Good KPI, Bad KPI? Is it time to interrogate your key performance indicators

Every business tracks numbers. From the sole trader checking monthly turnover on a spreadsheet, to the mid-size company monitoring a cost per acquisition to customer lifetime value ratio (CAC:CLV). It's safe to say that KPIs are part of the furniture.

The problem? A lot of those KPIs are working against you.

We see it regularly at Cutcher & Neale. A business owner comes to us with a clean dashboard, solid-looking metrics, and a nagging feeling that something's off. The data looks fine. Revenue is up. The team is hitting targets. But profit is flat, customer satisfaction is slipping, and nobody can quite explain why.

Often, the answer is in the KPIs themselves.

What makes a KPI "bad"?

These KPIs may be as simple as a top line monthly turnover, or as complex as a cost per acquisition to customer lifetime value ratio (CPA:CLV ratio).

However, all too often we see businesses setting KPI’s for their organisation or employees, that on the face of it appear to be robust, but could be improved to better measure business performance and identify strengths and weaknesses.

A bad KPI can lead businesses into a false assessment of performance or can create issues in assessing performance of an individual or team by incorporating factors they cannot control.

Here are a few examples we often see of bad business KPI’s, and an improved alternative:

Here's the simplest test: after looking at a KPI, do you feel the need to do anything differently? If not, it's probably not a key indicator of anything. It's just a number.

A few of the most common patterns we see:

• It measures output, not outcome. Tracking the number of sales calls made feels productive. But if those calls aren't converting, or if they're generating the wrong type of client, the metric is measuring effort rather than impact. The business objective isn't activity, it's revenue, retention, or profit.
• It creates perverse incentives. A customer service team measured on ticket resolution speed will close tickets fast. That might mean rushing through complex problems, or marking issues resolved before they actually are. Short-term results look great; customer satisfaction deteriorates quietly in the background. There are unintended consequences to almost every metric if you don't think through the second-order effects.
• It's a vanity metric. Website visitors, social media followers, app downloads; these numbers can look impressive without correlating to sales or profit at all. They're the kind of thing that goes in board reports and doesn't get questioned, right up until someone asks "so what's the ROI on that campaign?"
• Nobody owns it. A KPI without a clear owner is just a statistic. When performance drops, if the accountability is diffuse, the response tends to be a committee meeting rather than a decision.
• It only tells you what already happened. Lagging indicators like year-to-date revenue or last quarter's cost of goods sold are useful context, but they don't predict anything. A balanced approach combines lagging indicators (what happened) with leading indicators (what's likely to happen), and infers things like customer acquisition cost trends, pipeline conversion rates, or changes in retention rate. If your KPI set is all rearview mirror, you're navigating blind.
• It hasn't changed in over a year. If your KPIs look exactly the same as they did 12 months ago, there's a real chance they no longer reflect your business strategy or current market conditions. The business has moved. The measurement hasn't.

The problem with "set and forget"

One of the most damaging things a business can do is build a KPI framework, feel good about it, and never revisit it.

Markets change. Competitors shift. Your overall strategy evolves. What mattered in year one of growth push might be entirely the wrong focus for a business that's now trying to protect margin and improve profitability. Focusing on short-term metrics that made sense during a rapid acquisition phase can actually work against long-term goals once the business matures.

KPI management isn't a setup task. It's an ongoing process that should sit inside your regular business planning rhythm, be reviewed quarterly at minimum, and rebuilt from scratch whenever your strategy changes meaningfully.

How to build KPIs that actually work

The methodology matters less than the sequence. Most businesses get into trouble by starting with "what can we measure?" instead of "what are we trying to achieve?"

Start with your business objectives. Not the vague kind ("grow the business") but the specific kind: increase prices without losing volume, improve customer retention rate by 15%, reduce cost of goods sold by 8% over 18 months. From there, identify the critical activities that directly drive those outcomes. Then build metrics around those activities.

Here's the framework we recommend:

1. Define your objectives clearly - At both the business level and team level. Without clear goals, KPI selection is guesswork.
2. Identify the critical activities that lead directly to achieving those goals.
3. Set targets around those activities that would actually result in the business goals being reached.
4. Build metrics that measure performance against those targets.
5. Apply the SMART filter - Each KPI should be specific, measurable, achievable, relevant, and time-bound.
6. Remove metrics outside anyone's control - Teams shouldn't be held accountable for outcomes they can't influence. This is where bad KPIs often create genuine unfairness, and where the data starts getting gamed.
7. Track, review, and revisit - Not as a compliance exercise, but as a real management tool for making informed decisions.

A balanced KPI set will usually include a mix of financial metrics (revenue, profit, cost per acquisition, customer acquisition cost), operational metrics (productivity, quality, process efficiency), and customer metrics (customer satisfaction, retention rate, net promoter score). The right balance depends entirely on where your business is and where it's trying to go.

What a bad KPI actually costs you

Beyond the strategic risk, poor KPI management has real costs. Time spent collecting data that doesn't lead to decisions. Effort building reports nobody acts on. The damage to team morale when people are measured on things they can't control. The confusion when conflicting metrics send different signals about performance.

And then there's the bigger issue: if you're making investment decisions, hiring decisions, or pricing decisions based on KPI data that's misleading you, those decisions compound over time.

Bad KPIs don't just waste effort. They create a false sense of certainty that stops you from solving the actual problem.

A few questions worth asking right now

• Do your current KPIs connect directly to your business strategy, or did they come from a template?
• Are you tracking lagging indicators only, or do you have leading indicators that help you act before a problem becomes obvious?
• If a KPI moves in the wrong direction, do you know exactly what decision to make? If not, it may not be actionable enough to be useful.
• Has anyone on your team ever "worked the metric" rather than solving the underlying issue?
• When did you last change your KPIs?

For more on setting KPIs specifically for your team, see our guide: Our Top Tips for Setting KPIs for Employees.

Getting outside help

If you're not confident your current KPI framework reflects your actual business strategy, or if you've never had a proper review, it's worth getting a second opinion. Having an outside advisor look at your measurement system with fresh eyes often surfaces blind spots that are hard to see from the inside.

Our myCEO service works directly with business owners to build and review business planning frameworks, including KPI development, action plan design, and strategy sessions. If your numbers feel like they're telling you one story while the business tells another, that's usually a conversation worth having.

Further reading

For a deeper look at the unintended consequences of poorly designed KPIs, this piece from Change Factory is worth your time: Unintended Consequences of Poor KPIs. The examples are instructive and uncomfortable in the best way.

For a practical breakdown of how to identify vanity metrics before they mislead your strategy, Spider Strategies' guide on KPIs gone wrong is a solid reference.
Are your budget, business plan and KPI’s up to date and relevant, or do you just need a second opinion? Contact us today to see how we can assist you in developing or reviewing these items for your business.

The information in this article contains general advice only. It has been prepared without taking your personal objectives, financial situation, or needs into account. Contact Cutcher & Neale on 1800 988 522 to discuss how we can assist you in developing or reviewing your business plan, budget, and KPIs.