Key Performance Indicators
By Navigator member John Champion, Director, EBS Human Resources
| What is the difference between Key Performance Indicators and Critical Success Factors? It's difficult to get the balance right between spending enough time planning the future and fixing the burning problems of today. Long term planning is never urgent so it can always be put off until tomorrow. However, it's very important to set some strategic goals and monitor progress towards those goals on a regular basis. In 'Kick-Start Your Business', Robert Craven has a good explanation of the difference between KPIs and CSFs: We suggest that you think in terms of Critical Success Factors for the long term, say 1-3 years and Key Performance Indicators for the short term, say 12 months. In this edition of 'Customer Driven Change' we'll focus on the short term. After all, if you don't perform in the short term, the long term won't exist! |
| Why is it important to select the 'vital few' KPIs for your business? I've often mentioned the importance of selecting the 'vital few' actions which will have the most impact on performance. It's the same with KPIs. With so many things that could be measured it's important that measurement doesn't take too much time and burn resources. Monitoring a few, well selected KPIs will enable you to keep control of the business. If results month by month are not on plan it'll indicate problems. Then you can focus on developing action plans to solve the most pressing problems. |
| What parameters should you monitor? In business, all key functions need to meet targets to deliver a profit. So it's logical to think in terms of the functions: * The Managing Director/General Manager must deliver shareholder value which will be driven by profit. * The Sales Director must deliver top line revenue and gross margin. * The Technical Director must deliver new products on time or technology that meets expectations. * The Operations Director needs to deliver products and services to customers on time, at the right cost and to the specification. * The Marketing Director needs to deliver market share within a budget. * The Finance Director needs to deliver profits by controlling costs, expenses and cash flow. Most of the KPIs will be measured in monetary terms but you should also have a few that aren't. These are often to do with people. For instance: * Customer satisfaction and loyalty * Customer churn * Employee motivation and satisfaction * Employee turnover * Shareholder satisfaction * Channel partner satisfaction * Supplier performance * Brand awareness |
| How many KPIs should you keep track of? There are no rules - it's your choice. We would suggest, as a minimum, one for each key function plus one for each key stakeholder group. So for a business with five key functions the minimum would be seven - one for each function plus one for customers and one for employees. The optimum would probably be two for each key function plus one for customers and one for employees i.e. around twelve. Any more than twenty is far too many. However, remember the saying: 'spending too much time weighing the pig doesn't make it fat!' |
How will KPIs help you to improve business performance? Keeping track of a few KPIs will enable you to identify problems before they become critical. For instance, if you don't carry out the right prospecting activity this month it could impact profits and cash in a few months time. When a key performance indicator shows a gap between actual and the 'desired state' this becomes a problem. Once the problem is clearly defined, it's easier to get people working together to develop solutions and translate these into actions. Training your people on problem solving techniques is a great way to develop teamwork and quality processes. It's also cost effective - your own people do the work and feel ownership of the process. If you would like to explore problem solving techniques in more depth - give us a call to have a chat. One of the characteristics of quality companies is that they set themselves the task of continuous improvement. However, if you have no objective measures of performance it's impossible to achieve improvements year on year. |
Selecting a KPI to measure customer satisfaction and loyalty If you aspire to being a quality company, customer satisfaction has to be one of your top three KPIs. Keeping track of customer satisfaction is not difficult. If you ask 100 customers whether they are satisfied with your company and they have to answer 'yes' or 'no', it will give you a pretty objective measure. If 60 say yes you have a score of 60%. It really is that simple. So why do so many companies avoid doing it? I think most companies believe they're doing OK because they don't get many complaints. The trouble with that philosophy is that most unhappy customers don't bother to complain anyway - they just take their business elsewhere. Then it's too late to do anything about it. The other issue is getting objective answers. So the people asking the questions need to be neutral and truthful. Accurate results are critical so it's a good idea to get a third party to do the survey. It's also possible to get great results using internal resources if there's a committed management team. Ask every senior team member to do a few surveys each and feed the results back to the person responsible for monitoring customer satisfaction. However, the problem with a very simple approach is that it doesn't give any indication of the reasons for the 'nos'. It's the customers who are unhappy that are interesting. Why are they unhappy? A range of deeper questions has to be used to try and come up with some common issues - the root causes of any dissatisfaction. It's important to measure 'overall' customer satisfaction on a regular basis - quarterly or annually. Take a representative sample of your customer base and ask them a range of well selected