The importance of KPI's
Let’s forget for a second about business and talk about driving a car. If you were driving your car down the road and it was a dark night and all of a sudden your dashboard went out, all the lights on your dashboard went out so you couldn't see it any more, what would you do? Well I can guarantee that a lot of you have said that you’d pull over and try to fix it. Some of you said you’d drive on but be careful. But not one of you would be completely comfortable with that situation, not one of you. Why? Because we’ve come to be used to having this feedback, this information about our car that tells us the speed and the fuel.
Now some of you are going, ‘Ben, what about the temperature?’ Well most of us don’t look at the temperature, and even the fuel. Believe it or not, we don't look at it that often, as long as we know it’s in there. We’re only relying on one KPI off of the whole dashboard. Just one, which is our speed, and if that goes, if that disappears, we’re uncomfortable.
It's no different for Business
Now in business there’s a lot more than one KPI that we’re looking at. Your cash flow is like your fuel gauge. That’s the first thing you need to make sure you’re monitoring is how much cash do I have going in, how much cash have I got going out? But there’s a whole bunch of other KPIs that you should be looking at as well.
Here’s my top five tips for setting KPI's in your business.
Tip #1, It should be a high level snapshot
They say ‘paralysis by analysis’ You don't want to do that in your business. What you want to do is decide on a high level; what are the key things you need to know to know whether or not your business is heading in the right direction, or is it heading into a hole, is it going in the wrong direction.
When I talk about high level, I like to say to people imagine you’re on a beautiful island in the Pacific somewhere, sipping on a cocktail or beer. Every Monday morning you’re going to be delivered a report, but that report can be no longer than an A4 piece of paper. What are the key things that you want to see that will help you make decisions from that report? So it’s a high level snapshot. I’m a pilot, I enjoy flying a plane. I’ve got my own airplane. In the dash there’s a series of, they call them enunciators, basically they’re warning lights. If you’ve watched air crash investigations or anything like that, it always starts with a loud ‘meep meep meep’ buzzing and the master warning light, the master warning caution light coming on.
Well this snapshot is that warning light. It’s the thing that says, ‘Hey! Something is wrong, and now you have to have a deeper look.’ Like in the airplane, the light flashes, the buzzing goes off, but it doesn’t tell them what’s wrong. It just tells them to now look at all the other KPIs, which is their cockpit, to see what is the problem. What is it the warning’s going off for? And the same thing should apply in your business. It’s a high level snapshot, you look at these things. For example, it might have a number of units delivered that week or number of units sold or quotes done that week. Those can be your high level things. And you know the number of quotes based on the sales people in your business should be 35. You get the report and they’ve only done 20, you go, ‘Alright, hold on here, there’s a problem. We’ve only done 20 quotes this week, and I need to know why.’ So that’s tip number one. High level snapshot.
Tip #2, Check key indicators
You’re looking at critical factors, not airy fairy numbers that don't mean much to your business, you’re looking at critical things. When I talk to a business person, I always ask them, ‘what are the keys to your business?’ I’m not talking about the keys that unlock the door, I’m talking about the keys. So it could be if you’re not getting new customers in, you’re going to go broke. Or if your customers are complaining, your customer longevity, or you’re not signing up new contracts, or it could be up-selling. So your key could be once you’ve got a client, you up-sell them on a new product every month.
You’ve got to look at what are the key critical factors for your business. What are the things that make your business successful? What are those keys? Make sure they’re part of that KPI snapshot or at least track those things. Go, ‘If those are the critical things, if those are the key factors to my business working, then I know without those numbers, I’m not going to get where I need to go.’
So for example, in my business, one of the keys is sales meetings, we call them ‘business assessments,’ but essentially it’s a sales meeting. We meet with somebody one-on-one. If they qualify, for free, and at the end we do a business assessment. At the end of that business assessment, we uncover during the assessment what the holes are in their business, and by the end of that we discover whether or not they’re coachable or want to be in a business coaching program. Then we can talk about whether or not they suit one of our programs. But that’s one of our keys to our business, doing a minimum amount of those meetings every week. Because I know that if we’re not, then we won’t grow our business.
