introduction of metrics and formalizing the process might be a drop in morale, as the idea of being judged based exclusively on numbers doesn’t sit well with some people. Imposing KPIs can lead to a feeling of control and might kill creativity in areas that are not so clearly measurable. One of the essential values of every team is the right chemistry and the sense of comradery – these, unfortunately, cannot be measured.
Utilizing Key Performance Indicators takes time
KPIs are a great tool to measure a company’s effectiveness and build self-confidence and trust within an organization. However, they’re not easy to introduce. First, you need to determine the areas and metrics to focus on, which data is most important, and then slowly scale up, if required. Patience is a virtue, as it may take up to twelve months to gather enough data to see a complete picture.
If you’d like to know more about how to upgrade your software development KPIs and apply agile management solutions that help you grow your business, get in touch by using this contact form.
About the authorKrystian Szczepanowski
Software Delivery Manager
Software Delivery Manager with an extensive technical background. Krystian is a Computer Software Engineering graduate, with over 10 years of commercial experience. Former Senior .Net Developer, who decided to shift into a managerial path and now leads teams for Software Mind Clients.