KEY PERFORMANCE INDICATORS (KPIs)
“If you can’t measure it, you can’t manage it”
– Peter Drucker, American Strategy Guru & Author
Ahhh. KPIs, the acronym that can create work nightmares. Ok, take a deep breath, release the tension, and wipe your mind clear of any negative thoughts you have of KPIs. Let’s get one thing straight, KPIs are really important to strategy.
What is a KPI?
KPIs are the abstracted metrics from which you can diagnose opportunities, architect future goals, and manage the progress of an organization. Understanding, developing, and critical the right KPIs is a critical component of the strategy toolkit. Organizations that do utilize the power of KPIs to their fullest have a constant pulse on the organization’s strengths, weaknesses, progress, and opportunities.
Many goals within an organization are represented as key performance indicators or KPIs, core measurements of performance for an organization, department, team, or process. You probably have your own KPIs that you are trying to achieve. As a strategic leader, much of what you do, day in and day out, is focused on executing actions towards KPIs. And, so let’s spend a little bit of time going over KPIs because there is a bit of art and science to creating and managing them.
KPIs are meant to be ongoing measurements that are periodically measured and assessed. You can think of KPIs similar to statistics in sports, such as a baseball team’s win-loss record, runs per game, batting percentage, and earned run average. Below are some examples of typical high-level KPIs across an organization:
– Sales & Gross Margin
– Financial P&L, Balance Sheet, and Cash Health
– Operating Expenses
– AP and AR
– Actuals to Budgets
– Performance to Targets
– Total Sales & Gross Margin
– Sales per Sales Team Member
– Targets to Prospects Ratio
– Prospects to Customers Ratio
– Follow-on Sales
– Customer Retention & Attrition
– Total Volume in each stage of the Sales Funnel
– $ Per Customer
– Market Share
– Unaided Awareness
– Lifetime Customer Value
– New Customer vs. Attrition
– Return on Ad Spend (ROAS)
– Net Promoter Score
– Customer Segment Breakdown & Growth
– Inventory Turns
– Out of Stock Rate
– Back Orders
– Cost Per Shipment
– Defect Rate
– Interactions Per Day
– First Interaction Resolution
– Abandonment Rate
– Resolution Time
– Unique Visitors – New vs. Return Visitors
– Bounce Rate
– Duration Per Visit
– Cart Abandonment
– Sales and Avg. Sales per Transaction
– Review Score
– Employee Morale & Engagement
– Benefit Costs per Employee
– Sales per Employee
KPIs typically represent a high-level abstraction of the output of the core processes of a department or organization. Often, the strategic goals of a department or organization are represented as improvements in KPIs. And, the improvements in KPIs typically assure an organization that activities are having a positive impact, while degradation in KPIs can signal a potential issue that needs to be addressed. Below is an example of a high-level sales process and the typical set of KPIs a sales team manages.
Give the above visual a quick review. You can see I’ve taken the sales funnel for a B2B organization, and built KPIs for each process stage gate. While KPIs can be created at the total sales team level, they can be even more informative at the individual level or the product or service level.
Another important consideration to think through with KPIs is leading versus lagging KPIs. With the sales team example, one of the primary outputs of any sales team is sales and gross margin. But, sales and gross margin are lagging KPIs, since they come at the end of all the activity by a sales team. Some leading KPIs that will create sales and gross margin are KPIs upstream in the sales process, such as the number and size of targets, total number and value of prospects, the ratio of prospects to targets, and customers to prospects. If the leading KPIs are positively trending and healthy, then the lagging KPIs of sales and gross margin should be better in the future.
While I was COO at Goal Zero, I came across a few important leading KPIs that helped us manage the business. We were the leader in consumer portable solar power solutions. As we looked at forecasting our sales three months to a year out, one of the best KPIs was the growth of actual sales in the stores of our retail partners, such as REI and Bass Pro. We would analyze actual sell-through in the stores, and then use the data as one of our key inputs into our sales forecasting process. Another example of a leading indicator of returns and warranty issues was our quality inspection KPIs at the factories. If we saw our quality go down as products came off a line, it impacted our quality scores, reviews, and return and warranty rates six months to two years down the road.
How do you build and manage the right KPIs?
KPIs should flow out of your strategic planning process. They should be the key metrics tied to your organization or team’s vision and goals. Here are the key elements to think through with KPIs:
Choose the Right KPIs
It always starts with the right KPIs. What is your company’s strategy to drive customer value and competitively differentiate? How do the goals of your organization or team support the strategy? What KPIs reflect those goals? Try not to have more than 4-8 KPIs at any level or department of the organization.
Invest in Clean Data
How difficult is it to get the necessary data to build KPIs? Hopefully, you have good systems that have built-in dashboards, but too often, this isn’t the case. While it is great to have automated KPIs, often organizations have to, once a month or quarter, do ad-hoc analysis to calculate the KPIs. Regardless of the systems, it is important, as a company grows beyond 20-30 people, to consider hiring a part-time or full-time database analyst, who knows how to extract, transform, store and report on the data necessary for your KPIs. Otherwise, often the best solution is to use SaaS (Software as a Service) platforms for your organization’s technology needs, since SaaS platforms are typically simple implementations, easy to manage, and have a lot of the typical KPIs and metrics built into the platform.
Optimize the Frequency
You create KPIs to help understand progress, performance, and issues and inform decision-making. There is the old sports adage, “pay attention and stop looking at the scoreboard.” While some KPIs you need to see once a day or week, most should be done once a month, or even once a quarter. Unless you are going to act on the data, you don’t need to look at it all the time. In retail, I’ve seen companies report on sales and gross margin every single hour. It makes no sense since the decision the team made months ago regarding merchandise and advertising was impacting the hourly KPIs. Looking at KPIs too often can create pretty bad reactionary decisions. You have to let KPIs breathe and establish a trend, before throwing the kitchen sink at a KPI.
Create Broad Access
Typically, giving broader access to KPIs is better than restricting access. The players playing the game need to see the scoreboard. Doing email snapshots or giving employees access to a business intelligence tool are typically the best ways to disseminate KPIs.
Enable Drill Down & Dimensionalization
The best implementations of KPIs are ones built on good business intelligence platforms and tools, with the ability to drill down into a particular KPI and dimensionalize the KPI by time, product lines, customers, or other important dimensions.
Automate Exception Reporting
Another way to significantly increase the value of KPIs is to implement exception reporting, which involves triggering an alert, often by email, when a certain KPI hits a low or high threshold. Most KPIs are like your body temperature. You don’t need to know your temperature all the time, only during those times when it spikes high or low, indicating a potential illness or medical issue. The same with KPIs, in certain instances, when a KPI spikes high or low, it can be a sign of an issue that needs to be addressed. The best practice is to create exception reports to let the important stakeholders know something is out of whack.
DOWNLOAD THE KPI POWERPOINT WORKSHEET
To get you going on improving your KPIs, download the free and editable KPI PowerPoint Worksheet.