The effectiveness of management is about performance. And you can’t determine what performance is without having good metrics. The concept of cascading metrics is that everyone in the company has a measurement of performance, from top to bottom. We believe that every person in the company should have 2-3 metrics that they’re responsible for. Cascading means that the metrics at the top have supporting metrics throughout the organization to the last person. When all of those are aligned together, we find that the company is much more efficient and performs a whole lot better.
Getting a solid handle on the performance of your business isn’t easy. End of the month reports don’t help much because they just look backwards. Effective managers need to know current information to make decisions that will drive business success forward.
A Key Performance Indicator (KPI) is any measure that is significant in understanding how the business is performing. They can be used in every function and level: marketing, sales, operations, installation, service, purchasing, administration, net worth, valuation, customer satisfaction, etc. Defining, measuring and reporting a key performance metric requires thought and planning because a mature application of a good KPI can have enormous positive impact on the business, in the short term and long term.
Here are some things to ask and think about when you are designing KPI metrics for your business.
- What is the business question that you are trying to answer?
- To whom in the business does this question apply?
- Why is this question important?
- What actions or decisions can be taken with this information?
- Where does the data reside to answer this question?
- What is the specific measure, dimension, granularity of the information?
- Who is the target of the information and how will it be shared, reported, displayed?
- What further questions does this KPI metric raise?
Once you have defined a specific KPI metric, you need to know how to use it. The difference between data and information is that data are just a bunch of measurement points. By contrast, information collects, interprets, and displays data in such a way that it creates understanding for the recipient. So, a good KPI could also be called Key Performance Information. It can be quickly understood by the recipient and can they take actions to regularly manage or influence results. The information can be used in a cadence of accountability with huge benefits.
We separate performance indicators into two groups; KFIs (key financial indicators) and KPIs (key performance information).
Key Financial Indicators are the measures that come from your financial statements. These measures would relate to your sales, gross margin, financial results and financial strength goals. An example could be to track your accounts receivable days to see if you are improving your collection time on outstanding invoices. You would also want to track any sales, gross margin, expense and net income numbers against the goals that you have set. These measures should come easier to you since they directly relate to your financial statements.
Key Performance Information, however, does not come from your financial statements directly. These are measures of activity. For instance, if you wanted to improve customer retention, you could implement a survey system and track your overall ratings or track customer referrals as happy customers tend to refer. You could also track number of customer complaints. If you wanted to focus on developing your employees, you could track the number of training events that employees have attended.
Both types of measures will help you keep a pulse on your business and will help you stay focused to achieving your goals.
Once you have your company-wide goals and measures defined, you can then follow the process again to create goals and measures for the departments and individuals in your business. We have created a tool to help you outline accountability measures for everyone in the company that are aligned to the company goals. This tool is only valuable if you stick to it once you’ve completed it. You will need to meet regularly with your leadership team, your departmental leaders and those individuals to review the data and see if you are on track to reaching your goals. If you are not, then your management team can make adjustment decisions on real information. After you’ve implemented this tool, you should find that your team is more engaged and focused on helping the business achieve its vision.
Remember, everyone has a role to play.