One of the things I enjoy about watching a good basketball game is the commentator’s use of statistics.
I’m amazed by the wide range of statistics used and the conclusions drawn in the commentator’s analysis of the game. Statistics, in many ways, really tell the story of how the game was won or lost. In a similar manner, business is a game, and in the “game of business” it’s just as important to know your numbers as it is with any sport. Simply put, if you can’t measure it, you can’t manage it or improve it.
To effectively measure progress in business, top companies around the world use Key Performance Indicators (KPIs). KPIs are quantifiable metrics linked to the results the business produces from the execution of its strategies, processes and systems.
Why are KPIs so essential?
KPIs provide an objective viewpoint of your company’s performance, relative to your business goals and to any other industry benchmarks. A business owner can walk through their business and get a sense for what is happening by listening to employees and seeing the business activities that are occurring.
However, this is not enough. Objective as you may try to be; you as the owner have certain biases and can only see your business through distorted lenses. If you haven’t quantified the results in your business, then it’s nearly impossible to be objective about it. Instituting KPIs provides this needed objectivity, allowing you to see the business as it really is and helping you to better predict issues before they become a crisis.
From your team’s point of view, good KPIs can also minimize subjective evaluations of their performance. As they say, “numbers don’t lie.” KPIs are usually presented in management reports and should be organized in a manner that provides the business owner with information that’s meaningful and easy to understand.
Some management reporting tools used for reporting KPIs that you may have heard of include a “dashboard” or “balanced scorecard.” These tools are common in many large organizations and have been adopted by smaller companies as well.
When developing management reports it’s a good rule of thumb to ensure that the data is collected for efficiency, but reported for utility. Collecting the data shouldn’t require hours of employee time nor present any significant hindrance to their performance. At the same time, the data should be organized and presented in a meaningful way to the business owner, whether it be through charts, graphs, numbers, etc.
The next key in developing KPIs is to understand each metric’s ideal range and then to look for the exceptions that fall outside the range. Those metrics will require attention and action.
Based on the result of the metric, you as the owner can then determine the strategies and activities needed to improve the metric.
As an example, let’s assume that you are tracking your lead conversion rate (percentage of leads that turn into customers) on a monthly basis. You notice that one month it drops by 10%, which is outside the range you desire. After asking questions of your sales team, you determine that perhaps the competition has become more intense for certain products or services. Now you must determine the strategies you’ll implement in order to raise that specific KPI.
Such strategies could be testimonials, more sales training, a stronger guarantee, etc. After implementing the strategies, the following month you will then determine what impact the chosen strategies have had upon your lead conversion rate.
Is there one universal set of KPIs for every business?
Unfortunately not! The key is to establish the indicators that are vital to your business and lead to important outputs. The KPIs selected should also be aligned with the goals and objectives of your business.
From a marketing perspective, some indicators could include the number of leads, lead conversion rate, average sale/client, number of transactions/client, etc. Some other general classifications where you should have KPIs include employees, customer satisfaction, production and productivity, market standing and competitive position, administration and financial indicators.
This list may seem overwhelming, but keep it simple and start with a few and add more over time.
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