Measure Measure Measure – We all know we should be keeping a close eye on our business performance. We’re probably familiar with the term Key Performance Indicators or ‘KPI’s’
But what should we be measuring? How do we strike the right balance between getting bogged down in measuring everything and not measuring enough?
In this blog Kevin explains how to go about getting it right.
We’ve also no doubt heard this:
“What gets measured gets done”
But we know we can’t do everything – therefore by definition we can’t/ don’t want to measure everything!
So deep down we know we should be reviewing things regularly – so we know we should be making a habit of it. But to make something a habit, we have to get started somewhere.
There are two types of performance indicators you need to think about – leading and lagging:
Lagging KPIs are results you measure looking back over the previous period – for example your annual accounts or monthly sales figures. They have already happened and we reporting and analysing to make sure we are in control and things don’t slip,
Leading KPIs are more about behavioural indicators that we hope or know will lead to the results we want to see – they will effectively lead to our lagging KPIs.
So if we are driving a car around a race track trying to get faster and faster, the lagging KPIs might be our lap times, sector times, corner speeds etc. Even if we can see these when we are out on track, they are still after we have driven the lap or a particular sector or corner. So they are lagging. The overall objective is a fast lap time and we can analyse and look for where we might be losing time – and perhaps identify a particular corner where we are losing most time. This helps us know where to look/ where to focus and we might conclude that we are braking to early and not taking the best line – perhaps we are clipping the apex too early leading to us running wide on the exit. So for the next session we might focus on this priority corner.
So now we can set ourselves a couple of leading behavioural KPIs that should improve our time around this corner and therefore our overall lap time. We want to brake later to carry more speed – so we can pick a braking reference point and then gradually extend it lap after lap until we reach the limit.
We want to apex later, to do this we want to start our turn in later. So again we can pick another reference point and extend it until we clip the apex where we think is right to give us maximum exit speed.
So we can track the leading KPIs (where we brake and where we start our turn in) against our reference point or our benchmark. We can then look at our corner, sector and lap times and see the impact it has had on our lagging KPIs or our results. Once we are happy that we have nailed this corner, we might move onto the next most important corner and repeat the process – whilst maintaining the improvement for the previous corner.
So there are a few lessons here that we can apply back to business:
- What’s our overall objective? In this case to improve our lap time/ go faster. We might set our self a specific time – or to knock a certain amount off our time this season
- What are the key lagging KPIs to check our results? In this case overall lap time, sector times and individual corner times (perhaps apex speed and exit speed). Note we are not measuring everything – we have picked a handful of things
- What is our priority focus for the next period aligned with the overall objective? So what is our focus for the next session in this case – we chose a particular corner where we think we can have the most impact and we worked on this corner until we got it right
- What are the few leading KPIs that we think will have the most impact on this corner? We chose braking point and turning in point to clip the apex at the right point
- We gave ourself reference points – or benchmarks if you like. Something to aim for in terms of braking point and turning in point – that we can check if we did it right.
- And we then came back to the lagging KPIs (the sector/ lap times etc) to check whether our behaviours have led to the desired results.
There’s a couple of other things worth pointing out here – firstly we are not doing this in isolation. Presumably we want our lap times to improve so that when it comes to qualifying for the race we will be higher up the grid and ultimately win more races or the championship. So knowing what our competitors are doing will help us to set a lap time objective. Knowing what our team mates are doing may help us to find out how they take a particular corner if we find we get stuck/ cant’ improve beyond a certain point – they might share their experiences and tips.
Secondly we have only focused on one aspect – the driver. There are a whole host of other things that will influence lap times – the power of the engine, the performance of the brakes, the handling of the car etc etc – just like in a business.
Thirdly, there are some things we need to measure that just keep the car running well – that maintain the performance and make sure we don’t have a disaster like running out of fuel half way round the lap. So we need some checks and balances such as fuel, water, tyre pressures and treads, brake pads etc etc – just like a business we have some basic checks we need to do.
So how does this translate to business then?
What we need are some leading and lagging KPIs for improvement (to achieve our plan of improving our lap time) and for maintenance (to make sure the car keeps running well).
Behaviours that will help us improve the business/ reach our goals – e.g. brake later and turn in later for key corners
Results that will show whether or not we are doing well against our goals/ targets – e.g. Corner, sector and lap times (entry, apex and exit speeds)
Behaviours that will keep the business running well – e.g carrying out post and pre-race vehicle checks
Results that will show whether or not the business is running well – e.g. tyre pressures at target level, fuel/ fluids at correct levels, brake pads in tolerance etc.
So how do we go about setting those?
A great place to start is listing out the key functions of any business – regardless of whether you have a person with the job title:
- Marketing including Customer Advocacy
- Operations – may include production/ delivery, IT, R&D
- Team/ Human Resources
- Leadership/ Strategy/ Head of Company
Now imagine you were employing someone new for each function – list down a maximum of 4 or 5 things you would expect them to be doing regularly that would tell you if they were doing a good job or not – these become leading ‘maintenance’ KPIs or behaviours. It might be that you want to have some sub functions within each of the above depending on your business – or you might have a particular process that drives your business that you wish to focus on – so include this.
Then next to each function, list down 4 or 5 results that you want to see to know if that function was under control – these become your maintenance ‘lagging’ KPIs
So for example let’s take customer advocacy. Leading behavioural KPIs might be
- Ensure all customers have at least an annual account review
- Ensure all customers asked for post project feedback
- Ensure all customers asked for referral/ recommendation
- Ensure all customer queries handled promptly
The results or ‘lagging maintenance’ KPIs to go with this might be:
- Net promotor score/ customer feedback score
- Customer referrals/ recommendations
- Repeat business/ sales from existing customers
Each of these can have a benchmark or target number put with them so that we can assess whether we are doing well or not.
So that’s a logical approach to getting to what you should measure for your business. Some of us will find that fits with the way they think – and some of us will find that difficult to get started with just because of the way we tick. Either way the trick is get started so put an entry in your diary for a 2-3 hour meeting at the end or beginning of each month with an agenda based around the 7 areas.
So that’s pretty much it.
I’ve kept away in the main from giving you prescriptive KPIs to measure – I’ve given you a framework to help you to work out what is important for your business rather than measuring something because someone else tells you it is important.
However, there is one area where there are some key things you need to keep an eye on whatever the size of your business – and that is your cash.
So for financial your maintenance KPIs must include:
- Cash in the bank/ Change in cash position from previous month
- Money owed to the business (whether you do it in days payable or invoice amounts outstanding/ number of days late) but know how much money you are owed
- Money the business owes – don’t forget VAT/ taxes
I would be surprised if you won’t want to also measure sales/ turnover, Gross Profit/ Margin and Net Profit/ Margin
If you use a package like Xero then this will all be on the monthly summary at a press of a button (assuming you have input the information during the month!).
If you don’t then you can still do this once a month – certainly the cash just by checking your bank account and all the transactions along with invoices raised and received. Do not wait for your accountant to do it for you – you should take responsibility for this. It is your cash at the end of the day!
If you’d like a starting list of KPIs then email firstname.lastname@example.org