Key Performance Indicators

Good and Bad KPIs

Good and Bad KPIs

 
 
00:00 / 00:27:04
 
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When it comes to evaluating the performance of your company, you need to generate quality data and know how to make sense of it. It’s easier than ever to generate data, but the amount of data can sometimes be overwhelming. 

This is where your KPI’s, your Key Performance Indicators, come into play. When your leaders agree on what you will value, those indicators help you to filter and analyze the data you have generated. The only question is, which KPI’s are good and which ones are bad? 
On today’s episode you’ll hear:

  • How to define KPI’s
  • How to set good KPI’s
  • The importance of leading and lagging indicators
  • How to know which KPI’s to think about
  • The pitfalls of KPI’s
  • Tips on the best KPI’s

If you’re interested in learning more about KPI’s and the positive impact they can make on your company, then this is one episode you won’t want to miss!

Resources

Transcription of This Episode

The Gross Profit Podcast is your one stop shop on the path to profitability. Each week we share authentic advice on the positive practical steps you can take to make the company you love more profitable. If you’re looking for a positive plan to help you avoid common spending mistakes, control costs, and increase your profits, then this is the place for you.

I’m Ryan Cowden and this week we’re joined by James Kennedy and Garret Carragher. In this episode of the gross profit podcast, James and Garret discuss key performance indicators and how you can use them to improve performance in your business. When it comes to evaluating the performance of your company, you need to generate quality data and know how to make sense of it. It’s easier than ever to generate the data, but the amount of data can sometimes be overwhelming. This is where your KPIs, your key performance indicators come into play.

When your leaders agree on what you will value, those indicators help you filter and analyze the data you have generated. The only question is which KPIs are good and which ones are bad. On today’s episode, you’ll hear a robust definition of KPIs. A key performance indicator is a number chosen by your company that both measures your progress and guides your efforts. Next we’ll talk about how to set good KPIs. We’ll go step by step through the smart goal process and show how this process helps you assess your KPIs. Then we’ll discuss the importance of leading and lagging indicators. By looking at these factors together, you’ll be better able to understand cause and effect in your company. After that, we’ll talk about what KPIs you should be thinking about. The answer will vary according to your field, but the key factor here is determining your own success factors before setting your KPIs.

We’ll also discuss some common pitfalls of KPIs. Namely, we’ll go over three common traps people fall into when they start using KPIs and how you can avoid them. And finally, we’ll share some of our own favorite KPIs as examples for you to consider when doing this on your own. If you’re interested in learning more about KPIs and the positive impact they can make on your company, then this is one episode you won’t want to miss. There’s a lot of actionable advice in this episode. So grab something to write with you because you’re going to want to take notes. As always, I’ll be back on the other side to wrap up any loose ends. So without any further ado, here’s our conversation with James and Garret.

Hello and welcome back. It’s James Kennedy here, CEO at ProcurementExpress.com where we help hundreds of companies safely spend billions of dollars each year. Again this week I am joined by the secret CFO, Garret Carragher. Garret, how are you this week?

Very good James, very good. All excited today. Excited to be here but I know you are so… When your favorite subject is KPI’s and one that I know will drive any business and also excited about going to MicroComp next weekend, I think it’s all on. So looking forward to seeing Rob Mike at that should be really good. So far MicroComp Europe so it’s over in Croatia. So you might see some dragons from the Game of Thrones, you know?

Yeah, that’s true. It’d be good if I can come to his conference for sort of bootstrap tech founders and Garret and I are fans of those guys, startups for the rest of this podcast. They have enjoyed this content. You probably enjoyed that content, but you know what I enjoy even more than that? I think they’re amazing. Fantastic. It’s like programming people. Keep holding them account. So what’s a KPI?

What is a KPI exactly.

So KPI key performance indicator and it’s just a number that everyone agrees on that you’re trying to improve on your business. It might be a financial number, might be to do with your employee happiness or your customer happiness. It might be any, it might be a time that you are turning around support tickets.

It could be any, anything that you can run right down as a single number is a KPI and some businesses have a, they call it a true North metric, which is one metric which drives basically the whole company together. And what I like about KPIs is that if you have that True North number, so for example, in our case it might be a number of purchases which are successfully completed each week. Everyone, every department can kind of get behind that number and say, okay, this is what we’re trying to do. We’re trying to drive more successful purchases every week at line. So it makes it very clear in black and white whether you’re succeeding or not.And then you can break that down into further departments. So what are… How do you know whether you have got a good KPI or not? Garret.

