Building Your Business With The Use Of KPIs
Key Performance Indicators (KPIs) are the critical (key) indicators of progress toward an intended result.
KPIs provides a focus for strategic and operational improvement, create an analytical basis for decision making and help focus attention on what matters most. As Peter Drucker famously said, “What gets measured gets done.”
Managing with the use of KPIs includes setting targets (the desired level of performance) and tracking progress against that target. Managing with KPIs often means working to improve leading indicators that will later drive lagging benefits. Leading indicators are precursors of future success; lagging indicators show how successful the organization was at achieving results in the past.
- Provide objective evidence of progress towards achieving a desired result
- Measure what is intended to be measured to help inform better decision making
- Offer a comparison that gauges the degree of performance change over time
- Can track efficiency, effectiveness, quality, timeliness, governance, compliance, behaviors, economics, project performance, personnel performance or resource utilization
- Are balanced between leading and lagging indicators
The relative business intelligence value of a set of measurements is greatly improved when the Company understands how metrics are used and how different types of measures contribute to the picture of how the well the Company is performing.
KPIs can be categorized into several different types:
- Inputs measure attributes (amount, type, quality) of resources consumed in processes that produce outputs
- Process or activity measures focus on how the efficiency, quality, or consistency of specific processes used to produce a specific output; they can also measure controls on that process, such as the tools/equipment used or process training
- Outputs are result measures that indicate how much work is done and define what is produced
- Outcomes focus on accomplishments or impacts, and are classified as Intermediate Outcomes, such as customer brand awareness (a direct result of, say, marketing or communications outputs), or End Outcomes, such as customer retention or sales (that are driven by the increased brand awareness)
- Project measures answer questions about the status of deliverables and milestone progress related to important projects or initiatives
Every organization needs both strategic and operational measures to guide their business to success — and being sellable!
Strategic Measures track progress toward strategic goals, focusing on intended/desired results of the End Outcome or Intermediate Outcome. When using a balanced scorecard, these strategic measures are used to evaluate the organization’s progress in achieving its Strategic Objectives depicted in each of the following four balanced scorecard perspectives:
- Internal Processes
- Organizational Capacity
Operational Measures that are focused on operations and tactics, and designed to inform better decisions around day-to-day product / service delivery or other operational functions
Project Measures focus on project progress and effectiveness
Risk Measures which are focused on the risk factors that can threaten our success
Employee Measures that focus on the human behavior, skills, or performance needed to execute strategy
An entire family of measures, including those from each of these categories, can be used to help understand how effectively strategy is being executed.
Let's Break It All Down
Let’s say my business provides coffee for catered events. Some inputs include the coffee (suppliers, quality, storage, etc.), the water, and time (in hours or employee costs) that my business invests. My process measures could relate to coffee making procedure or equipment efficiency or consistency. Outputs would focus on the coffee itself (taste, temperature, strength, style, presentation, accessories, etc.). And desired outcomes would likely focus on customer satisfaction and sales. Project measures would focus on the deliverables from any major improvement projects or initiatives, such as a new marketing campaign.
Profit: This goes without saying, but it is still important to note, as this is one of the most important performance indicators out there. Don’t forget to analyze both gross and net profit margin to better understand how successful your organization is at generating a high return.
Cost: Measure cost effectiveness and find the best ways to reduce and manage your costs.
LOB Revenue Vs. Target: This is a comparison between your actual revenue and your projected revenue. Charting and analyzing the discrepancies between these two numbers will help you identify how your department is performing.
Cost Of Goods Sold: By tallying all production costs for the product your company is selling, you can get a better idea of both what your product markup should look like and your actual profit margin. This information is key in determining how to outsell your competition.
Day Sales Outstanding (DSO): Take your accounts receivable and divide them by the number of total credit sales. Take that number and multiply it by the number of days in the time frame you are examining. Congratulations—you’ve just come up with your DSO number! The lower the number, the better your organization is doing at collecting accounts receivable. Run this formula every month, quarter, or year to see how you are improving.
Sales By Region: Through analyzing which regions are meeting sales objectives, you can provide better feedback for underperforming regions.
LOB Expenses Vs. Budget: Compare your actual overhead with your forecasted budget. Understanding where you deviated from your plan can help you create a more effective departmental budget in the future.
Customer Lifetime Value (CLV): Minimizing cost isn’t the only (or the best) way to optimize your customer acquisition. CLV helps you look at the value your organization is getting from a long-term customer relationship. Use this performance indicator to narrow down which channel helps you gain the best customers for the best price.
Customer Acquisition Cost (CAC): Divide your total acquisition costs by the number of new customers in the time frame you’re examining. Voila! You have found your CAC. This is considered one of the most important metrics in e-commerce because it can help you evaluate the cost effectiveness of your marketing campaigns.
Customer Satisfaction & Retention: On the surface, this is simple: Make the customer happy and they will continue to be your customer. Many firms argue, however, that this is more for shareholder value than it is for the customers themselves. You can use multiple performance indicators to measure CSR, including customer satisfaction scores and percentage of customers repeating a purchase.
Net Promoter Score (NPS): Finding out your NPS is one of the best ways to indicate long-term company growth. To determine your NPS score, send out quarterly surveys to your customers to see how likely it is that they’ll recommend your organization to someone they know. Establish a baseline with your first survey and put measures in place that will help those numbers grow quarter to quarter.
Number Of Customers: Similar to profit, this performance indicator is fairly straightforward. By determining the number of customers you’ve gained and lost, you can further understand whether or not you are meeting your customers’ needs.
Customer Support Tickets: Analysis of the number of new tickets, the number of resolved tickets, and resolution time will help you create the best customer service department in your industry.
Percentage Of Product Defects: Take the number of defective units and divide it by the total number of units produced in the time frame you’re examining. This will give you the percentage of defective products. Clearly, the lower you can get this number, the better.
LOB Efficiency Measure: Efficiency can be measured differently in every industry. Let’s use the manufacturing industry as an example. You can measure your organization’s efficiency by analyzing how many units you have produced every hour, and what percentage of time your plant was up and running.
Employee Turnover Rate (ETR): To determine your ETR, take the number of employees who have departed the company and divide it by the average number of employees. If you have a high ETR, spend some time examining your workplace culture, employment packages, and work environment.
Percentage Of Response To Open Positions: When you have a high percentage of qualified applicants apply for your open job positions, you know you are doing a good job maximizing exposure to the right job seekers. This will lead to an increase in interviewees, as well.
Employee Satisfaction: Happy employees are going to work harder—it’s as simple as that. Measuring your employee satisfaction through surveys and other metrics is vital to your departmental and organizational health.
Interestingly enough I'm fascinated by the number of business owners who DO NOT use KPIs. In the past week alone, I've met with 'future clients' who could not explain where most of their new business comes from. A Retail company with a strong online presents has no idea where their website traffic comes from. A Travel agency couldn't tell me the conversion rate from their marketing campaigns. A Home Service company couldn't explain what percentage of their business is by referral.
If you don't measure it, you can't improve it.
Create a Business That Can Thrive Without You
You have worked hard to build your business and make it what it is today. It is essential to seek professional advice and support to maximize your return when you sell your business.
Author - Joe Griffith
I've been consulting with clients since the 90's in various capacities. I launched my first start-up when I was 25 years old. I since built and sold 4 start-up business since then. It's only been in the last 8 years that business owners have paid me to develop systems and procedures for their business.