At a theoretical level, the case for KPIs (Key Performance Indicators) is pretty clear.
Think of it this way: you jump in your car, planning on a long drive to somewhere new. You then see the speedo, fuel gauge and Satnav aren’t working. I suspect you’d think twice before setting off?
Running a business, especially one where you’ve got a team of more than 7, is certainly not less complex than driving somewhere new – and many would argue it’s a good deal more so.
Which is why it’s surprising that in 12 years of being a coach and speaking to hundreds – perhaps even thousands of business owners – I can think of only a handful with a working dashboard in place – and even those had structural issues that limited their genuine usefulness.
Some people are put off by the term ‘Key Performance Indicators’. That’s no problem, call it whatever suits you, as long as you have something current which gives you more understanding about how your business – and its component parts – are performing.
Once you’ve made the decision to try it, there’s the inevitable problem of how and where to start.
If you avoid these 5 mistakes you may not have the finished thing – but you’ll have much more understanding of what’s going on than you have now.
Mistake # 1: The wrong starting point
Imagine you owned your business but someone else ran it for you. Now imagine you’re on a trip with no internet and the only thing you can access to help you understand how your business ‘baby’ is faring is a KPI dashboard.
If all that dashboard had was revenue and profit, how relaxed would you be? How relaxed would you be if those numbers started to flatten – or fall? Could you even spot that decline starting to happen?
KPI dashboards are the numerical answers to complicated / insightful / valuable questions. The type of questions where the answer is illuminating and then gets those brain juices flowing about what to do next.
A great KPI starts with a great question:
- Is our marketing strategy working better than it did last year? Is the R.o.I. (Return on Investment) improving?
- What’s a new customer worth to us – on average, over the full cycle?
- Are we getting better at sales? I.e. Are we converting our ‘fair share’ of prospects into customers?
- Do our customers love us? More than last year?
- Do our all of our customers know about all of our products / services?
- As a team / business, are we getting more productive / efficient?
- Can we handle more business without overheating?
- Are we losing control of our overheads? Are we ‘getting fat’ as a business?
A great question to ask yourself whenever you think about doing anything new in your business – be that creating a dashboard, or writing a business plan or holding more team meetings – is “what exactly do I hope to achieve by doing this?”
As Simon Sinek said, ‘Start With Why’. (This wasn’t exactly what he meant, but hey!)
Start by writing down some statements that sum up what you want from these numbers. This is what you want to know / be able to see / understand.
Then list the questions you want answers to. The stuff that causes you restless nights. The stuff that fires your ambition or enthusiasm.
Just the process of writing it down will make it clearer.
(The book Measure What Matters by John Doerr is a great read for this. You can find find a range of free info and tools at his website What Matters)
KEY POINT: KPIs should be the answer to a genuinely interesting question. Boring question = boring answer = no follow up action.
Mistake #2: Focussing on ‘plain’ numbers
A ‘plain’ number would be something like revenue or profits.
I understand that these numbers represent, in all probability, a fair chunk of your ambitions but in terms of designing a working dashboard (ie the starting point / trigger for avoiding pain or creating value) they won’t help you.
This is because it’s somewhere between hard and impossible to understand what the numbers are telling you because they don’t give you enough clarity on trends.
Let’s look at a very basic example:
• Revenue: £643k £714k £799k
• Gross Profits: £343k £391k £441k
• Net profits: £119k £125k £129k
All the numbers are going up. Happy days, right? Now let’s translate those numbers into a form that makes the trends much clearer:
• Revenue: £643k £714k (+11%) £799k (+11%)
• Gross Profits: 53% 54% 55%
• Net Profits: 18.5% 17.5% 16.1%
Do you see it?
We can see that at a headline (revenue) level business growth is ticking along nicely.
Also, the product / service is fine – not only is there no selling price / raw materials pressure but profitability is actually increasing.
BUT, Net Margins are falling. Given that revenues are up and pricing / raw materials are OK, this means the business has to be getting ‘fatter’ in terms of fixed costs. Not to the extent that would lead you to outright panic – but better to know now and address it than wait to find out from the accountant – or worse still your bank manager.
(Interested in getting detailed about cashflow? Check out this article on The 7 Levers to Generate More Cashflow in Your Business.
KEY POINT: When building a KPI dashboard use averages, percentages and ratios to make the trend clear and obvious.
Mistake # 3: Too many numbers
Many people I speak to get monthly report & accounts – and obviously everyone gets them annually.
But how much time do you spend analysing them? How many clear ideas do they give you about exactly what your focus should be and strategies you could bring to bear? My guess is ‘close to zero’ on all counts.
This isn’t a dig at accountants. They have a job to do and do it well, but the unavoidable conclusion is that the end product (report & accounts) is not something we rely on to steer our business ships.
Why? Partly it’s because the numbers are historic (some of the monthly data sets are 18 months old), they’re expressed as data rather than KPIs – and thirdly, there are just too many of them.
