“What gets measured, gets done.” You’ve probably heard this many times. What this means is that you can set as many goals as you like, but if you do not set guideposts and track your progress, you’ll be no closer to reaching them than when you started.
Key Performance Indicators (KPIs) are the guideposts that let you know your business is on the right track. They provide a quantitative measurement of your company’s performance over time that can be understood by your management team, employees, Board Members, and potential partners.
KPIs go beyond financial statements and other metrics you may track in your company. Rather than measure overall health, they measure the progress your company is making towards specific goals. They help keep you on track and can provide an early warning sign if something is wrong.
KPIs are the key to successfully meeting your business goals, yet many businesses either neglect to use KPIs, or use them so poorly that they muddy the waters rather than providing clear navigation. Unable to choose the most important metrics, some businesses require managers to report every tiny detail – so that the most valuable information gets lost in a sea of data. Other businesses simply choose popular KPIs or the same KPIs as other businesses in their industry. But because those generic KPIs are not tied to their specific business goals, they don’t support success.
In this article, we talk you through defining smart KPIs and how to use them to spur business growth.
KPIs: Critical Business Metrics
KPIs are a metric that track how well your strategy is being conducted and therefore, they need to be carefully tied to your strategy, rather than plucked out of thin air. What does a good KPI look like?
A good KPI is –
- Closely linked to a specific business goal
Think of it like a health goal. Losing one kilogram a week may be a great goal for someone who is overweight – but if you are already at a healthy weight and exercising to tone your body, noticing that you’re losing one kilogram a week indicates a problem. That’s why there’s no such thing as a universal KPI. - Highly specific
Ideally, there should be a number involved. Instead of answering a question like, “Are our customers engaged?” a Key Performance Indicator should tell you what percentage (a specific number) of your customers open every email you send them. - Acritical measure of performance
It says so right there in the name – the KPI gives you a look into a key measure of success for your company. As an example, the amount of money you spent on the employee year-end party is a metric, but it’s not key to your business performance. You wouldn’t expect profits to double if the year-party budget doubled. - Benchmarked
Your yearly sales numbers are good to know, but, unless they’re benchmarked against last months and last year’s sales, they won’t tell you if your company is growing. A good KPI doesn’t stand on its own – it’s viewed against a backdrop that makes it meaningful.
Is every metric a KPI?
A metric is simply a measurement of something within your business. For example, the number of service visits made in a specific month, or the number of page views on your website. Some are merely interesting, while others – like the number of conversions your flagship product’s landing page gets – are quite important.
But what makes a metric a KPI is when it hits everything we spoke about above: It is a specific, critical measure of success linked to your overall business strategy and benchmarked against other factors to show progress.
It’s how you know you’re taking steps forward and not back.
How many KPIs should a business have?
As many as you need to support your specific business goals. You can have too few, and you can certainly have too many. The idea is to choose the best numbers to give you a snapshot of your business’ health whenever you need it.
KPIs should support goals across the entire business
Areas to consider KPIs include –
- Financial Performance and Budget
- Customer Satisfaction and Engagement
- Sales and Marketing
- Operations and Internal Processes
- Employee Productivity, Retention and Engagement
- Information Technology and Innovation
Defining KPIs with Leading and Lagging Indicators
The first step to setting good KPIs is to define your business outcomes. This could be something like a long-term growth strategy or a problem that needs to be solved. For example, if you run a heating and cooling company, you may notice that only a small percentage of annual maintenance customers purchase higher-margin services such as duct cleaning. If that current conversion rate is only 5%, you may set a goal of doubling that within the next year.
To learn whether you’re on the right track, you need to know your leading and lagging indicators.
Lagging indicators are “output” oriented. They’re easy to measure but difficult to directly influence. For our heating and cooling company, that would be the conversion rate.
Leading indicators are “input” oriented. They can be harder to measure but they’re easier to directly influence. For our heating and cooling company, that could be something like the number of outbound sales calls made to upsell recent annual maintenance customers on a duct cleaning.
Put another way, lagging indicators tell you whether you’ve reached your goal, while leading indicators tell you what you need to do to get there.
When using lagging and leading indicators to create KPIs, it’s critical that you establish a link between them. If not, you risk setting KPIs for employees that don’t result in more business growth – only more busywork.