A lot of people that might use, and this is what I use for a lot of kind of, when you’re setting an objective, it’s important to follow the SMART rules. SMART stands for specific, measurable, achievable, relevant and time limited. So we can just run through those in the context of KPIs because I think they’re super important. Otherwise you’re going to end up with KPIs which are really mismatch or meaningless and then you could even drive your business the wrong way. So if we can just run through those. First one is specific. So if you think about specific, what I like to always think about is what are many businesses which had the inventory is to think about somewhat, and this is a key thing because this holds up your cash. It ties up a lot of the businesses cash.

And the problem with inventory is it can become obsolete. It can get misplaced, which means that it gets stolen and different things can happen to inventory, it can lose its value, it can get damaged, you know, through maybe water damage or a fire. And this happened to a lot of businesses I’ve been in, so I’d really want to minimize your inventory. But if I said to you James, let’s… I want you to KPIs, I want you to decrease our inventory. That really is meaningless because it’s not specific. So what I need to say to you is what percentage or what value do I want to get our inventory down to. So it’s really by being specific. So it’s important to set your KPIs to initially to be very, very specific to so people understand what you’re talking about.

Then the second thing is of course that must be measurable. So it’s no point in saying, we’re going to increase our customer satisfaction rating by 10%. Like how do you measure what it was initially and how accurately can you measure what it’s going to move to, how frequently can you measure that? And do you have enough course verse even to get feedback from, to be able to measure that. So there’s no point in having a specific goal if that’s not also measurable. So you must also be able to have an easy and where you can measure what’s going on and tie it up back to specific goal you’re looking for.

Next it must be achievable. So, if I went to someone to say I want to decrease our inventory by 50% or I want our customer satisfaction rating to increase by 100% is this really achievable? So it’s difficult to know, it can be… This is something you might argue with the other person because obviously if I was talking to someone else, they’re going to look for an easier goal. They’re going to say, well, why don’t we decrease the inventory by 2% and you’re going hmm, 2% is that a lot? Is that best practice? What are we at currently? What’s the market at? If I look at other companies in our same industry what’s their best practice? How much inventory they are holding, can we, it’s important to be able to back up the stuff as well. Back up the numbers. There’s no point in saying, like I can think of companies where you could easily decrease inventory by 50% but I know this is right because I can back it up with the numbers.

Whereas in other companies, if you said to decrease the inventory by 5% that could be a huge goal for them. So it must be achievable. And then that must be able to be backed up by some kind of workings that people, everyone agrees with that those make sense. And I know where you’re coming from and okay, it is a challenge, but it is achievable.

The next thing we think about when we think about the SMART is it must be a relevant. So there’s no point in giving a reduction in inventory to someone who works in sales. And there’s no point in giving a sales target to someone who works in operations. You need to give the right KPIs to the right or right objective to the right person in the right department. Someone who can make it happen.

It gets more complicated when you get into the detail and you’re actually in a business and you’re taking the sales person, they should be able to hit a better sales target, shouldn’t they? So I dare the person to hit it, but maybe they’re not. Maybe it’s the sales director. Why are you giving it to the salesperson? Maybe the sales director need to lead his whole sales department to hit a sales objective. You know, hit a turnover revenue target or to hit a number of calls per day rather than give it to one person, the one sales person who maybe doesn’t have the resources or the authority to make that happen. So that’s very important.

We give it to the right person who can drive forward and make them be sure they’re responsible for a finding on an important one that some people might think only relates to projects or longterm things. It has to be time limited as well, so we think about the inventory again, we want it to decrease by 5% in three months. So it’s very, and I want you to work on it and you’re the person to do it. I need to make it achievable. So I’ll very specific. You can tie up by the person knows when they have to do it, what they need to do and who’s responsible. That is three W’s I always like to do in any meeting, I mean who, what and when. So I always know I can always tie stuff back. If you’re ever going meet James and no one is taking notes, the meeting might never have happened.

Well, you know what? It reminds me of often times we’ll be talking… Sitting around having a meeting and someone says, I’m going to…what does your goal for this quarter. And they come up with a metric or a KPI and then someone would say, well, is that SMART? We all know what that means. And then there’s normally an awkward silence like Oh no, actually maybe it’s not time bound or maybe I have no influence over that. Or maybe it’s not actually really measurable in the first place. And them it’s a quick way of running a ruler over your metric and making sure that it’s SMART. It is going to fulfill out of those things that it’s enough and everyone knows that go away and come out, put another number because it’s not going to work.

