I’m a big fan of a good Key Performance Indicator (KPI)!
When used effectively they are a useful tool to gain valuable insights to the key drivers of your business.
This piece isn’t an academic paper, so I’m not going to go into a long-winded analysis of the best process to identify and structure your set of KPIs; I like to just share some of my experiences in the field.
Over the years, I’ve worked in some large matrix organizations. I’m over that now and I’m a reformed character, but there are some interesting insights that I’d like to share about how different audiences in the business view and interpret key pieces of information.
My background is working for a large multinational, I was a finance director for several years and I went on to run a business unit with an ongoing role in global acquisitions. Both those roles required a lot of reporting.
It’s not an underestimation to say that at least 25% of my time, usually more, was spent on the reporting cycle – monthly reports, budgets and the 5 year plan to the head office. Quarterly reviews with the Regional Manager, Group Finance Director and Business Unit Director. An annual review with the CEO. Plus ad hoc reviews with function heads or project managers.
Let’s not forget the audit and internal control reviews. I did say I worked for a matrix organisation!
That’s a lot of different people with different information requirements.
How to cater to the masses?
Head office needed standard format numbers ready to consolidate and report by region or business unit, but all these other managers wanted some insight into their own particular area of interest.
In the first few months I created and gave a standard presentation that I updated with the latest financial and market data and tweaked and expanded pages for the audience – more manufacturing data for the Chief Operating Officer (COO) for example.
The presentation ranged from 20 to 50 slides depending on the audience and time. But the presentation had a standard flow with safety first then from market to strategy and down through financial performance detail.
I used that presentation at least 20 times a year, sometimes a lot more. It was usually well received!
In the standard report pack to the office there was a set of KPIs which I included in that presentation – there were 10 KPIs with some good insightful data – margin, product mix, productivity, etc.
After several presentations I released that almost no-one was interested when I presented the KPI slide. Yes they recognised them as the set of standard company KPIs and yes there was some discussion if one of those KPI were outlying, but no real focus or interest.
Something had to change
After some thought I realised that the lack of interest in the KPI slide was for 2 reasons – firstly the KPIs were too broad.
Take for example margin as a % of sales. That’s a pretty fundamental indicator right there, but it’s quite superficial and needs a lot of context.
Let’s say you sell your product in the UK and make a 24% margin but you sell the same product in Europe for 40%.
Which is better?
Now if the sales price in the UK is £100 but in Europe is £50.
Which is better?
What about taking in to account your product positioning or market penetration strategy?
Which is better now?
In fact 'margin as % of sales' is almost useless in this context, you simply cannot compare regions and products.
I realised the second reason for the lack of interest was that the indicator wasn’t resonating, or wasn’t relevant to their area of interest. This is an interesting one.
After one review meeting with the Global Business Unit Manager, who I’d known for time, I asked her about the KPI slide and what she thought of it.
She informed that she didn’t find it very relevant.
She agreed with me– that “most of these indicators are too broad. I go to lots of counties and I see these numbers and indicators but they don’t give much specific information.” I said I thought she probably wants to see indicators that are relevant to the her business unit – maybe about a specific product ratio as % sales?
Her answer was quite surprising – “No, I want to know about your business. I know about mine, I crunch the numbers before I come to you. I know what your sales breakdown is. I want to know what makes your business tick. What are the most important things going on for you?”
The proverbial light bulb moment!
A KPI is pointless unless the person reading it finds it useful and interesting. Sounds obvious and it is.
Think about who is using the KPI and what do they need from it? And the simple answer to that is to make the KPI cut to the heart of your business – make these 3 to 5 indicators reflect the driving forces behind your business success.
I had actually been using a set of 5 KPIs in my business for the last couple of years.
As a management team we had identified what we considered to be the most important factors to achieve our business mission. I used them in our monthly meeting and we were pretty proud of them, so I restructured my whole presentation and put my business centric KPI’s front and centre. The second slide in fact!
The response was immediate and I found the KPI’s formed the basis of most of the content, direction and tone of subsequent discussions.
Here's those 5 KPIs
- % of technical product sales
- Number of project specifications
- Average delivery distance from plant
- Furnace utilisation rate
- Average production batch size
I don’t want to bore you with all the details, but the key point is, these KPIs cut to the heart of our business transformation strategy.
We needed to sell more expensive high margin products, closer to the plant (delivery cost was a major factor) and significantly improve our factory utilisation to drive down production costs.
A lot of other factors were important – safety, sales volume, total margin, cashflow, stock levels, brand recognition, staff turnover, customer satisfaction, to name a few, but the above KPI's were those which were critical to our success.
Looking back at those KPIs now two things strike me.
Firstly - they were very specific! But they needed to be and that’s the point – KPI’s should be specific to your business situation and goals.
Secondly - I remember just how important they were in everything we did. We were all mildly obsessed with them. As a management team we reviewed them constantly – they were on the front page of everything we did but also everyone else in the company knew about them and everyone asked about them. Even the CEO asked about our progress. They were interesting!
The key focus
Now I have just one goal when I help a client establish and monitor their KPIs.
If they don’t read anything else; if they don’t read the balance sheet, the P&L, the cashflow or look at my fancy graphs then I want them to be mildly obsessed with their KPIs.
They should be front and centre, top of the page, relevant and interesting!
In a future blog I’ll detail what makes a good set of KPIs, the categories to consider and the process you can use to define and successfully implement them in your organisation.
But if there's one key takeaway from today, it's that the right KPI's have the ability to transform and drive your business!
