How many times have you created a plan for your business, gotten to the end of the year and realized you fell short … by a long shot? Chances are more times that you care to admit.
Moreover, you probably spent a fair amount of time coming up with those plans … and on paper, they looked great. You may have even established some metrics and accountabilities and yet still you fell short.
It wasn’t that you or your people weren’t busy. You probably worked a ton of hours. However, at the end of the year, even though you and your people expended a massive amount of energy and engaged in an unbelievable number of activities (and meetings), you still didn’t achieve your plan. What gives?
Well, as you probably know, “What gets measured, gets done.” If you create plans, goals, initiatives, projects etc. but don’t create measurements which you then measure often (i.e. daily/weekly) chances are you won’t achieve those plans. It’s easy in the fall of one calendar year to create a plan for the ensuing calendar year. It’s an entirely different thing to stay on top of that new plan to ensure it’s successful execution … for 365 days!
The solution: enter, KPIs (Key Performance Indicators). KPIs, and more importantly, the right KPIs, are tools to ensure that the plan you create, actually gets implemented successfully.
Note: KPIs only work if they’re the right KPIs, measured frequently, with a person held responsible for them, who uses the data they produce (with their team) to make adjustments to current activities in order to deliver the results the plan calls for.
So, if KPIs are critical to the successful execution of your plan (i.e. to the growth of your business), how can you ensure you’re picking the right ones this year? The following four ideas will help you do just that.
I. Pick KPIs That Will Focus Your Attention on Successfully Executing Your Plan
If your goal is to ensure that you’ll successful execute your plan, that thought presupposes that you have a plan. In other words, forget searching for a list of generic KPIs that you can use to figure out what your KPIs should be. That’s wasted time.
There is no one generic list of KPIs that you or any business ought to use. The only KPIs that matter, are the ones that should matter to you (which would be those that help you monitor your ability to successfully achieve your plan).
For example, you could select any of the following KPIs
- Revenue earned per employee
- Cost per lead
- Click-through rate
- Page views
- Customer churn rate
- Call time
- Current ratio
- Return on Assets
- Utilization rate
- Lifetime value
- Stock turnover
- Sales per square foot
- Average Days of A/R, etc.
However, the only ones that should matter to you would be those that matter to your plan. So, looking at your plan, what are the critical few ideas that will drive the success of your plan? In my nomenclature I call those ideas, Growth Accelerators and Constraint Eliminators.
For example, if you’re an accounting firm and your write-offs are high, then you’ll probably want to use a KPI around write-offs (which could be either a percentage decrease or an amount reduced).
Note: in case you’re unfamiliar with professional service firms, write-offs are the amount that a firm writes off because they can’t collect or don’t think they can collect the amount charged, typically per hour. In other words, an accountant who does a job that takes five hours at their normal rate of $200 per hour would charge $1,000 on their books but only bill the client for $750, thereby writing off $250.
Or, let’s say you’re a SaaS firm and in order to scale, you need to reduce your cost per lead. In that case, you’d use a KPI around cost per lead (not reducing your write-offs or improving your EBITDA or increasing your average tenure per employee).
So, looking at your plan, what KPIs will help you monitor the successful execution of your plan (i.e. achieving your growth accelerators and constraint eliminators)?
II. Pick Only a Few KPIs, Not a Slew of KPIs
Several years ago, I was talking with a new client when the subject of KPIs came up. He was talking about his weekly staff meeting and said to me, “Every week we go over 54 KPIs during our staff team meeting.”
I stopped him right there and said, “What did you just say?” He said, “I said, ‘Every week we go over 54 KPIs during our weekly staff meeting.’”
I immediately asked, “That’s amazing. Tell me, how engaged would you say your people are during that part of your meeting?” He said, “Not very. It’s one of the things that frustrates me. Everyone should care about our business as a whole.”
I then said, “If you want to keep your people engaged, my solution is simple, Cut your KPIs to ten or fewer. And you’ll be amazed at how much more energy you’ll discover at your meetings.”
Here’s the problem with long lists of KPIs, when you’re “measuring everything,” you’re really measuring nothing. No one can keep up on 54 metrics consistently. It’s just too many. Our brains aren’t hardwired that way.
Now, virtually every business will have two KPIs that they’ll measure consistently—Revenue (or Sales) and Profit (or Net Profit or EBITDA etc.). That means you have somewhere between three and eight others to choose (and less is more here).
