KPIs - You Can't Manage What You Don't Measure!

The right Key Performance Indicators (KPIs) reduce overwhelm immediately!

In this article, we explore the art of measuring the performance of your business by establishing powerful Key Performance Indicators (KPIs). In fact, you might discover your business success depends on it!

Learn about:

Why we should measure our business
What we should measure in our business
The impacts of measuring the wrong things
Lead Indicators
Lag Indicators

We will apply the goldilocks theory of not too much, not too little, but just right! Let’s put you in full control of your business. Powerful measures (KPIs) is a sure-fire way to reach your goals, achieve your vision, and establish the ability to pivot if the market changes. Additionally, you will feel the overwhelm lift immediately!

Read this article or listen to the episode

What is Performance?

According to the Harvard Business Review – Performance is a company’s ability to achieve its objectives and to profit from its resources. To this end, establishing Key Performance Indicators (KPIs) and ways to track them will produce data that should answer your performance questions about your business. However, establishing the wrong KPIs will generate the wrong behaviours and outcomes.

KPIs Matter!

Why Should we Measure KPIs our Business?

Knowing answers to your business performance questions enables you to identify the processes causing you the most issues, and fix them. However, choosing the wrong measures will waste your time. Additionally, if you are making changes in your organisation, you will be able to determine what changes are successful. KPIs put you are in the driver’s seat. Finally, you need measurements that make sense to your unique business, your unique processes, and your unique objectives.

What KPIs to Measure

There are unlimited things you could measure in your business, but only a handful provide you value. In summary, there are three apsects to measure – COST, QUALITY, and TIME. Keep it simple!

Here’s an example of each:

how much does it cost me to market and sell to each customer? A COST indicator
how long does it take me to fulfil a customer order? A TIME indicator
how happy are my customers with my services? A QUALITY indicator

You will notice the metrics we want to measure are posed as questions. This is the first and most important step of defining your Key Performance Indicators (KPIs)! Utlimately, you want to be able to look at your business model, determine the key elements to measure, and start putting appropriate measurements in place.

A Real Life Example of Wrong KPIs!

Here are a couple of stories to illustrate why measuring the right things is important.

Wrong KPIs Generate Wrong Behaviour!

When consulting to a large organisation, I found out they were paying a call centre based on the number of call answered. This inspired the agent to end the call as quick as possible to get the next call started. However, this was not meeting the organisations customer service mission.

Additionally, some agents were partially answering questions and encouraging the customer to call back so they could raise another ticket. More ticket, more money! Meanwhile, the customer satisfaction was not a consideration because the emphasis was on the number of calls! Therefore the end result was lots of calls fielded but no focus on solving customer problems. It was no surprise that when reviewed, the customer satisfaction score was extremely low!

We updated the call centre agreement and added a customer satisfaction measure (a QUALITY measure). A different incentive! The behaviour of the agents and the customer satisfaction score changed immediatley! As a result, the call centre still earned a similar amount but the results were completely different!

We have to measure the right stuff!!

Keep it Simple!

Previously, I’ve seen performance measurement specialists implement incredibly detailed measurement systems with all the bells and whistles. Formulas that make your eyes pop and charts as useful as a screen door on a submarine! The problem I’ve seen over and over is the data produced does not answer the questions the leaders have about their business. As a result, the leadership team remain in the dark to the issues and performance. Measurements in our business only have one job, to tell us how we are performing and to help us improve that performance. Anything else is just fluff and tickle!

Measurement Systems that Work

There are Two Types of Indicators

(1) LAG INDICATORS – an output measurement (what actually happened) EASY TO MEASURE. For example, the number of accidents on a building site.

(2) LEAD INDICATORS – an input measurement (they lead to something and impact lag indicators) HARDER TO MEASURE. For example, the percentage of people attending safety inductions on a building site.

The hard hat example demonstrates the relationship between the lead indicator and the lag indicator – cause and effect. The difference between the two is, a lead indicator can influence change whereas a lag indicator can only record the results of what’s happened.

Two more examples:
(1) “satisfied and motivated employees” (lead indicator) is a well-proven precursor of “customer satisfaction” (the lag indicator).
(2) “High-performing processes” (lead indicator) directly impacts “cost efficiency” (the lag indicator).

As you can see, there is a clear cause and effect relationship.