SETTING SMART KPIs
KPIs work best when they are SMART. That is, when they follow these five conditions:
- Specific: Connected to a well-defined strategic objective
- Measurable: Associated with a numerical metric
- Achievable: Grounded in what’s possible
- Relevant: Making sense within the context of the business
- Time phased: Linked to a certain period
Linking KPIs to Business Strategy
If you’re having trouble defining KPIs, the problem may be that your business strategy isn’t well-defined. This requires analysing the problem, setting realistic outcomes, and creating an action plan of specific, measurable steps that will lead to those outcomes.
In going back to the example about the heating and cooling company, perhaps after analysing the problem, they realise that even though customers are told about duct cleaning services during the annual maintenance visit, most customers get busy and forget to make the appointment.
The company could come up with several strategies at this point:
- Technicians could leave behind literature explaining about duct cleaning, along with a coupon
- Technicians could be trained to schedule an appointment while on the service call and offer a discount for making the appointment that day
- Sales could call homeowners the week after their annual maintenance to ask how the service call was and set up a duct cleaning appointment
Remember, each of these are leading indicators. The company can directly control how many pamphlets are left behind, how many technicians make the ask and how many post-services calls the sales team makes.
The company can track any one of those things, and they can also track the overall conversion rate.
But which one makes a good KPI?
Tracking the overall conversion rate will help the business owner understand if duct cleanings are on the rise, but it won’t necessarily tell him which business strategy is working. Tracking the number of conversions during the annual maintenance calls or post-service sales calls will provide a clue as to what works best and help the business owner refine the upselling process even more.
It’s important to make sure each of these KPIs you choose to follow are aligned with one another.
Ask for a Different View of Your Numbers
Take advantage of your team’s expertise. Getting a different perspective on your KPIs can uncover solutions you hadn’t thought of or alert you to problems you didn’t see coming. For example, if you have a financial person in your business preparing your monthly KPI report, it is a good idea to ask them for a brief statement on what they conclude or draw from the data. Since their focus is on the numbers, they may see business results from a different perspective.
Along with asking for their conclusions, you should also ask if they have any concerns about the numbers or recommendations on how to improve results. You may be surprised at the insights you gain from having a different view of your numbers.
Getting started with KPIs – A Checklist
Getting started using KPIs in your business doesn’t have to be intimidating. Follow these steps:
- Get your team on the same page
Make sure everyone affected by the KPI – from front-line employees to upper management – understands what is being measured and why it’s important to the overall strategy. If the metric seems arbitrary, people may not be as compliant.
- Start with your most important indicators
Trying to introduce too many KPIs at once can be overwhelming – both for your employees and for you as you try to track your progress. Instead, start with the most important numbers for your company and add on from there.
- Start with the low-hanging fruit
Some data will be easier to collect than others. As you’re getting started with KPIs, start by identifying which data sets you already have at your disposal before implementing new reporting methods.
- Keep your reporting consistent
If you’re tracking sales calls per day one month and customer conversions per call the next you won’t have a clear sense of your company’s direction. Each KPI should be expressed by a simple formula (such as Adwords budget/new customer = cost per new customer acquisition). Be sure to calculate it the same way each time you measure it.
- Track KPIs in a central place
KPIs should be a snapshot of your business health, but they won’t illuminate anything if you’re constantly searching for them. Track all your KPIs in a central place such as a shared Excel spreadsheet or the dashboard of reporting software. Make it a place that all relevant parties can easily update and access.
- Set regular check-ins
For your KPI tracking efforts to make the biggest difference, you need to review them regularly. Set a standing meeting – either with your team or just with yourself – to review the results and plan for the next month. At these meetings, don’t be afraid to reexamine your KPIs to make sure they’re still relevant and in line with your overall business goals.
KISS KPIs Can Prevent “Yes, but…”
Getting employees and management on board with KPIs is critical. When your team feels ownership and has confidence in the KPI measurement process, they’ll be much more invested in hitting those targets. A lack of involvement and understanding can lead to “yeah, but…” situations. Consider using KISS (“keep it short and simple”) principle when assigning KPIs to staff.
Rather than overloading them with metrics, focus on at most five KPIs and make sure the reporting process is simple and clear. If these pre-conditions are not met, your staff member may say, “Yes, but I didn’t realise that was my responsibility,” or “Yes, but I don’t agree with how that KPI was measured.”
Make sure you have your staff on board from the get-go, and you’ll see better results.
To learn more about our industry leading proprietary Business Builders Blueprint® and how it can help you with KPI setting and measurement contact us at –
admin@thealternativeboard.za.com
Office – 072 742 6018