Yeah. And you said James, you have any good KPIs or good ways of thinking about KPIs that you use?

Well, I love this idea that I came across in a book called Lean Analytics and it talks about leading and lagging indicators. So to follow on the example of the True North metric of number of successful purchases each month that we track, each department kind of have an influence over that, but it’s really the number of purchases is, is a lagging indicator. All right, so it doesn’t actually cause anything like you have to create more successful purchases is broken down by each department differently. So and success team, that means that they are looking after the customers properly, they’re getting back to responses, problems quickly. They’re resolving issues or helping people set up their accounts or onboarding people fast. The faster the new customer onto the system, the faster they’re going to create more purchases, which leads into the True North metric.

And then the sales team, obviously the more they sell, the more purchases that will be on the system. And the marketing team again feeds into that because the more leads they can provide to sales, the more purchased or will be on the system. And what happens is that the one departments are the overall companies lagging indicator becomes a leading indicator for someone else. What’s leading and lagging? Well, let’s take the cost of the example of sales. Where you have your indicator is let’s say number of new customers or growth and new revenue per month, but that doesn’t, that doesn’t actually tell you what causes that. What causes that let’s say in a typical example would be the number of phone calls happening each day to customers or potential customers, and so your lagging indicator would be your new sales but your leading indicator might be well, how many phone calls are happening each week in order to actually contact prospects and drive those sales.

So yeah, what you can do then is you can see you can quickly, in a management major, you can go down and saying okay, how are all my lagging indicators or sales rate are supposed to be? If they’re not, then you drill down into that. You look at the leading indicators first and you say, okay, well the reason here is we’re not having enough sales is if we’re not doing enough sales calls and so on. It’s a way to get overwhelmed with all of the numbers all of the time. We’re just drilling down into problem areas.

Yeah, that’s a super idea. It’s super effective for a business, to make quick changes sometimes should be on top of the numbers, make stuff happen on a daily and a weekly basis rather than waiting for your management accountant to do your reports at the end of the month and find out, Oh God, we haven’t spent enough on marketing and that’s driven down our sales in the month.

Yeah. The postmortem as I call it and it kind of comes in with a worried look on his face is word expression on stage. That’s all. You’re not going to like this. What do you mean I’m not going to like it? I thought it was a great month. Oh, that’s not what you want.

That’s not what you want so you need to obviously switch account and say oh James that’s clearly the problem because anytime I go into a meeting, I have a smile on my face and people know, even if the numbers are terrible, I will make them happy and tell them the way forward as only a commercial accountant can. That’s very interesting. So we’ve talked about the KPIs, we’ve talked about SMART, we’ve talked about leading and lagging. Something we want to bring up now is what KPIs should you be thinking about for your business. When you think about KPIs for your business, you need to think about what area your organization must perform well and if it is to succeed. So that’s going to be very individual and very bespoke for every company. So when you think of your company, you have to think back and think, okay, where do we need to succeed?

So if you’re a customer facing business and well, our businesses, our customers obviously. But if you’re really dealing with them, like if we’re a service business and you’re dealing with them and on a on a daily basis, maybe it’s customer satisfaction is key. If you’re a business who’s just saying that sells out products and may be a food business who’s buying in or manufacturing and processing different products and just sending the merge, maybe it’s delivery and operational is where you need to succeed and get them out the door quickly to supply into the shops. And maybe you’re only doing a contract deal once a year. So it doesn’t really matter if your customer is happy or not. It’s once a year you did a contract deal and after that you just need to make sure you have it in the shops on time and sort of shop and sell it.

And that’s what they’re looking for because their key KPIs, the number of deliveries on time, number of stocks is sent back. No more damaged goods. That’s the kind of things that it’s important for a business like that. So, every company or every business must set their own critical success factors and from then they can derive the correct KPIs for their particular business. So that’s something they need to work on. Something you need to spend time on and overtime your KPIs will probably change as your business changes and you find out which are best ones. From your experience James, what makes an effective KPI?