Don’t Only Measure LAG Measures (KPIs)

Most businesses typically measure lag indicators (results, outputs, or outcomes) because they are easy to measure. These are essential for charting progress however they are useless when attempting to influence the future.

Lead indicators are always more challenging to determine but are absolutely necessary to improve your business performance.

For example, if we want less accidents on the building site, it is assumed we need more people to attend safety inductions. To know if this lead indicator directly impacts accidents, we need to measure the people attending safety inductions and corrolate the two measures. Otherwise, this data tells us nothing.

– HOW TO CREATE KPIs –

If you are serious about working less, stressing less, and making more money, implement a business measurement system with the RIGHT KPIs!

Business Measurement Systems have two elements

LAG INDICATORS – BASELINE (to know our current business perfomance)
LEAD INDICATORS – ENABLE CHANGE

1. LAG INDICATORS – BASELINE

Every business measurement system needs a baseline. Without it, business changes cannot be confirmed as successful, you will be blind to your problem areas, and have low confidence on any decisions you make. Yep, it is super important!!

Identify your critical business outputs (lag indicators)

The easiest place to start is your business model showing your products or services that go out to your customers (outputs). Which of these are most critical to your profitability and business objectives.

Complete the following six steps to create your baseline KPIs

Each step contains three examples to illustrate the method applied to generate appropriate KPIs. It’s worth creating a table to capture these outputs as it will become a critical business document.

STEP 1 – Create a simple and relevant question

What is it you need to know about this output?
e.g. 1 – How do I know if my customer is happy with the product? (Quality)
e.g. 2 – how much profit do i make on this product? (Cost)
e.g. 3 – how long does it take to deliver the product to the customer? (Time)

STEP 2 – Determine the metric(s) you will measure

What is it you can or will actually measure?
e.g. 1 – a customer satisfaction measure from 1 to 5
e.g. 2 – the ‘sale price’ minus the ‘cost of sale’ for each product (as a percentage)
e.g. 3 – the time between date & time of order received to date and time of ordered delivered

STEP 3 – Can you currently measure the metric?

If you don’t have existing data, find a way to put a process in place to collect the data you need.

e.g. 1 – implement an online customer survey email as part of your product delivery process. This can include any elements you want to measure e.g. how did they find you, how do they rate your product 1-5, how do they rate your speed to delivery 1-5, etc? What do you want to know from your customer in regards to their satisfaction. e.g. 2 – find a way to capture your accounting data so you know the ‘cost of sale’ and the ‘sale price’ for each of your products.
e.g. 3 – find a way to extract the ‘time of order received’ and the ‘time of ordered delivered’.

STEP 4 – Ensure easy access to your data

Know where your measurement data is stored and how to retrieve it for review.
e.g. 1,2 & 3 – is the data readily available, collected into an excel spreadsheet etc?

STEP 5 – Deterimine frequency of review

Determine how often you will review it your metrics. Weekly, monthly, quarterly etc.? Implement a process to ensure you review these as planned

STEP 6 – Chart your performance

If you want to be really fancy, get your data into a simple chart, suitable to answer your questions about performance. You don’t want to be reading spreadsheet data to work out what it all means. Simply put, you want to know if your lag indicator improving or deteriorating, did any change in business processes make a difference. Etc.

RINSE AND REPEAT

And all you need to do is rinse and repeat this set of steps for your important lag indicators.

If you don’t have your Business Model clearly documented…
Listen to podcast Episode 4 – What is a busines model – how to define and document your business model. If you want help doing this and have 90 minutes you can invest in this process, book a session with me and let’s get it done! Email support@quickwinsforbusiness.com.

2. LEAD INDICATORS – ENABLE CHANGE

Once you have your LAG indicators baselined you can determine which indicator needs to be improved.

Lead indicators only become powerful when you find the right lever to pull that impacts the results that are most important to your business. This requires you to be clear about the business problem you are trying to solve, or the opportunity you are trying to maximize.

e.g. 1 – Are you wanting to improve your customer satisfaction?
e.g. 2 – Are you wanting to increase the profit on some of your products?
e.g. 3 – Are you wanting to decrease the time it takes to deliver your products?

Before you jump to any assumptions about which lead indicators you need to measure, please listen to Episode 03 – The secret to solving business problems. This will ensure you know what root cause you are solving so you can measure the right lead indicator.