Another key in our business is keeping our clients longer. Now the way that we do that in our business is to make sure our clients are getting good return on their investment. We have to put a huge amount of effort into training our business coaches that work with our clients to give them more and more of a return ongoing every month so that our clients stay longer. They’re probably my two main keys. Then there’s KPIs under those two things. So they’re critical factors. That’s what I’m talking about when I say identify critical factors and structure your KPIs around those two things.
Tip #3, Make it easy to measure
If your KPI weekly snapshot, that A4 piece of paper I’m talking about takes hours and hours of work and data analysing, like setting off a nuclear bomb where you need three people in three different countries to turn the key at the same time, you’re not going to get those reports right. You want to make it so it’s simple. I’m talking really simple. Just go for the most basic, as long as they mean something to you. As long as they’re going to set off that master caution warning alarm if something is going wrong, it doesn’t matter how simple they are. It doesn’t matter what someone else thinks. It’s about you having control over your business. So make sure it’s easy to measure.
Tip #4, They need to be meaningful
So tip four, make sure it’s easy to measure, but make sure they’re meaningful, that they mean something to you. It’s no good having numbers on there that aren’t meaningful, that your accountant says, ‘You should track this,’ or the internet says, ‘Here are the five things you should track.’ If it’s not meaningful to you, then don’t do it. Why would you bother? It’s got to mean something to you. If it means something to you when you look at it, it means you can make a better decision.
Now I get a lot of questions about setting KPIs when we’re testing and measuring things like conversion rates and numbers like that. It doesn't matter how it’s measured. I know a lot of you are going, ‘But Ben, these things have got to be accurate.’ They don’t have to be accurate, they just have to be measured consistently.
So for example, if I’m measuring conversion rates in my business for KPI, and I do that in a rough and ready way. So long as I get a number, I want that number to go up. So that’s my KPI. My conversion rate, which is how many leads I turn into customers, I want that number to increase, that’s the KPI. If it’s going backwards, then I know something is going wrong with the sales process, or the leads that are coming in or something. That KPI is now set, and I know that if that number goes up it’s good, if it goes backwards it’s bad. It doesn’t matter what that number is. So it doesn’t matter how I measure it.
I get all sorts of questions, ‘Do I measure these people? Do I measure those? Returning customers?’ Doesn’t matter, so long as you consistently measure it. You can measure it completely wrongly in someone’s eyes, but as long as you measure it the same way every week, it’ll be a meaningful number. Does that make sense?
Get a Weekly KPI Report
I’ve sort of already talked about this fifth tip, is get it in a weekly report. You should have your team reporting to you on a weekly basis with their KPIs. Don’t wait ‘til the end of the month to look at these numbers. It’s like driving the car and waiting until you get home to look at the speed. It’s going to say zero, it’s not going to tell you a lot at all. Same thing, when you’re driving your business weekly, look at the numbers on a week to week basis. You might have to look at cash flow on a daily basis. If cash flow’s tight in your business, you may need a daily statement every day to go, ‘How much is in my bank today? What have I got to pay tomorrow? What am I expecting to take in? What do I need the sales people to bring in?’ By looking at it on a daily basis, you’ve got complete control.
Hopefully that helps you set your KPI's
If you’re driving your business without the dashboard at all, like driving your car with the lights gone out in the dashboard, then you’re likely to crash. You’re likely to have something go wrong. It’s only a matter of time. Hopefully that’s helped you understand firstly, the importance of having KPIs and secondly, how to create the KPIs for your business.
About the Author
Ben Fewtrell is a sought-after Business Coach, Keynote Speaker and trainer who has featured in Virgin’s Inflight Magazine and Entertainment Portal, SKY Business and “Secrets of Top Business Builders Exposed”. He is also the host of the popular Business Brain Food Podcast where he interviews leading experts on anything and everything business.