At Third Road Management we have the honor of working with businesses and non-profits across a spectrum of industries, ownership structures, tenure and financial status. Through our experience we have gathered some wisdom that can hopefully be helpful to business leaders outside of our current network of clients. This is our venue to share.
For the purposes of this blog post we would like to cover the topic of key performance indicators, or “KPI’s.” There are many great resources (books, videos, blogs, etc.) out there that might be of additional assistance to you on this topic, but for our purposes we are going to try to keep this short to the main points.
Why does measuring KPI’s matter? Two simple reasons….
- KPI’s should represent the fewest number battles required to win the “war”. The “war” = the successful (and hopefully increasingly profitable) operation of your business. If you’re losing in achieving your KPI’s your likely losing the “war”.
- What gets measured gets done. If it gets measured regularly and discussed regularly it will get done regularly. In other words, if it is perceived to be important your team will make it a priority. If you don’t….they won’t.
So…how do you know which KPI’s to track? Here are some helpful guidelines:
- KPI’s should be measurable, not subjective.
- KPI’s should be measured against a benchmark, whether it be the prior year, budget/goal, or both. We recommend goals connected to your full financial budget.
- Less is More. There cannot be a ton of them. We recommend less than 5, ideally 1-3. This can be per department as discussed below.
- Focus on the cogs that move the wheel. For example, don’t just measure revenues in a sales department. Measure new customer inquiries, proposals written, closure rate and revenues produced, for example. Disregard anything duplicative or that ultimately doesn’t move the wheel.
- Make sure each department can influence their department’s KPI results. For example, the accounting department can’t influence the sales teams KPIs, or vice versa.
- Accountability to results should be measured regularly. We recommend weekly and/or monthly depending on the situation for each KPI.
- Don’t forget to apply measurable, meaningful KPI’s to all departments. The temptation is to just focus on sales, for example. However, the Purchasing department influences margins, the Production team influences productivity, the Customer Service team influences customer satisfaction, the Human Resources team influences staff retention and attraction, and so on.
- Invite your departments to participate in the creation of the KPI’s. Remember, allowing them weigh-in with their thoughts leads to buy-in.
So, in short, our guidance is to set a small number of KPI’s for each department in your business using the guidelines above, connect those KPI’s to the results you would like to achieve, and measure your progress regularly (weekly and/or monthly).
As always, if you need help creating and measuring KPIs, and connecting those to a full financial forecast, feel free to call us at Third Road. This is part of the value we provide in our Fractional CFO services.
Lastly, we would like to give some credit to two resources that have helped shape and form our perspective on KPI’s. The first is Patrick Lencioni’s book “The Truth About Employee Engagement” that lists “immeasurement” as one of the three signs of a miserable job, and “The 4 Disciplines of Execution” Chris McChesney, Sean Covey & Jim Huling, which is a tremendous resource on strategic execution. We recommend these resources if you would like to take a further dive into measuring results that move your business forward.