Complete the following six steps to create your Lead Indicators

Each step contains three examples to illustrate the method applied to generate the Lead Indicators. It’s worth creating a table to capture these outputs as it will become a critical business document.

STEP 1 – Understand the problem

Look at your baseline measures and find the business problem needs to change.

e.g. 1 – if you have a customer satisfaction rating of 3.2 out of 5 for your products, you may decide this is not a good result and you want to improve it to 4.5?
e.g. 2 – if you have a profit of 20% for one product and the rest are over 40%, you decide you want to increase the profit to 40%.
e.g. 3 – if you find out your deliver is between 8-10 business days, and delivery time shows up as an issue on your customer survey. You may want to reduce delivery business days to 3-5 days.

STEP 2 – Find the root cause

Determine the root cause of the business problem.
Don’t work on the symptoms or what you THINK is the problem because this is a big time waster. Find the root cause through a structured approach. Listen to Episode 03 – The secret to solving business problems.

e.g. 1 – you might discover the root cause of the low customer satisfaction is ‘no tracking number on the product delivey’.
e.g. 2 – you might discover the root cause of the 20% profit is the ‘suppliers price of the key ingredient is too high because it is being purchased in small batches’.
e.g. 3 – you might discover the root cause of delayed delivery is the ‘orders are only being picked up once a week by the courier’.

These root causes point directly to your LEAD INDICATORS.

STEP 3 – Create a target for your lead indicator

Determine the result you want to achieve in respect to the lead indicator you want to measure.

e.g. 1 – All online orders have a tracking number
e.g. 2 – supplier price per item is reduced by 35% by purchasing in bulk
e.g. 3 – orders are picked up by the courier within 24 hours of order received

Step 4 – Change your processes

Determine what changes you need to put in place to get the results you need in the lead indicator.

e.g. 1 – ensure the operating system automates the tracking number into every customer email and sms notification.
e.g. 2 – update the inventory management process to ensure bulk orders are managed
e.g. 3 – update the distribution process and courier frequency to ensure orders are ready and picked up daily

Step 5 – Setup data collection

Implement a process to measure the lead indicator.

e.g. 1 – sample check emails and sms records to ensure tracking number is included
e.g. 2 – measure cost per item for the key ingredient
e.g. 3 – measure order received and courier pick up date and times

Step 6 Review results

Review your lead and lag indicators to see if the changes you made in your business processes are getting you the results you expect.

RINSE AND REPEAT

And all you need to do is rinse and repeat this set of steps for your important lead indicators.

IN SUMMARY

Firstly, start with your most important business outputs.
Secondly, work through the steps to establish your key lag measures.
Thirdly, identify your lead measures for each lag measure.
Finally, review your data frequently to manage the performance in your business.

A little note from Deb

Take it slow as this is a lot to think about. Keep it simple! KPIs are such a fabulous business tool, it is worth learning how to create them so they inform you about your busienss. The good news is, KPIs will take the guess work out of your business and ensure you are completely in the drivers set!!

Hope this Quick Win has given you some value. Please share this article or the Podcast Episodes with people you know and love.

To recap…

Identify your lag indicators – start with your critical business outputs.
For each lag indicator follow these steps:

Create a simple and relevant question about this output.
Determine what metric you are going to measure to answer this question?
If it is not already measured, put something in place to capture this info.
Know where your data is stored, get it into one place.
Work out how often you should review your data
Create a visual way to read it that makes sense

For each lag Indicator that is not performing to the level you want, follow these steps:

Determine the business problem you are trying to solve
Identify the root cause of the problem (this will reveal your lead indicator)
Decide the result you want to get for this lead indicator
Determine the solution you will implement to resolve the root cause and get the results you want for the lead indicator
Determine what and how you measure your lead indicator and put this in place.
Review your results of both your lead and lag indicators to determine if your changes are successful.

In Closing

Implementing KPIs is the best thing you can do to remove overwhelm, provide focus, and give you absolute certainty with every decision you make.

If you need support, reach out to support@quickwinsforbusiness.com and let’s get your measurement systems in place.

Join me online for more Quick Wins

If you are an active learner, and enjoy sharing the journey with others, join our private facebook community. I will be there actively moderating, sharing additional information, and fostering a community that is safe, supportive and powerful. Think of this as your online mastermind group. Come be a part of it!

See you there!