Confused by key performance indicators (KPI)? Learn what they are and which KPIs are important to your business for current and future success.
Most modern business owners of any enterprises of any reasonable size ought not to be hands-on to daily events. Their business is surely managing high-level relationships and charting the way forward for their firm. Unfortunately many of them remain hog-tied by daily trivia, and spend hours paging through detailed accounts and fighting fires. If this sounds like you too, then you really do need to take a step back and ask yourself whether you are doing what a business owner (or senior business manager) should do. Key Performance Indicators (KPI’s) are a way to blend the need to remain in touch with the greater imperative to focus on key factors for success.
A well-conceived KPI (Key Performance Indicator) measures an activity that is a vital gear in your business machine. It fulfils two vital functions – either you are doing well in that respect and may make your golf appointment, or you need to take urgent remedial action instead The Pareto Principle applies to KPI’s at least as much as it does to anything else – measure the 20% of activities that really do make a difference, or get swamped in detail once again.
There are at least as many theories about how to derive Key Performance Indicators as there consultants with ideas about key factors for success.
In the interest of simplicity I prefer the following two-pass subjective process over six month’s of an expensive consultant’s time.
If you were away from the office on a holiday, which five – that’s right just five – summary reports would you like to receive on your phone.
What would happen to your business if these five reports were outside the normal band? In other words, are you worrying about the right things in the first place too?
I’m surprised how many managers list the office phone bill among their five worry beads, and throw a tantrum when it shoots up. I bet they wouldn’t worry if orders for invoice books increased, although in both cases I should think sales figures would be a better indicator?
A good set of KPI’s should monitor all departments in a company; if for no other reason than they should all be pulling their weight. Here is a simple checklist I like to use to get the ball rolling:
- Marketing – cost per lead, total leads, new customers
- Sales – lead conversion rate, average sale value, total order value paid
- Operations – output value / hour, returns, order backlog
- Finance – actual versus budget, profitability, debtor book
Every firm is different, and there are many more possibilities besides these few. I advise my clients never to delegate responsibility for ensuring that key factors for success are reported punctually and in the level of detail and the format required. It is equally important to regularly discuss key performance indicators with subordinates concerned to ensure that the drivers receive their continuous attention. When you focus on the things that matter in your firm, then your KPI Set (and your business profitability) will steadily improve.
John Standaloft is a business coach with a lifetime of business experience. He is also a master practitioner of neuro-linguistic programming, hypnotherapy and time-line therapy. Contact him in the event that you would like to explore in confidence what business coaching might do for you.