Well, there’s one thing that you need that really cuts through the wheat and the chaff on a KPI, which is those days, KPI drive change will something differently happen. How different happen if the number’s off, if it doesn’t, you may as well not track it because that’s the point of it because it’s not driving change. There’s no purpose, it’s just keeping you happy. And I’ll give you an example of this because sometimes it can be for good reasons or bad reasons. So we over the last year had identified that part of our application was, it was slow, slower than we would like and by an index called ApTex, which is a sort of a technical index that gives the synoptic score of 8.5 which is okay, but it wasn’t as good as we wanted it. A good score would have been over nine and 9.5 and we tracked on almost daily, actually we tracked that number for a period of six months, came from 8.5, 8.6 ,8.79, 9.4, to now steadily at 9.5 for the last three months.

So it was driving change at the start in that we, our engineers started focusing on performance issues and making the app faster and changing the architecture and improving the servers that we used on the database and so on. And after a while to actually achieve that objective, and the goal has no, doesn’t drive change anymore. It’s just, it’s static. It’s good. It’s already world-class. Which is good. We have to keep an eye on it in case it dips down again. But there’s no point in tracking it if there’s nothing to be done just to issue a report that no action is taking on after note.

Yeah, that’s super important. You had to really make sure the KPIs review even the KPIs I don’t understand that are really driving the business forward.

So what are the big pitfalls with KPIs, I mean, can you go over the top of KPIs or where do people go wrong with them?

Yeah what now matters here if we think about potential pitfalls, number key areas that stand out for me. So first one is like not enough performance measurements are set. So if you think about it, there is a famous phrase, what gets measured gets done , I’ve actually seen this in a business I’m working in recently where so many employees might’ve been recording just to service businesses. Some of the business, some of the employees were recording all the time to the correct jobs. So did it be a job done? the employee wasn’t really putting in all their time. It should’ve been like 160 hours per month or roughly based on the number of weeks there is in a month, and the calendar monitor and they weren’t really recording enough hours. And that was it, that was a real problem for us because we weren’t attributing to correct costs, correct jobs, or understanding of profit.

So when you think about that, it’s important then, once we started measuring that and I said to the, you know, I was able to give feedback to the manager and basically say, Hey, you know, these people aren’t recording their hours. Suddenly their hours went up and they’ll recorded their hours correctly. So, that just shows you the effectiveness of what gets measured gets done. And that happens with the KPIs as well because when you’re thinking about a KPI, it’s important to set the right KPIs for the right people, what you want to do. So a sales target for your sales team that will happen to drive the sales forward. But understanding the right people, understanding the right product, understanding the right margin. So you need to understand what are the KPIs need to be in there.

Because if you’re not measuring the margin, what might happen with a lot of sales people and we all notice from experiences they will cut the cost as much as they can until maybe even making a loss. Because that’s not their KPI. They don’t care what a KPI for them is, is the number of sales cost, the number of sales closed per week or per month or per year. It’s the contracts and you need to really tie it up back in that not only are selling and the revenues going up but also that we’re making a profit on these particular jobs. Because that can get lost in the mix, that can actually land back to Ops and suddenly Ops are looking and they’re making the loss and then you find out suddenly, eh, you know, the sales team were sent the values or would be measured on making sales but not on where we are actually making a profit.

The next thing we might think about in pitfalls for KPIs is too many. So you can have over 20 KPIs. So again, for salespeople it might be number of sales calls, number of calls close, different areas like that, number of calls per region and number of calls per hour. Sort of adapt what you know are we ranking them importance, which is the most important there is it the number of calls per hour or number of calls closed.

So you need to think about that as well. So they might say, I’m hitting four to five of my KPIs. I’m hitting that target each day. But you might go back and say, yeah, but the one KPI, you’re not hitting is you’re not closing them. And that’s the one we care about.If you’re making calls, you’re making a number of calls every hour, you’re making calls to different regions. You making calls to new suppliers or leads we’ve given you, but actually you’re not closing any of them. And so even though you might have four or five KPIs being hit, when you actually look at it, it’s not driving the business forward. It’s not doing what you really want it to do. So it’s super important to make sure you write the KPIs. Even if you have a lot of KPIs, you rank them by importance and you understand which ones are key for the business to really drive it forward.