For example, you might choose
- Net Profit
- # of referrals asked (because you discovered your people aren’t asking for referrals and they’re your #1 source of new business)
- Quick ratio (because you have a cash flow problem that needs to be solved)
- Average Days of A/R (because you have a cash flow problem)
- # of marketing conversations per week (because your people are too focused on doing the work vs. getting the work)
Yes, there are a hundred other KPIs you could use, but those six KPIs could be business changing. And looking at six each week, that’s doable; 54 not so much.
So, what are the five to ten KPIs that you think could help you successfully execute your plan?
III. Pick a Combination of Leading and Lagging KPIs
If you’re unfamiliar with the concept, a leading indicator is one that will lead to a certain result. The lagging indicator is the result. For example, when I’m working with a church client, every church measures their success (at some level) based on their average attendance rate. So, let’s say they’re a church of 800 and they want to grow to 1,000 this year. The lagging KPI would be attendance.
The leading KPI would be a way of monitoring if they’re going to hit that number. In this case, the number of visitors per week might be a good leading KPI. Another good KPI could be “assimilation rate” (i.e. for every 10 guests, how many become regular attenders). If they want to grow by 25% (from 800 to 1,000) and they want to assimilate a third of their guests (i.e. an assimilation rate of 33%), then they would need to have 600 guests visit to increase their average attendance rate by 200 people per week.
However, since not everyone attends church every week, let’s assume two out of every three weeks, that would mean the church needs to get 900+ guests this year in order to grow by 200 people. Note: it’s actually worse than this because every church loses people each year (for a variety of reasons from moves to conflict to …) which means that our 900 guest number is probably more like 1,200+ visitors (actually, 1,266).
In other words, instead of staying focused on the result (the KPI of average attendance) it’s actually far more valuable to focus on the KPI that will drive that number, either the leading KPI of # of guests/visitors or the assimilation rate. Using # of guests per week, 1,266 guests divided by 52 weeks results in an average number of guests required of 24.3 per week. If a church is monitoring that number every week (the leading KPI), chances are far more likely that they’ll hit their attendance goal than if they simply keep monitoring the weekly attendance number (the lagging KPI).
In a more traditional business, a classic leading KPI would be the number of outbound sales calls made. The lagging KPI would be revenue.
A classic leading KPI for an online business would be click-through rate. The lagging KPI would be online sales.
Again, this isn’t an either/or issue. It’s a both/and. Using the example in point two, revenue, net profit, quick ratio and average days of A/R would be lagging KPIs, # of referrals asked and # of marketing conversations would be leading.
In general, lagging KPIs are easier to find (they’re often easily found in your financial statements). However, leading KPIs are usually more powerful because you’re measuring inputs over outputs.
IV. Pick KPIs That Are Relatively Easy to Measure
The reason why this matters is because whenever a number is difficult to obtain, it’s hard to maintain. For example, if you want to increase you customer satisfaction rates and the only way you know if you’re doing that is to send out a survey or call on X number of clients/customers to get that number, you won’t be able to manage that on a weekly or monthly basis. It’s just too hard to obtain.
On the other hand, if you’re trying to decrease your online shopping cart abandonment rate, that’s pretty easy to obtain. How many people clicked through to your sales page and how many of them didn’t buy. Your software can tell you that number (i.e. it’s easy to obtain).
In some businesses, measuring market share is relatively easy, but in most, it’s incredibly difficult to measure. In other words, it’s not uncommon for a business to say, “We want to increase our market share from 7% to 10%.:” If I ask them, “How will you know if you’ve achieved that?” the answer is usually, “I have no idea.” Why? Because most of us aren’t in big markets (like consumer electronics) where large firms measure market share. So, if you’re in a smaller market and you can’t easily find that number, don’t make market share one of your KPIs. It’s not worth it.
On the other hand, if you want to measure taking clients away from competitors, that’s something relatively easy to measure because you can ask in your client on boarding process, “What company did you use previously for …?” And then have your software collate that data for you.
So, as you look at your list of KPIs, are they all relatively easy to obtain?
Well, there you go. Even though there are a number of other concepts for helping you pick the right KPIs, these four should get you on the right path.
- Pick KPIs that’ll focus your attention on successfully executing your plan
- Pick only a few KPIs, not a slew of KPIs
- Pick a combination of leading and lagging KPIs
- Pick KPIs that are relatively easy to measure
And the good news is that if you follow these four guidelines, chances are you’ll not only pick the right KPIs, you’ll also accelerate the growth of your business.
To your accelerated success!
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