questions. The answers should give you an accurate Customer Satisfaction score and lots of other useful information. If you want help developing the questions - give us a call and our customer satisfaction expert, Noel Austin, will be pleased to discuss the options. Another important point to measure customer satisfaction is just after you've delivered something. A quick call to make sure everything is OK before the invoice goes out is a quality approach. You don't want to wait until the customer withholds payment to find out something's gone wrong. Checking satisfaction at this stage will also help you to see if there's a 'snagging list' that needs addressing. One other suggestion, if you're really serious about customer satisfaction, is to consider giving a reward to all your staff based on the annual customer satisfaction score - it will really give it focus and could drive teamwork. Just think of the impact poor customer satisfaction will have on your bottom line: * You'll have to spend much more on marketing to replace lost customers * You won't get enough referrals * Your costs will be higher because a lot of effort has to go into clearing up the mess |
Selecting a KPI to measure employee motivation and satisfaction You know it's going to be hard to get high customer satisfaction scores if your employees are 'hacked off'. So you should also measure employee satisfaction and motivation as a high priority. For a quality company, employee motivation and satisfaction must be in the top five KPIs. Again the best way to measure employee satisfaction is to do a short survey on a regular basis - say every year. However, you could employ cruder measures such as employee turnover, absenteeism, lateness etc. Excessive levels on these measures will indicate there are issues and this will be hitting the bottom line. It's probably less expensive in the long run to be working on things which will engage with employees and drive up satisfaction levels. A good indication of employee satisfaction can be gained by asking each employee 10 key questions. The ultimate question being - on a scale of 1-5 - how satisfied are you with Bloggs & Co as a place to work. If you would like to know the 10 key questions - give us a call to find out. |
How might understanding KPIs help to increase sales? In the vast majority of circumstances, people or organizations buy something to solve a problem. It's even more important if they're going to buy something expensive. For instance: * We buy a new house because our current house has problems - it's too small, it's too far from schools, the neighbourhood has gone 'down hill' etc. * We buy a new car because our current car has problems - it doesn't present the right image, it's getting old and unreliable, etc. * We buy a new suit because our current suits are the wrong style, worn out, the wrong colour etc. When we buy something we look for a solution to our problems. So those sales people who help their customers go through a problem solving process and come up with a good solution (which of course involves buying their particular product) will be more successful. Listening and asking the right questions will help to identify exactly what the customer wants. Even Tesco sells food 'solutions' nowadays! We've also talked about business executives having to achieve their KPIs. Sales people who understand this concept will be in a better position to identify PAIN (see below). If they're holding a sales meeting with a sales director, it's likely that prospect will be seeking ways to achieve their sales targets, a finance director will be seeking ways to reduce costs, a managing director will be looking to increase profits etc. 'Solution selling' is all about helping buyers to solve problems. If you can't find the problem it's going to be really difficult to close a sale. Buyers usually don't spend money for fun - they have to see a return. If you want an objective approach to whether a sales person is going to close a sale ask this one question - what's the buyers PAIN? If no pain has been found there's unlikely to be a sale. "Have we found the buyer's pain?" is just one of five objective questions to ask a sales person. If the answer is 'no' to any one of these five questions a sale is very unlikely. If you would like to know the other four questions give John Champion a call to find out. |
Quality tip of the month - continuous improvement Organizations that aspire to 'quality' know that dramatic improvements are hard to achieve. Instead they seek to improve a few vital KPIs bit by bit each year. They know that small changes in a few areas can bring about a significant improvement in the bottom line. The reason for this is a 'multiplier' effect. A few percentage points increase on the top line times a small increase in gross margins plus a small reduction in overheads will improve the bottom line significantly. Improving customer satisfaction by just a few points could achieve the revenue increase and improving employee satisfaction could bring about the reduction in overheads. Here's a suggestion - make a commitment that in 2010 you are going to make improvements in two or three well selected KPIs. If you don't already measure customer or employee satisfaction you should seriously consider them. Do it NOW! If you want any help, call us or visit our website for contact details www.ebs-management.co.uk |
Additional information on topics in this article can be obtained from the following websites:
* HR Services from EBS Management Resources: www.ebs-hr.co.uk
* Management Services from EBS Management Resources: www.ebs-management.co.uk
Further reading:
* Kick - Start Your Business by Robert Craven. Warwick Business School ISBN 0-7535-0532-0
* The New Solution Selling by Keith Eades. McGraw Hill ISBN 0-07-143539-5
John Champion, Director, EBS Human Resources
www.ebs-hr.co.uk
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