Remember we’re trying to design a dashboard. That’s the reason I chose the ‘car dashboard’ as the example rather than the cockpit of a 747. When you try to ‘focus’ on too many numbers, they’ll just swim around and be useless as a tool to help you drive your business forward.
As a rule of thumb, I’d limit yourself to 3 to begin with – and absolutely no more than 12 in your finished dashboard.
This will force you to focus on the most pressing priority for you right now. Get clear on that, figure out some strategies for improving those numbers and see the evidence come through. Then look to add others to your dashboard from a position of greater understanding – and confidence that what you’re doing is valuable.
KEY POINT: Start small, figure out how to make it valuable, build from there.
Mistake # 4: Not being aware of the unintended consequence
Apparently, in the time of British rule in India, the governor of Dehli became concerned about the number of venomous snakes in the area and put a bounty on cobra heads.
For a while it worked and the poor snakes met an untimely demise. Then the penny dropped. “If we breed snakes we can make some decent money.” The governor got wise to this and revoked the bounty, the snakes became worthless and were released into the wild. Oops.
This is an example of Goodhart’s Law which states that “When a measure becomes a target, it ceases to be a good measure”. I’d argue this is more so for economic indicators than business KPIs (I know, I’m a huge hit at dinner parties) but it is worth mentioning.
It’s not that KPIs become worthless – rather that human beings have a nasty habit of looking for shortcuts and gamifying the system. Perhaps this is most notable with salespeople, but I suspect it’s just a human nature thing.
So, for example, a client who incentivised his sales team to get more orders promptly flooded the system with small orders, thereby hitting their target but eroding margins and making everyone unprofitably busy.
It’s fine to incentivise more orders – as long as there is a counter-balance by incentivising the average size of an order. They’re both important.
You might think it’s a great idea to measure how efficiently you deal with clients. Best make sure you also have an accurate way of measuring customer satisfaction too.
You might want to measure team efficiency. It’ll be well worth measuring team engagement / happiness as well.
KEY POINT: Weaknesses have a habit of being a strength that’s been taken too far. Ask “what could go wrong if we focus on this” – and measure that as well.
Mistake # 5: Not making the link between KPIs and targets / forecasts
If you follow the first four steps you’ll have the makings of a really compelling and useful dashboard.
Now’s the chance to add the element that really brings it to life.
Colours.
One of the aspects of coaching I hadn’t anticipated is the sheer number of business owners who are to some degree dyslexic – or simply mentally glaze over at the first sight of a spreadsheet.
Even if you merely labour under the belief that ‘you’re not a numbers person’, you’ll thank yourself for making this 5th improvement.
Set targets & timescales
Firstly, you’ll need to put in place some targets for each of your KPIs for the future. What timescale you use for your targets will depend for a large part of whether you perceive yourself to be doing well or badly right now. And also, where you are on DiSC psychometric grid.
People who are doing well tend to be comfortable setting longer term goals – 3 / 5 and even 10 years on. If you’re struggling, you’ll probably feel more comfortable going for a period of less than 1 year.
On DiSC, a high I for example (optimistic, big picture, enthusiastic) will be OK with longer term goals / targets. A high C on the other hand (cautious, logical, precise) might find it hard to look beyond 3-6 months without feeling like ‘it’s all pie in the sky’.
Either is fine as long as you stretch yourself a bit.
Then define what is good, OK and ugly
Next set parameters for each KPI relative to whether it is on track to match, exceed or miss your targets.
For example, your current priority might be increased sales and your focus is on the Conversion Rate from prospects to clients as your KPI.
Let’s say you’re converting 25% right now and you know that all other things being equal (i.e. your prospects typically get 3 quotes) you ought to be converting 33%. That means for every 100 prospects you speak to, 8 are going to your competition when they should be yours. which equates to serious money.
Add some colour
You might then decide 33% and above is Green; 28-32% is Yellow and 27% and below is Red.
If you build up to the full complement of 12 KPIs and always look at this month and the previous 11, that’s a total of 144 KPIs. Even that is enough to start them swimming a bit.
By using the R.A.G. filter you can immediately spot which KPIs are tracking at a level which is good / great – and which ones need your T.L.C. and management time.
It’s hard to think of a better diagnostic time management tool than that.
KEY POINT: Colours stand out – make it obvious where you need to devote your resources of time & budget.
Summary
A bad KPI does, well, nothing. You look at it, shrug and get on with your day.
A great KPI illuminates an aspect of the business, focusses mental energy, inspires thought – and because of that is well worth the time and effort required to dream it up, track and review it.
Start with 2 or 3 numbers that zero in on whatever is most important for you.
Use averages, percentages and ratios to make comparisons (and therefore trends) obvious.
Set targets or benchmarks relative to where you want to be down the track.
Colour code the results to make the result hit you between the eyes.
Have fun applying this and if you get stuck, drop me a line.