Again, another one might be, the wrong performance measurements, the wrong things being measured. So an example might be if we think of a luxury producer of cars or luxury goods, is it really that important that to keep an eye on cost? Well cost is important in any business but for luxury businesses, probably not as important because their differentiation is where they’re making their… Is their strategy. So, in some businesses cost is key. So if you think of businesses where, say Amazon or businesses like that where they’re selling products and like you’re going to them because they’re the cheapest, cheapest for a lot of stuff.

They have a lot of stuff there, but they’re also the cheapest really on everything and you’re buying your products off them. That’s what their strategy is. Where’s we think of somewhere like Mercedes Benz or Hermes the luxury provider of handbags. They’re not really focused on cost. People are going to them, they don’t want the cheapest handbag. They want the most exclusive handbag. If they go into Mercedes Benz they want the car that has status and also reliability. I suppose around reliability of a good tailored as well. Maybe not so much in recent years but they are really just looking for status on exclusivity and even looking at cars like Ferrari and that they don’t really care about the costs.

They are just cough up at 20 grand, are they going to to sell more? Probably not really. They’re going to really, the key thing for that kind of business is the exclusivity and that’s what they’re looking for. So-

So Garret, what would you say is the best… What was the best KPI you’ve ever deployed in a business?

The best KPI, one of the best KPIs was, we had a business, a service business, and we’re looking at number of customer complaints, open customer complaints. So when, when we looked at that, we could see if the customer complaint wasn’t a close within a certain period of time, we knew that this was going to mean reconciliation by the customer in the longer term. So it was key to have these customer complaints dealt with and closed off within a short period of time. And then we knew that that was going to keep our profit on our revenues high what about yourself, James?

Definitely the NPS score. So the NPS score is the net promoter score. It’s a fancy way of just surveying a set of people, it could be your customers, your employees watch how likely are you to recommend our product or service? And it’s a good question because it’s, if asked them, do you like our service or do you not like our service? That’s a bit vague, but are how likely are you to recommend the service indicates whether they think it’s good service because you wouldn’t recommend something you don’t like or think is good. But on the other hand it’s also specific because you think, well would I actually recommend sort of, so it’s a good industry standard on the best NPS scores. They range from minus numbers all the way up to 70 or 80 it’s not actually out of a hundred score it can go minus as well.

But it’s very useful because what you will do is, for example, every three months we ask our customers, how likely are you to recommend our product? People respond on that and we get a baseline then of how happy our customers are with the product. And we tracked that on a weekly basis. And then we know if that goes down, something’s open a stage of that mark. So if our NPS dips down below 30 we know that something’s up. We started to look at the success number of open success tickets or any problems. We start to look and see if we’ve released any engineering features I have problems with and we dig into us and say well what is this?

And also to be proactive about it. We also think if a score is always up, Hmm, hold on, what have we done for our customers recently? Now how can we actually make them a bit more delighted? Have we improved anything for them? Delivered a new feature with them, a special piece of content for them or sent them the best customer, something in the post to say thanks or you know, a range of different things and top score, that number, although it’s an intangible, it crystallizes into a black and white number which you’re can focus on. You were actually surprisingly sensitive in terms of if there are problems, oftentimes the NPS will be the first thing that we see and that’s enough we wrap it up. Dig into it.

Very good James.

Yeah. Okay, well that was great. I love this topic Garret. We could talk about it for hours.

I think there is a future topic down the line James, if it’s there, we could probably do another one on something on this area again and, it’s super useful you know?

Related to this is to Patented Fighter Pilot Program that we use in Procurement Express and it’s of somehow related to KPI’s. It’s plenty of quality system. It’s great. So I would love to talk to you about that, make you listen to me talking about our system as well as our listener, whoever. You can listen to or he or she can listen to it as well. Well it’s a very, very cool system for system for improving policy in almost any area area of a business and straight on it’s related to KPIs. Let’s do that next time Garret.

Cool.

All right, so from me James and Garret secret CFO. Until next time, we’ll see you then.

Thanks very much. Bye. All right, folks, there you have it. That wraps up our conversation with James and Garret. They shared a ton of valuable insights and advice today about the impact key performance indicators you can have on your company. We also shared some tools and resources, which will all be linked up in the show notes. Don’t forget to click on one of those links to get a free chapter from the book profit leaks by James Kennedy and Garret Carragher. I hope you enjoyed our conversation. Please consider subscribing, sharing with a friend or leaving us a review in your favorite podcast directory. Until next time, best of luck in all that you do and we’ll look forward to seeing you on the next episode of the Gross Profit Podcast.

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