Using KPIs to Faithfully Shepherd Your Business
Because execution is often harder than strategy, leaders competent in strategy may be frustrated by execution. Good intentions don’t produce positive outcomes if we fail to implement a consistent, systemized approach informed by key performance indicators (KPIs). It is easy to coast with generalized year-over-year comparisons and to mistake activity metrics for progress. This approach may work in the short term, but it is difficult to scale and fosters liability. Instead of merely reacting whenever roadblocks spring up, we should constantly monitor our gauges to help us proactively steer our businesses toward quantified objectives, drive results, and avoid disasters.
Proverbs challenges us with two metaphors from God’s creation. We are to be like mindful shepherds who know the condition of our flocks and give attention to our herds. We are also called to consider the wise ants who diligently prepare and work in the appropriate seasons. Biblical stewardship requires a present awareness of the relationship between the work being performed and its impact on progress toward our goals.
Paint a Picture
Most strategic plans hinge on a valid total revenue target for robust good health (RGH). Without dwelling on limitations and impediments, paint a picture of RGH for each area of the business. Whether that picture is in the near or distant future, having that metric without being distracted by current frustrations helps calibrate the team to an achievable future and enables realistic goals and appropriate targets.
Then we can work backward to develop the strategic objectives that will drive the accomplishment of that goal. These quantifiable objectives create a successful path to move from passive to proactive activities, focusing our energy on the areas within our influence or control.
From Strategic Intent to Specific Finish Lines
Multiple methodologies argue the same proven principle: measure what matters most. The critical metrics we use to evaluate performance and progress can be classified into two categories: leading and lagging indicators. Lagging indicators are output-oriented and easy to measure but hard to improve or influence. Leading indicators—typically more difficult to identify—are input-oriented and harder to measure but easier to influence.
9Guage, owned by C12 Member Brian White, is an advisory and consulting firm that helps businesses develop a scalable financial infrastructure and data-driven actionable insights to enable informed, real-time business decisions. The firm was founded on the principle of tracking and monitoring a set of key “gauges” so leaders know how their business is performing.
The areas represented by each gauge are not intended to be viewed in isolation or as a secret recipe but as a representation of critical aspects of a thriving company that must be optimized to achieve optimal success. Even when strategies are right and the financials and forecasts are accurate, companies that aren’t looking at KPIs don’t know if they’re actually headed in the right direction to get where they want to go. Monitoring KPIs and leveraging insightful management reporting ensures the company is making progress in the right direction.
The dashboard of gauges on different aircraft (e.g., single-engine prop versus a 747 transatlantic airliner) varies greatly due to engine size/type, radar systems, aircraft rating, and other functional requirements. Similarly, the specific KPIs for a business vary by a business’s size, complexity, and type. Leadership teams must figure out what specific gauges they need to operate their business both today and in the future.
9-Step KPI Evaluation Process
Consider the following process for focusing on the right indicators:
- Look at the business holistically. Understand all aspects of the business and how it operates. Focus on understanding inter-related business and market drivers that you can control, versus those you cannot.
- Identify the individual business units that support the company’s overall goals. These could be defined by product lines, regions/geographies, industry verticals, etc. The drivers, influencers, and risks may be very different across business units.
- Ensure your historical reporting is accurate and sufficiently detailed to assess past performance accurately. If you don’t know where the business currently stands, you can’t define the roadmap to take you from here to there.
- Identify how you measure success in each area. The key drivers are the things that, if understood and improved, would drive growth and increase profitability (e.g., in a professional services business we look at average bill rate, billable utilization percentage, realization percentage, backlog, client retention, NPS, eNPS, employee retention, etc). Keep asking, “Why is that important?” and “How does it directly impact business results?” in order to drill down to the core.
- Narrow the list to a small number of measurable performance metrics. Choose measurable indicators that make the most sense for your business and will drive the most impactful results if you get them right (e.g., three, six, or nine gauges).
- Set targets that would yield the right results. Don’t confuse inputs with outputs, or else the illusion of success from activity and volume can mask strategic drift or even peril.
- Focus on improving these metrics continuously. We can’t change our KPIs every month, but when the business is growing and evolving, we must understand the seasonality and cadence of the business and adjust accordingly.
- Develop budgets and forecasts that help you plan effectively and measure actual results versus expectations. Forward-looking business planning helps you identify the resources and capabilities you will need in order to grow revenue, scale business operations, and improve overall financial performance.
- Create a plan for your cash. Companies can have a great product/service, post attractive gross margins, and even show profit on paper. But if they run out of cash, it’s game over! Cash is fuel for a business: without it, your business will stall or altogether fail.
Metrics for Meeting Milestones
As Aezion, Inc. scaled across continents, founder/CEO Chris Kambala realized he could no longer rely on gut instincts to uphold the company’s unique brand promise.
As we look to the year ahead, where do we need to invest in defining the right gauges, setting clear targets, and leveraging effective KPIs for optimal performance?
January 7, 2021